What is Unit of Account? | CryptoWallet.com

What is Unit of Account?

Unit of account is an economic term referring to the property of a financial instrument as a standard unit measure of something. Simply put, it is that property of money that makes it possible to compare the value of items such as cars, houses, or artworks.

All of these items can be represented in a particular form of money (be it fiat currencies, cryptocurrencies or any other financial instruments) that makes their value comparable with one another.

A unit of account is simpler explained in financial accounting terms, which is a representation of figures in a financial statement, i.e. the figures in a financial statement are expressed in a particular monetary unit such as USD, GBP, BTC, ETH etc. This is also referred to as a unit of scale.

Bitcoin as a Store of Value, Unit of Account, and Medium of Exchange

Bitcoin as a medium of exchange is undoubtedly proven even in its earlier days owing to arguably the most famous pizza purchase ever. For two pizza boxes, a sum of 10 BTC was exchanged at a value of about $25 in 2010, and a quick google search will tell you just how much that purchase is worth today. Although Bitcoin has gained widespread popularity, it is certainly not close to functioning as a legal tender, a store of value or a unit of account in any national economy.

In many countries, the store of value, unit of account and accepted medium of exchange for day to day transactions is the native currency of that country, and Bitcoin simply serves as an alternative to fiat currencies. 

Although Bitcoin fulfils these monetary functions to a large extent as it has proven to be more secure, divisible and transparent, many factors hinder it from being entirely trusted by world governments. For example, Bitcoin’s volatility issue hinders it from being a stable unit of account in a national economy as it can experience price fluctuations of up to 30% in a single day.

Bitcoin as a Unit of Account

This same reason stands for being used as a medium of exchange as Bitcoins are still currently converted back to popular fiat currencies. For Bitcoin to work as a medium of exchange, it must first achieve global adoption such that merchants who accept Bitcoins can exchange it directly for the goods and services they offer.

As it stands, a seller runs the risk of losing a percentage of their payment primarily due to high transaction fees and volatility. In accounting terms, Bitcoin exists as a unit of account given it can be represented up to 8 decimal places, making it far more divisible (a standard property of money) and representable in financial reports than fiat currencies. 

Despite Bitcoin’s ability to fulfil all these three functions of money, its volatile nature remains a significant barrier to the digital asset’s global adoption as a legal tender. Bitcoin must comfortably inhibit all these properties if it is ever to gain worldwide adoption and actualize Satoshi’s vision of replacing fiat currencies.