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Crypto vs FX

Can Cryptocurrency Truly Serve as Money?

Pomegra Learn

Can Cryptocurrency Truly Function as a Currency?

The question of whether cryptocurrency can serve as money sits at the heart of the crypto-versus-forex debate. Bitcoin was created in 2008 with the explicit mission to be "peer-to-peer electronic cash," yet 16 years later, no major cryptocurrency is widely accepted for everyday purchases in developed economies. Meanwhile, El Salvador's 2021 decision to adopt Bitcoin as legal tender alongside the US dollar became a cautionary tale about adopting volatile cryptocurrency as money, with government tax revenues collapsing in BTC-denominated terms during bear markets. Understanding cryptocurrency as money requires examining money's three core functions—unit of account, medium of exchange, and store of value—and asking which cryptocurrencies, if any, fulfill these roles better than fiat currency or why the gap persists.

Quick definition: Cryptocurrency as money refers to digital assets like Bitcoin or stablecoins being used to fulfill the economic functions of traditional currency: measuring prices, facilitating transactions, and preserving purchasing power across time.

Key takeaways​

  • Cryptocurrencies fail the "unit of account" function because prices are quoted in fiat (dollars, euros) not in Bitcoin or ETH; this dependency prevents true monetary status.
  • Stablecoins perform the medium-of-exchange function well (fast, low-cost payments), but only for users with access to exchanges and wallets; geographic and regulatory barriers remain severe.
  • Bitcoin functions as a store of value for some investors, but extreme volatility (50%+ annual swings) makes it unsuitable as a currency for wage-earners or savers in developing economies where inflation-adjusted returns matter most.
  • Forex markets measure currency value through exchange rates; cryptocurrency lacks the network effects and institutional anchoring that give fiat currencies their monetary status.
  • For cryptocurrency to become currency, one of three changes must occur: (1) merchant adoption reaches critical mass (>50% acceptance), (2) a major central bank prices its monetary aggregate in crypto, or (3) algorithmic stablecoins eliminate depegging risk entirely.

The Three Functions of Money: Where Crypto Falls Short​

Economists define money by three functions: unit of account, medium of exchange, and store of value. Fiat currencies (USD, EUR, JPY) serve all three. Commodities (gold, oil) serve store of value and medium of exchange but not unit of account (prices are quoted in fiat, not gold ounces). Cryptocurrency occupies a liminal space.

Unit of Account: The Critical Failure Point​

A currency's primary function is to be the measure in which prices are expressed. When you buy coffee for $5, you are agreeing that coffee's value equals five units of account. The US dollar is the unit of account because:

  1. The US government taxes in dollars.
  2. The Federal Reserve measures monetary aggregates (M1, M2) in dollars.
  3. 90%+ of US corporate earnings are reported in dollars.
  4. Prices are negotiated and settled in dollars.

Bitcoin violates all four. The IRS taxes in dollars and treats Bitcoin as property (not currency) for tax purposes. The Federal Reserve does not measure monetary policy in Bitcoin. Public companies report earnings in fiat, not BTC. Most critically, prices are not set in Bitcoin.

Consider a merchant in Miami who accepts Bitcoin. The store does not mark items as "0.0001 BTC" and adjust prices daily as Bitcoin's USD value changes. Instead, the merchant marks items as "$49.99" and uses an exchange (Coinbase, BitPay) to convert incoming Bitcoin to USD at real-time rates. This dependency on fiat as the unit of account proves that Bitcoin is a commodity or asset, not a currency. The moment price discovery moves away from fiat (i.e., the merchant prices in BTC and USD adjusts), Bitcoin becomes a currency; until then, it is a forex-traded asset.

El Salvador attempted to change this. In September 2021, the government mandated that businesses accept Bitcoin at a fixed rate of 1 BTC = ~$20,550 USD. Immediately, problems emerged:

  1. No negotiation: A business receiving payment owed different dollar amounts the next day as BTC volatility shifted. If a company received 1 BTC on Day 1 (worth $45K) and $30K on Day 2 (same amount in sats), accounting became impossible. The treasury could not budget in BTC because revenue fluctuated 10–20% daily.
  2. No storage: El Salvador's government is now holding ~2,250 BTC in treasury reserves, accumulated at an average cost of ~$42K/BTC. As of May 2026, those holdings are underwater (Bitcoin ~$65K currently, but the portfolio has experienced drawdowns as low as –60% during bear markets). No stable currency would see a government's treasury fluctuate by $60+ billion over 18 months.

This experience demonstrates that for cryptocurrency to serve as currency (not just medium of exchange), volatility must be subdued—a lesson that stablecoins learn and traditional fiat leverages through central bank backing.

Medium of Exchange: Stablecoins Lead, Bitcoin Lags​

The medium of exchange is where cryptocurrency has the strongest case.

Bitcoin: Payments are notoriously slow. A Bitcoin transaction takes 10 minutes on average to be included in a block, and 60 minutes for 6 confirmations (the standard for irreversibility). In an economy running on Bitcoin as the primary medium of exchange, you cannot buy a coffee because you would wait an hour for confirmation. Bitcoin's design (1 MB blocks, 10-minute block time) deliberately traded speed for decentralization; the result is a settlement layer, not a transaction layer.

Lighting Network, a layer-2 solution on Bitcoin, enables instant payments with Bitcoin, but adoption remains minimal. As of 2024, fewer than 5,000 merchants worldwide accept Lightning Network payments; compare this to Visa's billions of daily transactions.

Stablecoins: USDC and USDT settle on-chain in seconds (Ethereum) to minutes (Polygon, Arbitrum). For remittances, they are already competitive with traditional banking. However, the barrier to stablecoin use is high:

  1. Wallet setup: Users must obtain a crypto wallet and fund it with fiat—a three-step process that many in developing economies find daunting.
  2. Exchange access: Not all countries have regulated access to crypto exchanges. In some nations, converting stablecoins to local currency is illegal or impossible.
  3. Regulatory acceptance: Many small businesses fear regulatory fines for accepting stablecoins; merchants in El Salvador, for example, were later allowed to reject Bitcoin payments as adoption remained dismal.

Real example: Stablecoins in Argentina (2023–2024) Argentina experienced 250%+ annual inflation in 2023, making the Argentine peso economically unusable as a store of value. Citizens began holding USDC and USDT as an alternative, particularly for large purchases (vehicles, real estate). By late 2023, stablecoins were the de facto medium of exchange for significant transactions, even though the official currency was the peso. Banks detected this shift and began offering stablecoin accounts directly—a signal that stablecoins were becoming part of the monetary ecosystem.

However, stablecoins remain marginal in Argentina's overall money supply. The peso is still the medium of exchange for 90%+ of daily transactions (salaries, groceries, utilities); stablecoins serve as a store of value and a medium of exchange for large or international transactions. This is not full currency status.

Store of Value: The Volatility Problem​

Fiat currencies lose value through inflation (2–3% annually in developed economies). Gold holds value through millennia. Bitcoin is highly volatile: annual returns range from –65% to +200%, making it unsuitable as a store of value for most savers.

Consider two savers in a hypothetical Bitcoin-based economy:

Saver A: In 2013, buys 1 BTC at $800 to hold for retirement (store of value, 50-year horizon).

  • By 2017, that BTC is worth $13,500 (gain: +1,600%).
  • By 2018, it's worth $3,800 (loss: –70%).
  • By 2021, it's worth $65,000 (gain: +1,600% again).
  • By 2022, it's worth $16,000 (loss: –75%).

The saver cannot predict retirement income because the unit of store is volatile. In contrast, a saver buying US Treasurys at 2% annually loses to inflation but knows with certainty the real value they will receive.

Stablecoins, by definition, solve this problem—they are stable stores of value. But they are only stable because they are collateralized with, or pegged to, fiat currencies. They do not solve the underlying value question; they defer it.

The Forex Connection: Why Fiat Maintains Its Monopoly​

Forex markets exist because fiat currencies have deep, fundamental anchoring to national economies:

  1. Government mandate: Taxes must be paid in the national fiat currency (USD in the US, EUR in Europe). This creates immediate demand.
  2. Central bank backing: The Federal Reserve controls inflation and interest rates; the market trusts (most days) that USD value is managed. No entity controls Bitcoin's supply; the market must trust only mathematics.
  3. Network effects: Billions of people use fiat currencies daily; this network effect is self-reinforcing. New users entering an economy must acquire the local fiat to function; they have no choice.

Bitcoin cannot replicate these anchors. No government requires taxes in Bitcoin; only El Salvador tried, and the experiment has faltered. No central bank controls Bitcoin's supply; this feature is intentional (decentralization) but prevents responsive monetary policy.

For Bitcoin or any cryptocurrency to replace fiat, one of three conditions must be met:

  1. Adoption tipping point: A nation with >100 million people (e.g., Brazil, Nigeria, India) formally adopts a cryptocurrency, forces its citizens to hold it, and anchors it to fiscal policy. This has not happened and is unlikely (central banks prefer control).

  2. Merchant critical mass: >50% of the world's merchants accept cryptocurrency for everyday purchases. Currently, the figure is <1%. This requires solving the volatility problem first.

  3. Algorithmic stability: A decentralized stablecoin (like DAI) gains sufficient liquidity and regulatory acceptance that it functions as the de facto unit of account across multiple jurisdictions. This would require breaking the sovereignty of fiat—unlikely in the near term.

Flowchart: Paths to Cryptocurrency Becoming True Money​

Real-World Examples: Cryptocurrencies as Money in Practice​

Example 1: Venezuela and the Petro (2018–present) The Venezuelan government launched the Petro (PTR), a blockchain-based cryptocurrency, supposedly backed by oil reserves, with the goal of circumventing US sanctions and restoring capital flows. The Petro was never widely adopted because:

  • The government could not enforce merchants to accept it.
  • International exchanges did not list it (regulatory sanctions).
  • Trust was absent (authoritarian government might confiscate holdings).
  • Alternative cryptocurrencies (Bitcoin, USDT) offered better store-of-value properties.

As of 2026, Venezuelans use Bitcoin and stablecoins (USDT, USDC) to preserve wealth and conduct international transactions, not the Petro. The Petro remains a cautionary tale: government backing does not guarantee currency status; trust must be earned.

Example 2: Bitcoin in El Salvador (2021–present) El Salvador's government made Bitcoin legal tender, allocated ~$15 million to fund a "Bitcoin wallet" (Chivo Wallet) for citizens, and promised financial inclusion. Uptake was limited:

  • As of 2026, fewer than 20% of El Salvadorans use Chivo or hold Bitcoin.
  • Most continued using the US dollar (the official parallel currency) for daily transactions.
  • The government's Bitcoin treasury suffered ~50% drawdowns during 2022 bear market, straining the budget.
  • In 2023, El Salvador stopped promoting Bitcoin after a change of administration.

Yet Bitcoin adoption in El Salvador did increase remittance efficiency: Salvadorans abroad can send Bitcoin to family for near-zero fees, then convert to USD locally—a genuine use case. However, this is remittance corridor efficiency, not currency status.

Example 3: Stablecoins in Emerging Markets (Nigeria, Kenya) In Nigeria and Kenya, mobile money (M-Pesa in Kenya) and bank transfers are slow and expensive (2–8% fees). Stablecoins (USDC, USDT) offered a faster alternative starting in 2022. A cross-border transaction between Nigeria and Kenya that took 5 days via bank transfers now takes 10 minutes via USDC on Ethereum.

However, regulatory pressure in Nigeria (CBN banned crypto exchanges in 2021, later partially reversed) and Kenya (stricter KYC requirements) has limited formal adoption. Stablecoins function as a medium of exchange for diaspora remittances and informal commerce, but not as the primary unit of account for wages or prices. The local fiat (naira, shilling) remains the unit of account.

Common Mistakes​

  1. Confusing "payment method" with "currency." Bitcoin can be a payment method without being currency. Visa is a payment method but not a currency. Stablecoins are a payment method with currency-like properties; they approach true currency status but do not replace fiat for most users.

  2. Ignoring the role of government backing. Fiat currencies are backed by the full faith, credit, and taxation power of sovereign nations. This backing—not intrinsic value—gives fiat its monetary status. Cryptocurrencies lack this backing; trust must be earned through market performance, a slower and less reliable process.

  3. Assuming volatility will decrease with scale. Bitcoin's volatility has not materially decreased since 2010, despite a 10,000x increase in market capitalization. Market size and volatility are not inversely related; speculative asset class volatility is driven by sentiment and leverage, not adoption.

  4. Overlooking the tax impediment. Most tax authorities treat cryptocurrency as a capital asset, not a currency. Each transaction is a taxable event. This makes cryptocurrency financially disadvantageous for everyday use; a worker paid in Bitcoin cannot simply use it without incurring tax reporting obligations. Fiat salaries and currency conversions face no such friction.

  5. Forgetting that network effects are sticky. Fiat currencies have a 500+-year head start on cryptocurrency. USD is entrenched in international trade, bonds, equities, and derivatives. Displacing this network effect requires not just a better technology but a compelling reason for billions to coordinate a switch—a near-impossible threshold.

FAQ​

Why doesn't Bitcoin function as a currency despite being designed as one?​

Bitcoin was designed as peer-to-peer cash, but its technical constraints (10-minute blocks, 1 MB block size) make it slow for daily transactions, and its price volatility makes it unsuitable as a unit of account. Most critically, fiat currencies benefit from government mandate (tax requirements) and central bank backing (inflation targeting). Bitcoin has neither. Without these anchors, Bitcoin remains a commodity traded in forex-like markets, not a currency.

Could a central bank cryptocurrency (CBDC) become a real currency faster than decentralized crypto?​

Yes, dramatically faster. A CBDC backed by the US Federal Reserve or European Central Bank would have instant unit-of-account status because the government would price its transactions in CBDC. However, CBDCs are designed as wholesale settlement tools (for interbank transfers) first and retail currency second, if ever. A true retail CBDC would compete with private digital wallets and decentralized cryptocurrencies, creating regulatory and sovereignty concerns that slow adoption.

What percentage of transactions must use cryptocurrency for it to be considered "currency"?​

Economists generally define currency status as the dominant medium of exchange in a jurisdiction—i.e., >50% of daily transactions. By this standard, no cryptocurrency is currency anywhere in the world. Stablecoins in some emerging markets (Nigeria, Argentina during high inflation) approach 10–20% of transaction volume for specific use cases (remittances, large payments), but they are not the primary medium of exchange for wages or groceries. Bitcoin's transaction volume is <1% globally.

Why do some economists argue Bitcoin could replace fiat despite its volatility?​

A minority of economists (Saifedean Ammous, proponents of "hard money" theory) argue that Bitcoin's fixed supply makes it superior to fiat for long-term store of value, and that volatility will decrease once adoption reaches scale. However, this view ignores that (1) volatility has not decreased as Bitcoin's market cap grew 10,000x, and (2) a unit-of-account function requires predictable value, which Bitcoin cannot provide. These economists value Bitcoin's properties (anti-inflation, censorship-resistant), not its utility as currency.

Could stablecoins become the global currency instead of fiat?​

Stablecoins could become the medium of exchange in many jurisdictions, especially for remittances and international payments, but they cannot become the unit of account without a sovereign issuer. USDC is denominated in USD; it derives its stability from the USD backing. If stablecoins were to achieve true currency status globally, one of three things would have to happen: (1) a major central bank issues a stablecoin (a CBDC), (2) an international body (IMF, World Bank) issues a multi-currency stablecoin (like the proposed XDR digital asset), or (3) an algorithmic stablecoin (DAI) achieves such massive adoption that major prices are set in DAI. None of these are imminent.

How do forex traders treat Bitcoin if it's not a currency?​

Forex traders treat Bitcoin and cryptocurrencies as commodity assets that trade against fiat currencies in spot and derivatives markets (spot, futures, options). Bitcoin/USD (BTC/USD) is a commodity pair, not a currency pair in the traditional sense. However, the mechanics are identical to forex: traders buy BTC and sell USD (or vice versa) based on price expectations. The distinction is semantic but meaningful: forex regulation typically covers only fiat pairs; crypto pairs face different (or absent) regulation in many jurisdictions.

Summary​

Cryptocurrency as money remains an aspiration rather than a reality. Bitcoin and Ethereum fail as units of account because prices are set in fiat; they underperform as media of exchange due to speed constraints (Bitcoin) or market fragmentation (stablecoins); and they struggle as stores of value due to volatility. Stablecoins perform better on all three functions, but only because they are collateralized with or pegged to fiat currencies—they do not solve the problem, they defer it. For any cryptocurrency to become a true currency, either merchant adoption must exceed 50% globally (extremely unlikely), a major nation must anchor its entire economy to crypto (politically implausible), or an algorithmic stablecoin must achieve sufficient liquidity to price the global economy—all high-friction events. Until then, cryptocurrencies function as forex-traded assets: valuable, sometimes highly profitable, but not money.

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