Introduction
Publicly introduced in 2008 and existing since 2009, bitcoin is still quite new.
While many articles and books on bitcoin exist, the characterizations of bitcoin their authors offer are usually controversial, misleading, inadequate and poorly justified.
That is why we set out to make a serious analysis that could reveal the true nature of bitcoin.
Book entry form
We start with the notion of a book entry form. It was originally used to describe the form of securities that are not given as certificates to investors. In contrast to paper certificates, the ownership of book entry securities is tracked in a (usually electronic) book.
Similarly, the ownership of bitcoin is tracked in the blockchain, which is a public ledger recording the ownership of bitcoins. As designed by the inventor of bitcoin, bitcoins do not have or need any physical form.
This allows us to conclude, that similarly as book entry securities, bitcoins have a book entry form.
Coin
Can there be a book entry coin?
To find out whether an object having a book entry form can be a coin, we consult the Wikipedia, which states that a coin is
a small object
Not having a physical form, there is no problem with considering objects having a book entry form small.
usually round
As the word "usually" suggests, round shape is not necessary for an object to be called a coin.
The important property of a coin is, that round-shaped small coins can be put into a pouch and transported. In other words, round shape and small size make coins portable.
Book entry objects are portable, because their ownership can usually be transferred through Internet. Portabilities of different bitcoin splits (BTC, BCH) may differ.
usually flat
Similarly as with the round shape, the flat shape is not necessary for an object to be called a coin.
The important property is, that a flat shape allows coins to have numerals, images or text on them. These make coins recognizable.
Book entry objects are generally recognizable, because their ownership ledger contains complete information on any of them.
made of precious metal, base metal, alloy, porcelain or other human-made materials
Having seen the above list of materials, we conclude that the material used to form an object is not what determines whether an object is a coin.
The important property is, that the material used to form a coin makes the coin durable.
Book entry coins are durable, if there are many copies of the ownership book at many different physical locations, ensuring the durability.
We think that we succeeded to convince the reader that book entry coins can exist.
This idea was proposed by inventors such as David Chaum and others earlier than the inventor of bitcoin set out to make bitcoin a reality.
The word "bitcoin" suggests that the goal of bitcoin's inventor was to create a coin, making this the final reason why we classify bitcoin as a coin, more precisely, as a book entry coin.
Numismatic value
Being a coin, bitcoin has got a numismatic value.
Similarly as with other coins, the numismatic value of bitcoin does not depend on it being used as a currency.
The factors influencing the numismatic value of bitcoin are
intest in bitcoin
The interest in bitcoin has got a historical dimension.
The efforts to create a book entry coin predate bitcoin.
Bitcoin is the oldest existing book entry coin.
Bitcoin is the first book entry coin that is also a commodity. We demonstrate this property below.
The interest in bitcoin is confirmed by the existence of numerous books and articles on bitcoin.
The interest in bitcoin is confirmed by the number of searches for information on bitcoin.
Bitcoin is exhibited in museums as a new, significant item in coinage history.
The interest in bitcoin is confirmed by the existence of numerous bussinesses offering exchanges between bitcoin and fiat money.
scarcity in relation to the demand, meaning that a human effort is required to obtain a bitcoin. Bitcoin is scarce, since
Everybody wanting to create new bitcoins must produce a proof of work.
Some authors claim that bitcoin is not scarce, since there can be an infinite quantity of bitcoin look-alikes called altcoins based on free availability of bitcoin source code, but
Due to bitcoin's recognizability, it is easy to discern bitcoin from the look-alikes.
The existence and development of bitcoin look-alikes demonstrates interest in bitcoin. This is a factor increasing the numismatic value of bitcoin.
Some authors claim that bitcoin is not scarce, since it can split infinitely many times.
Bitcoin splits, however, do not decrease the total value of bitcoins owned by a person similarly as share splits do not decrease the total value of shares owned by a person.
Having established that bitcoin is a book entry coin that has a nontrivial numismatic value, we established that bitcoin is an economic good.
Bitcoin already has got splits such as BTC, BCH or BSV. Our observation that bitcoin has got a nontrivial numismatic value applies to all of them, but there are significant differences in interest between the splits, causing significant differences in their numismatic values.
Production
A definition states
Production is the process of combining various inputs, both material (such as metal, wood, glass, or plastics) and immaterial (such as plans, or knowledge) in order to create output.
Production of bitcoin can be described by the total reward equation
t = r + f
where
t is the total reward
r is the block reward that consists of newly created bitcoins and goes to the miner
f are the mining fees that go to the miner
For the production to be viable, the input costs (which consist mainly of electricity costs) must not exceed the total rewards obtained by the miner.
The most important finding is, that bitcoins are produced in a process combining various inputs (the main component being the electricity costs) in order to get the output that consists of newly produced bitcoins and bitcoins obtained by the miner as the mining fees.
Moreover, there are many miners producing bitcoins.
Commodity
We use the definition stating that
A commodity is an economic good such that the market treats instances of the good as equivalent or nearly so with no regard to who produced them.
Note the word produced in the definition. This suggests that commodities must be produced.
This finding is confirmed by another commodity characterization stating that
Commodities were things of value, of uniform quality, that were produced in large quantities by many different producers; the items from each different producer were considered equivalent.
This characterization specifies not just that commodities must be produced, but adds a clause that they must be produced by many different producers.
USDT
In contrast to economic goods that are produced, USDT is not a result of a production process. It is just issued.
There was a situation when somebody else than Tether issued some USDT. As soon as this fact became known, the USDT in question were eliminated from the market as invalid.
This is not compatible with the "no regard to who..." clause.
Neither it is compatible with the clause that commodities must be produced by many different producers.
Summing up, USDT is not a commodity.
Premined coins
Premined coins are not produced. They are just issued.
Similarly as for USDT, the "no regard to who..." clause does not hold.
Summing up, premined coins are not commodities.
Note that, e.g. XRP is a premined coin.
Proof of stake coins
The problem with proof of stake coins is, that they are not produced.
Summing up, proof of stake coins are not commodities.
Bitcoin
As we demonstrated above
Bitcoin is an economic good.
Bitcoin is produced by many different producers.
In relation to the "the market treats instances of the good as equivalent or nearly so with no regard to who produced them." clause
The rules of bitcoin do not prescribe that a miner has to reveal his identity. Thus, one reason why the value of bitcoin cannot depend on the identity of its producer is the fact, that the identity of the producer of a coin may be unknown.
When a bitcoin transaction is performed, the coins entering the transaction (transaction inputs) are replaced by the coins exiting the transaction (transaction outputs). If the transaction inputs had different producers or unknown producers, there is no single miner one can identify as the producer of the transaction outputs. Thus, another reason why the value of bitcoin cannot depend on the identity of its producer is the fact, that bitcoin transaction outputs commonly do not have an identifiable single producer.
Summing up, bitcoin is a commodity.
Since its start in 2009, bitcoin has split several times and bitcoin splits such as BTC, BCH and BSV exist. Our above findings apply to all of these.
XEC
XEC is also a bitcoin split, but, due to change of mining rules, the status of XEC is different.
The main difference is, that the reward equation for XEC can be described as
t = s+ f + q
where
t is the total reward
s is the part of the block reward that goes to the miner
f are the mining fees that go to the miner
q is the part of the reward that goes to the group of XEC developers
Now for the process to be viable, the sum of input costs paid by the miner must not exceed s + f, the part of the total reward that goes to the miner. Since f represents previously existing coins, this establishes that economically, the output of the production process is only the part of the block reward denoted by s.
Unlike the part of the total reward denoted by s, the part of the total reward that goes to the group of XEC developers denoted by q economically cannot be considered an output of the production process. Instead of being produced, the part of the total reward denoted by q is just issued to the group of XEC developers.
As a consequence, and as opposed to the other above mentioned bitcoin splits, XEC is not a commodity.
A security?
An object having a book entry form may be a security. As we discussed above, such an object may also be a coin.
To determine whether an object having a book entry form is a coin, we use a simple rule - the intent of the designer.
The question whether a specific object is a security is significantly more complicated, since it is a legal matter. The answer may differ from legislation to legislation.
We try to apply the Howey test and discuss possible differences in other legislations.
Commodity
As an investment of money
Some investors buy commodities on the market as an investment.
In a common enterprise
Producers of the commodity compete when producing the commodity.
As competitors, producers do not constitute a common enterprise.
When obtaining money for their production, the producers must cover their input costs. The necessity to cover the input costs does not allow the producers to pool the money obtained on the market.
With a reasonable expectation of profit
While commodity owners can profit from commodity market price changes, there is no guarantee or promise by anybody that market price changes would occur.
Profit to be derived from the effort of others
For a commodity, there is no entity who pooled the investor money and who could use the pooled money to influence the market price, pay dividends, make interest-like payments or otherwise generate profit for the investors.
Summing up, in accordance with our expectations, the Howey test does not classify commodities as securities.
As far as we know, this result is general in the sense, that there is no legislation classifying commodities as securities.
This finding applies specifically to the above listed splits (BTC, BCH and BSV) of bitcoin.
XEC
While XEC is a bitcoin split too, due to a change of the mining rules, its status differs from the status of BTC, BCH or BSV.
As an investment of money
Some investors buy XEC on the market as an investment.
In a common enterprise
In case of XEC, the group of developers obtaining the issued XEC can be considered a common enterprise, since it can pool the money obtained for the XEC they sell.
With a reasonable expectation of profit
The group of XEC developers promised to develop the software of the XEC network.
XEC owners expect the group of developers obtaining the issued XEC to improve the software in such a way that the price of XEC increases.
Profit to be derived from the effort of others
As mentioned above, the group of XEC developers is supposed to increase the price of XEC by their efforts.
Thus, according to the Howey test, XEC is a security. A different result may be obtained in legislations not using the Howey test.
USDT
An investment of money
Some investors buy USDT as an investment of money.
In a common enterprise
The issuer of USDT obtains money from the investors for the newly issued USDT.
The issuer of USDT pools the money from investors, which can be classified as a common enterprise.
With a reasonable expectation of profit
The owners of USDT expect to buy USDT at the 1:1 rate to US dollar and sell it at the same rate. Thus, if USD is their legal tender, the owners of USDT do not expect profit from USDT's exchange rate changes.
As far as we know, the owners of USDT do not expect other, interest or dividend-like payments coming from the USDT's issuer.
Profit to be derived from the effort of others
It appears that the only profit USDT owners using USD as their legal tender are able to earn is derived from their own efforts like taking advantage of high portability of USDT manifested by
fast transactions
low transaction fees
Summing up, in our opinion, the Howey test does not classify USDT as securities when owners use USD as their legal tender.
This is a result we obtained with a reservation that the issuer of USDT did not promise USDT owners some other profits.
A different result may be obtained in legislations not using the Howey test or in legislations using the Howey test but not using US dollar as their legal tender.
XRP
As an investment of money
Some instutional investors obtained XRP from Ripple by an investment contract.
In a common enterprise
The role of the common enterprise in the above contracts played Ripple, which pooled the money of the investors.
With a reasonable expectation of profit
The above mentioned institutional investors had the reason to expect profit from exchange rate changes caused by the advertising and infrastructure building efforts promised by Ripple.
Profit to be derived from efforts of others
Ripple promised to use the pooled money to build the XRP infrastructure and to advertise XRP.
Summing up, the Howey test classifies XRP as securities. A different result may be obtained in legislations not using the Howey test.
Conclusion
In this article we analysed the nature of bitcoin. According to our results, bitcoin, represented by its BTC, BCH and BSV splits, is a commodity and a book entry coin and per our Howey test results it is not a security.
The status of another bitcoin split, XEC, is different: XEC is not a commodity and it is a security per the Howey test.
We found that USDT is not a commodity. It does not look as security per our Howey test results, but the status of USDT in legislations not using the Howey test may differ.
XRP is not a commodity. It is a coin that, at least when sold to institutional investors, was found to be a security. The status of XRP in other legislations may differ.
The world of book entry coins is manifold, containing many coin varieties, some of them being commodities and others being classified as securities per the Howey test.