Why Bitcoin is Neither Private nor Fungible

Bitcoin was once considered to be a private digital currency used primarily by people on the dark web looking to buy and sell drugs. But most experts recognize that’s no longer the case. Illegal activity accounts for less than 1% of all Bitcoin transactions. It’s also become readily apparent that Bitcoin is not private. Bitcoin is pseudonymous, not anonymous, and Bitcoin is easily traceable. A much more contentious statement is that Bitcoin also lacks fungibility, one of the key properties of money.

Properties of Money

First, let’s go over what the fundamental properties of sound money are. Keep in mind in most cases it’s not an all or nothing distinction. There’s a scale.

  1. Unit of Account – A unit of measurement for tracking the underlying value of a good, service, or wealth. Currencies that are highly volatile relative to other currencies do not perform this function as well as more stable currencies since more volatile currencies need to keep changing the price to account for volatility.
  2. Durability – Lasts for long periods of time.
  3. Divisibility – Can be divided into smaller units.
  4. Portability – Easy to transport. While money does not need to be available in digital form, money available in digital form can be at an advantage here if managed correctly.
  5. Medium of Exchange – The value it holds can easily be exchanged for a good or service.
  6. Unforgeable – Not always included as one of the fundamental features, but obviously still important. Scarcity gives money value, and printing additional or fake money makes it less scarce. Without security features, money is easily duplicated.
  7. Fungibility – A key property of money whereby a given unit of value is interchangeable and equal in value to the same unit of value.
  8. Store of Value – Retains value and purchasing power over time (short-term, medium-term & long-term).
History of the Fungibility of Money

Money is fungible when its units are equal in value and interchangeable. If you have a $10 bill in your pocket, it should be the same value as any other $10 bill. And also the same value as two $5 bills. If you were to attempt to pay for a good at a merchant with a $10 bill and they said, “I’ll give you $9 (of value) for it”, it would not be fungible!

Fungibility of money is something we take for granted now because of the idea that some money might not be fungible sounds ridiculous at first. But the lack of fungibility of money used to be a very big issue. In the past when gold and silver coins were used, they often were composed of different purities. Older coins had higher gold/silver content in them, while newer coinage often had been ‘debased’ with cheaper metals like copper. People unsurprisingly preferred coinage with higher purity, as the scarcity of rarer metal is what gave it value. This is just one example but history is littered with examples of money lacking fungibility.

Modern Fiat Currency

Today, the fungibility of money isn’t discussed much because it’s usually not an issue. Cash, or more specifically, banknotes, are highly fungible. Banknotes are fungible because laws deem two banknotes of the same denomination to have the same value. People have no reason to assign different values to different banknotes anyway. They are just pieces of paper. Plus, banknotes can be hard to distinguish between one another; one needs to look carefully at the serial number in order to track banknotes, and no one really bothers to do that.

Fiat currency in digital form isn’t quite as fungible as physical banknotes, but generally speaking, it is still reasonably fungible. The main exception to its fungibility is when it’s used for illegal or fraudulent purposes. Recipients of digital fiat risk having the transaction reversed or currency seized in some cases even if they did nothing wrong themselves; the money is deemed to be ‘dirty’. This is why owners of ‘dirty’ money often seek to ‘clean’ their money, better known as ‘money laundering’. Once that money has been utilized and passed on to the next person, and the owner has received something of similar value in return, the funds are now ‘clean’. Digital fiat currency isn’t quite as fungible as cash. But because ‘dirty’ money can be seized or can cause problems for the owner, it’s often valued less than its face value.

Bitcoin’s Lack of Fungibility

Bitcoin has issues with fungibility due to how easily Bitcoin can be tracked. It’s more traceable than digital fiat currency and far more traceable than cash. Due to laws surrounding Anti-money Laundering (AML), exchanges often blacklist cryptocurrency that is ‘too closely’ linked to illegal or questionable sources. Exchanges often do this due to government laws or mandates requiring them to not facilitate the trading of ‘dirty’ money. Therefore, that Bitcoin is therefore worth nothing at that exchange or merchant. If you can find another person to trade it with, they might be willing to accept it albeit perhaps less than face value under the assumption they will either find a way to ‘clean’ it or be able to sell it somewhere else at its face value. Ultimately, some Bitcoin is valued less due to its ‘dirty’ history.

If you as a merchant happened to receive payment for a good or service that came from a ransomware hacker for example, and your exchange or service provider has that source address ‘blacklisted’, it shouldn’t be your responsibility to ensure it’s ‘good’ bitcoin. It wouldn’t be practical either for every individual to keep track of all the bad addresses as well as addresses that are ‘too closely linked’ to bad addresses either, and then cross-reference each transaction received before providing the good or service. But, for better or worse, that’s the situation we find ourselves in today. Bitcoin is lacking one of the key properties of money: Fungibility.


One of the main ways ‘dirty’ Bitcoin is tracked is through known ‘bad’ addresses, and then measuring how far any given wallet is away from said address. To ‘clean’ Bitcoin, some people create a variety of transactions, one after the other, so the illicit funds are more ‘hops’ away from the bad source(s). Other people elect to use a CoinJoin implementation, like the one implemented by Wasabi Wallet to obfuscate dirty history. Other people elect to not use Bitcoin at all and instead use ‘privacy coins’. These strategies work to varying degrees of effectiveness. Nonetheless, if you have to use such strategies in the first place for 1 BTC to be worth 1 BTC, the currency lacks fungibility!


The fungibility issue with Bitcoin exists because of laws requiring exchanges and businesses to avoid dealing with ‘dirty’ or tainted money. Such service providers follow local laws and take such actions accordingly, but compromise Bitcoin’s fungibility in the process. Bitcoin can be highly fungible just like cash. But unfortunately, that does not seem like the direction we are heading in. Rather, countries are heading in a direction of censorship, attacking transparent and traceable money in the process. These actions by governments are likely to push people to take measures that are even more resistant to censorship, less traceable, and more private. When that happens, governments will have a much tougher time fighting crime; they’ll be doing so blindfolded.

4 thoughts on “Why Bitcoin is Neither Private nor Fungible

  1. Paul Janowitz Reply

    Okay, I see your points with Bitcoin’s lack of fungibility and privacy. But why are you blending out other cryptocurrencies which already solved these problems.

    Namely Monero on your points of sound money:

    1. Unit of Account – Volatility is a natural thing for smaller assets with limited supply and markets but it decreases with higher trade volumes, so this shouldn’t be something settled in stone with USD / EUR / CNY or few other similar currencies which have enough volume.
    2. Durability – While Monero (and Bitcoin) are pretty young, unlike many other assets / cryptocurrencies they have shown steady development and growing support from the community within the past years.
    3. Divisibility – That is a key feature of Cryptocurrencies, Bitcoin offers 8 decimal places, Monero has even 12 without any fixed denomination like cash bills or notes.
    4. Portability – Borderless, over any public or private network or any other storage device.
    5. Medium of Exchange – Adoption is key for every currency, national currencies have the advantage to be adopted / enforced by law, non-national (crypto)currencies have to struggle with the hen & egg dilemma, but at least some online industries are more and more keen to accept cryptocurrencies as payment method, since they are cheaper and fraud resistant in comparison to traditional bank transfers or credit card payments.
    6. Unforgeable – There has been no protocol bug yet which would have been exploited in Bitcoin for 10 years now and also Monero has not have had any such issue, also the supply is clearly defined from its beginings (in comparison to FIAT cash with all the counterfeits and also central banks printing money out of thin air).
    7. Fungibility – Unfortunately Bitcoin failed to be fungible since coins can be tainted (eg. from theft, fraud, drugs) and a random user can not determine if his coins are “clean” or not. However, there are techniques to make cryptocurrencies as fungible as cash. Monero’s privacy features make it very fungible, since no coins history can be traced on the blockchain and is similar to cash which you don’t have to care if it was used in any illegal transactions before you got it.

    Would be nice to see a comment from your “forensic” point of view!

    • Paul Sibenik Reply

      1. USD & EUR are by far the best units of account. Nothing else really comes close. This is because of their volume and adoption. A merchant in Norway wouldn’t have to raise the price of goods in their local currency if the SEK increased in value relative to the NOK, but they might have to if the EUR increased noticeably! Unit of Account is typically the hardest and last criteria for a currency to achieve, and while it is a property of ‘sound’ money, it can still have value even if it hasn’t fully met this criterion yet.

      2. Durability has never really been an issue with modern currency nor cryptocurrency.

      3. Divisibility has never been an issue with modern currency nor cryptocurrency either.

      4. Transportable yes for those with the technology, but not necessarily more practical for all people. Someone who doesn’t have a smartphone would need to do it from a desktop or laptop computer with an internet connection.

      5. No cryptocurrency satisfies the medium of exchange criteria all that well. There’s a chance Libra might in a few years IF it’s successful, but we’ll have to wait and see. Bitcoin, while not coming close to meeting this criterion is still leaps and bounds ahead of Monero though. I think Monero will have far more difficulty becoming a successful medium of exchange than Bitcoin is having. This is because nation-states will push harder and harder against them, maybe even prohibiting settlement of transactions in the currency in its own borders. Businesses are not going to push so hard for private money that’s they’ll subvert governments in this manner in well-developed countries. You might argue that 30 years ago all transactions used to be private with cash and its only recent that transaction history is no longer private. But given how useful trackable money has been to governments to discover and prosecute all sorts of crimes, I highly doubt they’re going to give that up in a digital age where money can easily be tracked! When we had to deal with paper, they had to accept it, but now there’s no reason governments would have to stop tracking money — we’re not going back.

      6. Well-proven cryptocurrencies, meet the unforgeability criterion quite well!

      7. Agreed that Monero is very fungible. But a currency can still have value even if it doesn’t meet this criterion as well. Most Bitcoin isn’t TOO closely tied or tainted to criminal activity. And Bitcoin is still considerably more fungible than currencies used far in the past like the gold coins of differing precious metal contents (but same stamped value) on them!

      No currency perfectly meets all this criteria. The USD or EUR are the best at meeting this criteria overall, but it’s possible they may be eclipsed by a cryptocurrency in the future.

      I don’t ever expect Monero to become a mainstream currency because it’s likely never going to come close to meeting the medium of exchange criterion that fiat currencies currently do – some major cryptocurrency like BTC & ETH will probably better meet this criterion in the future, but I don’t expect Monero to be one of them. Governments will push hard that it’s designed for criminal use, and businesses have lots of other cryptocurrencies they can accept if they want. And if it can’t meet the medium of exchange criterion, it won’t even come close to meeting the unit of account criterion.

      On another note, Monero works well in a privacy-centric world, but that’s not the world we live in. People buy & sell monero off exchanges (which have KYC endpoints), and if people ever start using it as a medium of exchange at merchants (should they ever accept it), that also compromises your privacy as it proves you own Monero, even if the exact balance cannot be determined.

      • Paul Janowitz Reply

        Thank you for your detailed response!

        Sure privacy-focussed projects like Monero are a seen as threat by governments, agencies and regulators, however it’s hard to define what is too much privacy and what not. What about Bitcoin’s Lightning Network which introduced some kind of privacy, what about technologies like simple CoinJoins or even MimbleWimble which may be introduced on the Bitcoin network?

        Do you really think a single specific coin (like Monero) will or even can be banned in any democratic country? This didn’t work for the export ban of cryptography like PGP and how would you define a ban on selected open source projects which can easily be forked by literally anyone out there? Would a government instead ban a specific technology like “zero-knowledge proofs”? I would just see an option to ban “private money” as a whole being accepted as payment method, but there you have to deal with stuff like miles, vouchers and so on which are all some sort of private monies.

        Device or communication encryption is also a threat for pretty much the same agencies and they were happy when people used telephones, emails and sms instead of encrypted messengers. All big tech companies like Apple, Google or Facebook push encryption for messaging which makes it also harder to track criminal activity. However, grassroots open source projects like Bitcoin or Monero don’t have the lobby which big tech companies have, so it might be indeed some kind of difference.

        I personally don’t see neither Bitcoin nor Ethereum becoming mainstream, for the simple reason “lack of privacy”, exposure of any funds you own to anybody you transact with and practically unforeseeable transaction fees. Sure, KYC exchanges and similar services might impact some of your privacy even when using Monero, but your overall privacy is still a lot higher than on a transparent blockchain, not even mentioning decentralised exchanges like Bisq or OpenBazaar.

        Every new technology needs some kind of “tipping point” which is not yet being hit by Bitcoin nor by Ethereum or even Monero, but if it will be hit, there will be no way back in my opinion. Hardly any official comment is complaining about end-to-end encrypted messaging like Whatsapp or Apple Messages nor about encrypted mobile devices out of the box or SSL/TLS encryption for websites literally everywhere, but it took dozens of years to establish these on the mostly open / unencrypted internet. Cryptocurrencies are not yet being broadly used even by people involved in them, they are mostly involved due to speculation. However, this might change at some time, when people realise what impact (the lack) of financial freedom really means, maybe something like “Fridays for Future” in Europe on the climate change…

Leave a Reply

Your email address will not be published. Required fields are marked *