Why is Bitcoin Considered Outside Money? Exploring its Unique Status
The classification of Bitcoin within the world of economics is a topic of ongoing debate. One key aspect of this debate revolves around whether Bitcoin qualifies as "outside money." What does this mean, and why is it significant?
Understanding Outside Money: Beyond Traditional Definitions
Outside money refers to assets that are not liabilities of any private entity. Outside money are simply commodities such as gold or Bitcoin. It represents a store of value independent of any specific institution or government. This contrasts sharply with "inside money," which represents private debt. The actual definitions suggest that inside money is an asset representing a form of private debt (non Bitcoin falls outside this category.)
Bitcoin as Outside Money: Independence and Decentralization
Bitcoin\'s decentralized nature is a primary reason it\'s often considered outside money. Bitcoin was designed by its pseudonymous inventor, Satoshi Nakamoto, to work as a currency, but its status as a currency is disputed. [1] Unlike traditional currencies issued by central banks, Bitcoin operates on a peer-to-peer network, free from centralized control. This characteristic aligns with the core principles of outside money: autonomy and independence.
Bitcoin\'s Role as a Global Settlement Asset
A crucial distinction lies in Bitcoin\'s ability to facilitate global settlements. Bitcoin is the only outside money that can be immediately physically settled to and from anywhere in the world. This capability sets it apart from other forms of outside money and highlights its potential in a globalized economy.
The Debate: Is Bitcoin Truly Money?
Despite its potential, Bitcoin\'s classification as "money" is still widely contested. Economists define money as a store of value, a medium of exchange, and a unit of account. While Bitcoin has gained traction as a store of value, its volatility and limited acceptance hinder its adoption as a widespread medium of exchange and unit of account. In a recent article, Yermack (2025) argues that bitcoin is not money because it functions poorly as a medium of exchange, unit of account, and store of value. We offer a different perspective on its unique characteristics.
Bitcoin as Digital Gold and Alternative Investment
While Bitcoin may not be considered money in the traditional sense, it has emerged as a popular store of value and alternative investment asset. Many investors view Bitcoin as a digital gold, a hedge against inflation, currency devaluation, and geopolitical instability. Its limited supply and decentralized nature contribute to its appeal as a safe-haven asset.
Conclusion: Bitcoin\'s Evolving Identity
Whether Bitcoin fully meets the traditional definition of "money" remains a subject of debate. However, its characteristics as outside money – its independence, decentralization, and potential as a global settlement asset – position it as a significant and evolving force in the global financial landscape. As the world continues to grapple with digital currencies, understanding Bitcoin\'s unique attributes is crucial for navigating the future of finance.