Bitcoin has captured global attention, not just as a digital currency but as a revolutionary financial innovation. While many associate it with dramatic price swings and high-profile endorsements, its true significance lies in its underlying economic and technological foundations. To unpack what sets Bitcoin apart, we turn to insights from Will Luther, an economics professor and expert in monetary systems, whose work sheds light on Bitcoin’s unique role in the modern economy.
How Bitcoin Compares to the US Dollar
At first glance, Bitcoin and the US dollar may seem worlds apart—one digital and decentralized, the other government-backed and widely accepted. Yet, as economist Will Luther points out, they share surprising similarities.
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“Bitcoin is similar to the dollar in many respects,” Luther explains. Both are intrinsically worthless, meaning they have no inherent value beyond their use as a medium of exchange. Neither is redeemable for a physical commodity like gold. And both function as digital base monies—with the US dollar being approximately 99.96% digital through electronic banking systems, while Bitcoin exists entirely in digital form.
However, their differences are profound. The US dollar is controlled by the Federal Reserve, which can adjust the money supply at will—a power that enables inflationary policies during economic crises. Bitcoin, in contrast, operates on a decentralized network with a fixed supply cap of 21 million coins. This supply is preprogrammed and immune to manipulation by any single entity.
This structural difference has major implications. Because no central authority governs Bitcoin, it cannot be inflated through excessive printing. This scarcity is a core reason many view it as “digital gold”—a store of value resistant to devaluation.
Another key distinction is financial privacy. While cash transactions in dollars offer anonymity, most digital dollar payments—like those via banks or Venmo—require trusted third parties that log transaction details. Bitcoin, however, enables peer-to-peer transfers without intermediaries, offering greater privacy in digital exchanges.
Is Bitcoin a Currency or an Investment?
One of the most debated questions about Bitcoin is whether it should be classified as a currency or an asset. Given its wild price fluctuations and frequent trading on exchanges, many treat it like a speculative investment—similar to stocks or commodities.
But Luther argues that this perspective misses the bigger picture.
“Bitcoin is, first and foremost, a currency—or at least a potential currency,” he says. “And all currencies are assets.” Just as the US dollar holds value and can appreciate relative to other currencies, so too can Bitcoin.
Yet Bitcoin’s price volatility stems from its dual nature. Its value increases not because of corporate earnings or dividends, but because of its growing utility as a medium of exchange. As Luther puts it: “Bitcoin’s price will only rise if (1) it becomes more useful as a currency today or (2) is expected to be more widely adopted in the future.”
This means that even those investing in Bitcoin for financial gain should understand its foundational role as money. Without adoption as a transactional tool, its long-term value remains uncertain.
Why Is Bitcoin So Volatile?
Bitcoin’s price swings are legendary—plunging 50% in months, then doubling within weeks. This volatility deters everyday use but attracts traders seeking high-risk, high-reward opportunities.
So what drives these extreme fluctuations?
Luther identifies two main factors: fixed supply and network effects.
Because Bitcoin’s supply is capped and follows a predictable issuance schedule, price changes are almost entirely driven by shifts in demand. Unlike stocks or real estate, there’s no intrinsic cash flow or earnings to anchor its value. Instead, its worth depends on collective belief in its future utility.
This leads to powerful network effects—a phenomenon where a product becomes more valuable as more people use it. “No one wants to use money that no one else accepts,” Luther notes. “Everyone wants to use the same money as their trading partners.”
When demand for Bitcoin increases—even slightly—it can trigger a feedback loop: more users make it more attractive, which draws even more users, amplifying price movements. The reverse is also true: negative sentiment can spiral into rapid sell-offs.
Compare this to the US dollar, which enjoys a stable base of demand because the US government accepts it for taxes and fees. That institutional backing creates a “floor” for demand. Bitcoin lacks such guarantees, making its value more sensitive to market sentiment.
Could Bitcoin Become Everyday Money?
Despite growing acceptance—over 100,000 merchants worldwide now accept Bitcoin—its use in daily transactions remains limited. You can buy an AT&T bill or furniture from Overstock with Bitcoin, but most people still reach for credit cards or mobile wallets.
Why isn’t it catching on faster?
According to Luther, it’s not about availability—it’s about practicality.
“Bitcoin is very well suited for cross-border payments and private transactions,” he says. “But few of the transactions I make involve international transfers or require high privacy.”
For most consumers, traditional banking offers sufficient speed, convenience, and protection. Bitcoin’s slower confirmation times and price volatility make it less ideal for buying groceries or paying rent.
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That doesn’t mean Bitcoin is failing. Rather, it’s fulfilling a niche role—much like cash is used less for large purchases but remains vital for anonymity and peer-to-peer exchange. In the same way, Bitcoin may remain a specialized form of money rather than replacing the dollar entirely.
Frequently Asked Questions (FAQ)
Q: Can Bitcoin replace the US dollar?
A: While unlikely in the near term, Bitcoin could serve as an alternative store of value or complement to traditional currencies, especially in regions with unstable monetary systems.
Q: Why is Bitcoin’s supply limited to 21 million?
A: This cap is hardcoded into Bitcoin’s protocol to ensure scarcity and prevent inflation—a design choice meant to mimic precious metals like gold.
Q: Is Bitcoin truly anonymous?
A: Not fully. While transactions don’t require personal information, they are recorded on a public ledger. With enough analysis, identities can sometimes be traced.
Q: Does using Bitcoin require technical expertise?
A: Not anymore. Wallets and exchanges have made sending and receiving Bitcoin as simple as using a mobile app.
Q: Can governments shut down Bitcoin?
A: Due to its decentralized nature, no single entity controls Bitcoin. While governments can regulate exchanges or ban usage locally, eliminating the network globally is extremely difficult.
Q: Is Bitcoin environmentally friendly?
A: Early concerns about energy use stem from its proof-of-work mining process. However, increasing adoption of renewable energy and technological improvements are reducing its carbon footprint.
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Final Thoughts
Bitcoin is more than just a digital currency—it’s a new model for money itself. Built on decentralization, scarcity, and cryptographic security, it challenges traditional notions of value and control. While it may not replace the dollar anytime soon, its role as a hedge against inflation, tool for financial privacy, and enabler of borderless transactions ensures its place in the future of finance.
Understanding Bitcoin isn’t just about tracking its price—it’s about grasping the economic principles that make it both revolutionary and controversial. As adoption grows and technology evolves, one thing is clear: Bitcoin has already changed how we think about money forever.