The definition of a commodity is imperfect and ambiguous – there is no bright line test. Generally, commodities are basic goods that can be bought and sold at prices that are heavily influenced by supply and demand. In commerce, commodities are interchangeable with other goods of the same type. For example, a piece of corn is interchangeable with another piece of corn in the market with no regard to who produced the corn.
Commodities can be anything. They are generally natural resources, but recent innovation has expanded the classification of commodities to include new developments that represent the same characteristics, such as computer memory and more recently, bitcoin.
Pursuant to the U.S. Commodity Exchange Act (CEA), a commodity is defined broadly by a list of enumerated products. For example, a commodity is defined as being wheat, cotton, rice, or corn but not onions or motion picture box office receipts – it can get confusing. The CEA does not include bitcoin or other virtual currencies in its enumerated definition of commodity. So, why is bitcoin classified as a commodity?
In 2015, the U.S. Commodities Trading Future Commission (CFTC) defined bitcoin and other virtual currencies as commodities under the U.S. Commodity Exchange Act. The CFTC’s definitional decision came to light in a settlement order, which stated, “[T]he definition of a “commodity” is broad […] Bitcoin and other virtual currencies are encompassed in the definition and properly defined as commodities.”
As stated, determining if something is a commodity does not require an elemental test or clear-cut definition as used by the Securities and Exchange Commission (SEC) for securities determination (i.e., the Howey Test). Moreover, securities are commodities but not all commodities are securities. In a separate enforcement action, a U.S. federal court found that the CEA’s text supports the CFTC’s position that virtual currencies are commodities, as the CEA defines “commodity” generally and categorically, “not by type, grade, quality, brand, producer, manufacturer, or form.”
Therefore, the CFTC defined bitcoin as a commodity because it looks and acts like a commodity. It’s an illustrative example of functional regulation. Never mind the colloquial reference to “digital gold” (gold being a commodity), bitcoin and other cryptocurrencies behave like commodities. Bitcoin is interchangeable, meaning each coin is identical. Bitcoin’s price is also driven by supply and demand and is not dependent or influenced by a producer or “centralized entity.” Bitcoin is categorically a commodity.
Whether other virtual currencies are to be considered commodities is to be determined. To date, the CFTC has made a declarative judgment that bitcoin and ether are commodities and Congress is working to solidify that declaration through statute (see the S. 4760, Digital Commodities Consumer Protection Act).
Likely, many other virtual currencies should be classified as commodities, while others will inevitably meet the SEC’s test and be deemed securities. It will be up to the regulators to provide that judgment and clarity. Stay tuned!
FAQs
Bitcoin is interchangeable, meaning each coin is identical. Bitcoin's price is also driven by supply and demand and is not dependent or influenced by a producer or “centralized entity.” Bitcoin is categorically a commodity. Whether other virtual currencies are to be considered commodities is to be determined.
Why is Bitcoin still the most important cryptocurrency? ›
Bitcoin is a unique in a few ways: * Like Ethereum and unlike Lightcoin, it's the original and it isn't copying anything else. * It the only original currency, featuring a decentralized central bank with an experimental monetary policy. No other crypto is about central banking or monetary policy.
What makes Bitcoin stand out? ›
Unlike fiat currencies, Bitcoin has a fixed supply of 21 million coins, making it resistant to inflation. With 90% of all Bitcoins already mined, scarcity further drives its value.
Why is Bitcoin better than other cryptocurrencies? ›
“Bitcoin is fundamentally different from any other digital asset,” the report said, and other cryptocurrencies are unlikely to improve on BTC as a monetary good because it is the most “secure, decentralized, sound digital money.”
Is bitcoin a digital commodity? ›
Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. Is Bitcoin a commodity? Yes, virtual currencies, such as Bitcoin, have been determined to be commodities under the Commodity Exchange Act (CEA).
When did bitcoin become a commodity? ›
In 2015, the CFTC came forward and defined Bitcoin and other virtual currencies as commodities under the U.S. Commodity Exchange Act (the CEA).
Why is Bitcoin so useful? ›
Apart from being a medium of exchange, Bitcoin is often considered a store of value. Similar to gold or other precious assets, Bitcoin is seen as a hedge against inflation and economic instability. The decentralised nature of Bitcoin, coupled with its limited supply, make it resistant to interference and manipulation.
Why is Bitcoin so powerful? ›
This is because Bitcoin relies on a decentralized network of computers to validate and record transactions, rather than relying on expensive intermediaries like banks. As a result, the fees for using Bitcoin are often a fraction of what you would pay for a similar transaction using a traditional fiat currency.
Why is Bitcoin the safest crypto? ›
The Bitcoin network's security is multi-layered. Transaction hashing, mining, block confirmations, and game theory all work together to make Bitcoin's blockchain impenetrable. Since the first transaction block in 2009, the network has never once shut down – and no bitcoin has ever been stolen from the blockchain.
Who owns the most Bitcoin? ›
Satoshi Nakamoto, the pseudonymous creator of Bitcoin, is believed to own the most bitcoins, with estimates suggesting over 1 million BTC mined in the early days of the network.
Bitcoin was created by an anonymous person or group using the pseudonym Satoshi Nakamoto. Nakamoto published a whitepaper titled "Bitcoin: A Peer-to-Peer Electronic Cash System," outlining the concept of a decentralized digital currency.
Is Bitcoin actually worth anything? ›
Key Takeaways. Bitcoin derives its value in the same way any currency does: by fulfilling the six characteristics of money. Those characteristics are: durability, portability, divisibility, fungibility, scarcity, and acceptability. We believe that Bitcoin is superior to any other money that has ever been created.
What happens when all bitcoins are mined? ›
After all 21 million bitcoin are mined, which is estimated to occur around the year 2140, the network will no longer produce new bitcoin. The block subsidy will go to zero but miners will continue to receive transaction fees, which will make up an ever greater portion of the block reward.
What is better than Bitcoin to invest in? ›
Unlike Bitcoin, Ether's underlying network is far more than just a tool for peer-to-peer payments; the Ethereum blockchain is custom-made for smart contracts and decentralized finance tools, as well as for so-called Web3 applications and the trading of non-fungible tokens, or NFTs.
Is there something better than Bitcoin? ›
Cardano (ADA)
Cardano is a decentralized proof-of-stake blockchain launched in September 2017 to be a more efficient system than bitcoin, ethereum or other proof-of-work blockchains available at the time.
Is it better for bitcoin to be a commodity or security? ›
Arguably this offers investors more protection, however, it can limit the freedom of the market. If cryptocurrency is defined as a commodity, the restrictions are generally a lot looser, giving investors more freedom, and allowing entrepreneurs to define the system through more innovation – but with more risk.
Is bitcoin taxed as a commodity? ›
Key Takeaways. Bitcoin has been classified as an asset similar to property by the IRS and is taxed as such. U.S. taxpayers must report Bitcoin transactions for tax purposes. Retail transactions using Bitcoin, such as purchasing or selling goods, incur capital gains tax.
What is the difference between bitcoin and commodities? ›
Bitcoin, a digital or virtual asset, presents a stark contrast to traditional physical commodities. As a decentralized currency operating on blockchain technology, Bitcoin is not subject to control by any single entity, unlike commodities which can be regulated by governments and central banks.
Why is bitcoin more valuable than gold? ›
Key Points. Gold's supply can increase with demand shocks, while Bitcoin's ultimate supply is capped. Bitcoin is easier to store, transport, and transact with. Over the past few years, Bitcoin has been able to significantly increase one's purchasing power.
