Fundamentals of Money and Why Bitcoin is Halal


Assalamu Aleykum my dear brothers and sister, HCP wishes you all Ramadan Kareem!

Is Bitcoin Halal? if this is the first question that comes into your mind when Cryptocurrencies are mentioned, then this article is for you.

 Before we dive deep, if you don't know how cryptocurrencies work consider checking our recent blog about how cryptocurrencies function and how to invest in them Islamically

Let's start with what's money?

According to Wikipedia Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, in a particular country or socio-economic context. The main functions of money are distinguished as a medium of exchange, a unit of account, a store of value, and sometimes, a standard of deferred payment. Any item or verifiable record that fulfills these functions can be considered money.

To put it into simple terms money is a medium of exchange, and Islam encourages us to participate in trade and prohibits indulging in unlawful activities i.e Interest, usury, gambling, etc.

Is Bitcoin Money?

Let's scale this with the fundamentals:

Although many will argue that Bitcoin fulfills neither of the fundamentals stated above, they would be wrong.

Bitcoin is used to measure a unit of account against fiat currencies and other cryptocurrencies, ie, $1USD = 0.00002153 BTC or Satoshis(denominations less than 1BTC) at the time of writing this article.

Bitcoin is also used as a medium of exchange, recently El-Salvador rendered Bitcoin a legal tender and Germany recognized Bitcoin as a form of private asset. This doesn't mean that Bitcoin is obsolete in other jurisdictions that didn't render it legal, if the country or the authority of any jurisdiction didn't outright ban Bitcoin it can be used to facilitate transactions within the jurisdiction & beyond.

Does Bitcoin align with Islamic principles?

To simplify Bitcoin is a digitized form of capital. That runs on Blockchain technology(Distributed data store for digital transactions) to facilitate value transactions without the risk of forgery or double-spending. Generally, this aligns with the Islamic view on the currency.

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As we know Bitcoin is very volatile and fluctuate in big swings, so how can we safely say that Bitcoin is a store of value?

What's a store of value(Mãl)?

A store of value is any commodity or asset that would ordinarily keep purchasing power into the future and is the function of the item that may be saved, retrieved, and exchanged at a later period while remaining reliably valuable when retrieved.

The Bitcoin community argues that bitcoin is the digital equivalent of gold. It can be used as a safe haven for wealth in the same way as gold, to back up this claim recently several wealthy investors, institutions, and corporations have increased their holdings of bitcoin. This move indicates that gradually the digital coin will be widely adopted store of value, considering its limited supply of 21Million coins would cause a gold rush-like market scenario once the cryptocurrency market becomes the norm. So yes Bitcoin qualifies as a store of value regardless of its short-term fluctuation!

Bitcoin - Traditional market correlation

Correlation is a critical factor in determining the riskiness of a specific asset.

If the price of a particular asset moves independently of the economy or other traditional investments, incorporating that asset into your portfolio can significantly reduce overall risk.

Correlation coefficients range from -1.0 (completely inverse correlation) to +1.0 (completely positive correlation) (a perfect positive correlation). A correlation of 0 indicates that there is no correlation at all.

The correlation between Bitcoin and US stocks has reached 0.66, indicating that it is not the best way to reduce the risk profile of a traditional portfolio.

The cryptocurrency industry is still in its infancy, so there are many challenges ahead. However, Bitcoin's drawbacks are quickly being addressed and solved, and its adoption rate is rapidly increasing over time, the world's most popular cryptocurrency may realize its full potential as digital gold.

Now that we know the fundamentals of money and how Bitcoin functions;

Is Bitcoin Halal?

"Any money or currency is neither halal - permissible - nor haram - impermissible. Guidance is about the value that it represents. If money is transacted in a lawful manner then it is halal," Zayd al Khair, a religious adviser at the Ramadan mosque, told 'The Daily Telegraph'.

Although the views of scholars on Cryptocurrencies differ, the fundamentals stay, if a Cryptocurrency isn't involved in unethical activities or any activity that's prohibited by the Islamic teachings then it's deemed to be Haraam. But if Cryptocurrency doesn't involve any of the prohibited activities then it's allowed. Wallahu A'lam.

In our next articles we'll analyze the other popular cryptocurrencies and examine if they align with the Shari'a or not

If you need help determining which cryptocurrencies will best suit your needs when investing by Sharia Law, please feel free to contact us here at Halal Crypto Pro or join our telegram. We're always happy to hear from our readers, and we'll do our best to help you find the right investment opportunities for your needs!