Human history has been defined by a large number of monumental developments. The wheel allowed civilization to transport goods and people across long distances. The printing press allowed knowledge to be recorded and widely disseminated. The automobile gave people more freedom and improved the reliability of travel. However, perhaps none of these developments, or the countless others we didn’t mention, have had a greater impact on society than money.
The importance of money cannot be overstated. Prior to the invention of money our world largely operated on a barter system, wherein individuals traded the goods and services they produced for one another directly rather than using a uniform medium of exchange. However, the barter system was wholly reliant on satisfying what is called the “coincidence of wants”. If I were a chicken farmer wanting to acquire some flour, I would have to hope that the people producing flour wanted to give it to me in exchange for my chickens. Sometimes bartering worked out, but oftentimes it did not.
The invention of money eliminated the “coincidence of wants” to a large degree. Money was established as a medium of exchange that all people were willing to utilize in order to buy and sell the goods and services that they produced. Almost everyone could be trusted to accept a society’s chosen money, improving the flow of large economies and allowing trade and civilization to flourish.
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The Primary Functions of Money
Money has taken a variety of forms over the millenia, and people have naturally gravitated towards monies that best fulfill the following three functions:
Store of Value: Goods and services can degrade in value over time as products rot and as the abilities of service providers decline. High quality money, on the other hand, has a strong ability to maintain its value over time. A monetary asset that performs well as a store of value allows holders to carry value forward in time to be used at a later date when it is more needed than at present. This benefit in many instances enables individuals and societies to wait to invest their money in resources and technologies that have a better chance of improving their standard of living. Monies that do not function well as stores of value, such as the German mark after World War I and the Zimbabwe dollar in the late 2000s, force holders to immediately spend their money on whatever goods they can get their hands on before their money’s value tanks.
Unit of Account: A high quality money allows goods and services to easily be priced and compared against one another across an entire society. Barter systems included units of account to some degree, but you can imagine that it would be difficult for a chicken farmer and flour miller to price their own goods against one another over time as the supply and demand of each fluctuated, not to mention against the thousands of other goods and services typically available in an economy. Money as a unit of account allows all goods and services to be priced in the same denominations and enables producers and purchasers to track value across the entire economy.
Medium of Exchange: As mentioned above, a good money is something that appeals to a large number of people, whether locally or across large regions. If no one wants to accept the money that I’m using, then I’m back to having to solve the problems associated with the “coincidence of wants”. I have to find someone who wants my money or else find someone who’s willing to trade directly for the goods or services I provide. However, if my money is widely accepted as a medium of exchange, then I can be highly confident that I can acquire the goods and services I need without too much difficulty.
Bitcoin: One Money to Rule Them All
Money has seen quite an evolution over time. Originally, objects like cows and shells were used as money because they were often widely available and had a lot of value across societies. Precious metals served as money for centuries, including in today’s world to a certain degree, because they were durable and could be used in a variety of ways. Fiat money like dollars, euros, and rupees, next came into vogue because of the powerful governments enforcing the use of their money within societies. There are a variety of qualities that make good money and have helped to guide the evolution of money over time. We’ll review each of those qualities in the context of humanity’s best money to date: Bitcoin.
Durability
An asset’s durability speaks to its ability to retain its form and function over time. Shells can get crushed or otherwise damaged. Paper can tear or get so dirty as to make it impossible to use. Precious metals like gold are extremely durable which contributed to their use as money for much longer than many other forms.
Bitcoin exhibits a high amount of durability due to its digital nature, which keeps it from rusting, tearing, or becoming damaged. And its blockchain runs on top of thousands of computers around the globe, meaning it is extremely robust and resistant to any form of tampering.
Portability
Money is more useful as it becomes easier to carry around, especially in large quantities. Shells are typically small and large amounts can be transported with relative ease. Cows and precious metals on the other hand are rather heavy and making a large purchase denominated in either would require a lot of effort to get them to and from a marketplace.
Bitcoin is extremely portable, again due to its digital nature. In fact, any amount of Bitcoin can be secured in a single cryptocurrency wallet, meaning that all one needs in order to access large quantities of Bitcoin is the corresponding private key recorded on a flash drive, on a piece of paper, or in the holder’s mind.
Divisibility
Divisibility of money allows for more precise quantities of a good or service to be acquired. Many forms of historical money were rather difficult to divide into portions without also negatively impacting their durability. Fiat money, however, is typically seen as being highly divisible, such as exchanging a $100 bill for 100 $1 bills or exchanging a $1 bill for 100 pennies.
Bitcoin again excels in this area since each Bitcoin is divisible into 100 million “satoshis” on the layer-1 blockchain. Many layer-2 services, like the Lightning Network, and crypto companies allow for even smaller denominations to be recorded in their own native ledgers.
Fungibility
A monetary asset that has units that can easily be exchanged one with another without losing value is said to be fungible. Trading an ounce of silver for another is typically seen as highly fungible as long as it hasn’t been used as plating on top of a less valuable metal. Fiat currency is also commonly recognized as having a high degree of fungibility, although governments and citizens have to be on the lookout for counterfeit bills and coins.
All Bitcoin are highly fungible and can easily be exchanged one with another without any risk of counterfeiting or tampering. After all, the simplest way to think about Bitcoin is that it is simply a series of entries on its blockchain, which is a digital ledger.
Money will continue to evolve as it always has, and Bitcoin may not always retain its position on top. That said, Bitcoin exhibits many of the most important qualities of good money and is certain to enable societies and economies that use it to flourish and grow more than ever.
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This is not financial advice. This newsletter and related content are for informational purposes only. Cryptocurrencies, stocks, and similar assets can be risky. Always do your own research before making any sort of investment.
