Is Bitcoin a commodity, security, or property? According to the Commodity Futures Trading Commission (CFTC), Bitcoin is classified as a commodity. A couple of years ago, the Securities and Exchange Commission (SEC) also ruled that Bitcoin is a commodity. The Internal Revenue Service (IRS) considers Bitcoin as property, and it is subject to taxable gains, just like stocks and real estate.
But what is Bitcoin, exactly? In our opinion, Bitcoin is a pure commodity. Now, let’s be super clear here: Bitcoin is not a commodity in the same way gold or other rare earth materials are, which must be removed from essentially valueless soil. It isn’t a raw material used to manufacture or produce finished goods, such as crude oil. While both gold and crude oil are valued due to the effort required to extract them and their inherent supply scarcity, Bitcoin is a commodity based on its protocol scarcity.
Therefore, to understand Bitcoin, you must understand the Bitcoin protocol.
But first, a bit of history.
Bitcoin emerged as a new digital asset class following the release of the Bitcoin white paper in 2008 and the launch of the network in 2009. Though it was the first successful cryptocurrency, it was surrounded by mystery. It was developed by an unknown individual or group under the pseudonym Satoshi Nakamoto. Nakamoto was active in the Bitcoin community until April 2011, when he sent a message to developer Mike Hearn, saying: “I’ve moved on to other things. Bitcoin is in good hands…”1 He has not been heard from since, and his Bitcoin wallet, holding an estimated 1.1 million BTC, has not been touched since 2010.
The impetus to create a cryptocurrency like Bitcoin has been attributed to the global financial crisis of 2008. It was “a backlash against the failings of the conventional financial system, with its overleveraged shadow banks and daisy chain of leverage and maturity mismatch.”2 The 2008 white paper painted a vision in which the financial world becomes simply a peer-to-peer transaction, eliminating the problematic middleman, and it largely achieves that goal using unique coding and standards (protocol) that allow it to maintain this vision. One common theme in most early cryptocurrencies is that, in theory, there is no inflation—as dictated by the source code, the supply cannot be increased and can’t be debased by inflating the supply as central banks do.
Bitcoin is not a company. It has no central control system, CEO, or executive team making decisions. Instead, it’s open-source code available to anyone, meaning anyone can copy it to create a competing cryptocurrency—though competition in the space has been surprisingly peaceful. Bitcoin operates on a protocol designed by Satoshi Nakamoto, agreed upon by everyone using it. The Bitcoin network (the system of miners who record and verify transactions) is distinct from the Bitcoin protocol (the set of rules governing the digital asset).
Miners confirm transactions and, in the process, release new Bitcoins into circulation. While any internet-based system could be a target for hacking, the Bitcoin network has never been hacked in its seventeen years of operation. Its resilience comes from being distributed across thousands of computers, preventing any single group of miners from gaining control or creating a central point of failure.
Bitcoin is a digital asset maintained on a blockchain—a public, cloud-based ledger that anyone can view. Every Bitcoin transaction since the network began is recorded and visible without special permission. Transactions are processed continuously and confirmed in “blocks” roughly every ten minutes by the miners, who are rewarded for verifying transactions and securing the network.
Now with the basics out of the way, let’s discover what drives Bitcoin’s price and its incredible peaks over the years.
The Economics of Bitcoin
Bitcoin economics are driven primarily by three vectors—equipment cost, degree of difficulty, and the halving, with price discovery shaping value over time.
Equipment Cost
Bitcoin’s equipment cost is determined by the price of the Bitmain Antminer S21 XP machine, which is primarily used for mining. This machine is essentially a server, although many call it a “mining rig.” The current Bitmain Antminer S21 XP costs approximately $5,000. The life expectancy of this server is approximately 3 years, as the processors are continually updated. Also factoring into the cost of the Antminer is Bitcoin’s degree of difficulty and hash rate. The hash rate is the average computational power of the network.
Currently, the hash rate is approximately 900 exahash per second (one quintillion 1018 per second). One year ago, the hash rate was approximately 600 exahash per second. The higher the hash rate, the more powerful and expensive the equipment becomes. Newer models boast higher speeds, advanced chips, more efficient cooling, and higher energy use, all of which contribute to the cost of the machinery.
These advances are among the factors driving the appreciation of Bitcoin. As computational speed improves, the purchase of new mining equipment will continue. This will continue to increase the hash rate as the number of mining rigs continues to grow. An increasing hash rate means it will be more expensive to mine Bitcoin, thereby increasing the price of Bitcoin.
Halving
At the time of writing, the number of Bitcoins mined is 19,896,200. From now until the year 2140, only 1,103,800 Bitcoins will be produced. Several Bitcoins have been lost (also called “BitRot”). These are cases where owners cannot access their coins since they have lost their private key.
Unlike gold and other commodities, Bitcoin’s rate of issuance is strictly controlled by its mining protocol, which follows a fixed schedule regardless of outside factors. Every four years, a “halving” reduces the reward miners earn for adding a block to the chain by half. In 2009, miners earned 50 BTC per block; by 2024’s halving, that reward had fallen to 3.125 BTC. The next halving, scheduled for April 14, 2028, will reduce it to 1.5625 BTC. These built‑in scarcity measures mimic precious metals like gold and have often been followed by price increases.
Price Discovery
Unlike other commodities, in which price is set mainly by supply and demand, Bitcoin’s price is determined through continuous buying and selling, and influenced by the abovementioned factors, including equipment cost, scarcity from halving events, and market sentiment. All of these forces interact to set Bitcoin’s value in real time, within the constraints of its fixed supply and intentional scarcity.
In conclusion, Bitcoin is a unique and innovative asset whose protocol causes the cost of production to rise over time, allowing its value to increase accordingly. This fundamental yet brilliant protocol design supports its investment performance and sets it apart as a distinct asset class unlike any other. Many investors still underestimate how exceptional its economic model truly is. However, as more people learn about Bitcoin, the hope is that it will transform the way we handle, spend, and think about our currency.
Citations:
1. Learn_With_Fullo. (2023, December 13). Bitcoin: 13 years ago Satoshi Nakamoto posted his last message [Online forum post]. Binance Square. https://www.binance.com/en/square/post/1309003657793
2. Shin, H. S. (2022, December 16). The great crypto crisis is upon us. https://www.bis.org/speeches/sp221216.htm
