What Is Money?

“What is money?” is one of the most important questions of our age, largely because the money we use now is broken beyond repair.

It’s an important question to ask and a fun one to bat around in philosophical discussions. If philosophy is what you want, though, you’ve come to the wrong place.

Here is my breakdown of what I believe money is, in plain English.

Money is the most salable good in the economy. This means that it is the good (yes, it is a good like any other) most demanded by people because it is half of nearly every transaction. “You give me Good X or Service Y and I give you money that can be used to then go acquire other goods or services.”

Money should have three primary attributes:

1. Store of value. It can generally retain, or even grow, in value over time. This ensures that the value you’ve provided the economy can’t be stolen through inflation the money supply.
2. Medium of exchange. As described above, money can be used to exchange value between two or more parties. Somebody will accept your money and in return provide, labor, goods, or services.
3. Unit of account. You can use money as a measuring stick for value by setting prices. Ideally, this unit of account is relatively stable and doesn’t fluctuate day-to-day or, optimally, year after year.

Different forms of money accomplish these things with varying levels of success, based on qualities like:

• Scarcity. How difficult is it to produce more of it? If very difficult, then it likely excels as a store of value because it can’t be diluted. If easy, then it likely fails as a store of value because it can.
• Durability. If a form of money can’t be kept in tact over long periods of time, it will also fail as a store of value. For this reason, gold has historically been strong as a store of value while bananas never have.
• Divisibility. Some monies are more easily divided than others to be used in exchanging different amounts of value. US dollars are divisible down to pennies and are therefore easy to use in purchases, small or large. Seashells, which were used as money in certain cultures long ago, are not so easily divisible and are therefore harder to use as a medium of exchange.
• Portability. If money is difficult to transport, it struggles as a medium of exchange. Gold suffers from such challenges, as it is expensive and bulky to ship and secure across space; this is why banks and governments started issuing “paper gold.” Bitcoin, on the other hand, can be transported on a piece of paper, in your head, or on a small device with ease.
• Censorship-resistance. The easier it is for a third-party (e.g., government or banks) to intermediate and prevent the use of money, the greater the risk of confiscation or censorship in using it. While the risk is hypothetical in parts of the world today, history shows us that the threat is real and therefore impacts peoples’ propensity to use certain forms of money.
• Fungibility. For money to work properly, one unit should optimally be the same value as the next unit and exchangeable without issue. Without this property, it can be more difficult for merchants to accept said money as a medium of exchange and makes the unit of account use case more difficult.
• Verifiability. Good money should be easy to verify. Is it real? Is it counterfeit? Dollars are frequently counterfeit and even gold could be just a tungsten bar wrapped in a gold exterior. Bitcoin ownership, on other hand, is easily verifiable on a decentralized, public ledger.

In recent years, precious metals like gold and government-issued pieces of paper (fiat) have both served as money. But each falls short as excellent money in several ways.

Gold, for example, retains value based on its relative (though non-absolute) scarcity and durability. But it is very difficult to settle transactions in gold in a digital, global economy. And it is also challenging for the average person to know if they are holding real gold to begin with.

Fiat money run through our modern banking system makes global payments across space rather easy (if not without hiccups and delays). Fiat is fungible and highly divisible as well. But it fails the tests of scarcity, durability, censorship-resistance, and verifiability - more can always be printed (devaluation), it can rip or rot (non-durable), transactions can be easily prevented and people easily unbanked (censorship), and is hard to verify (counterfeiting).

Bitcoin alone stands supreme as a form of money.

It’s decentralized, issuer-free nature means it won’t be devalued.

It’s digital nature makes it durable, divisible and portable.

It’s peer-to-peer design makes it censorship-resistant.

It’s programmed subunits (satoshis) make it highly divisible.

It’s public ledger made it quickly verifiable.

Bitcoin is not perfect money. But it is the best money we’ve ever had and, I believe, the best money there ever will be.

For this reason, it can serve as an investment, a form of capital, as “digital gold,” or just about as any sort of utility that good money can. But it is not distinctly or exclusively any of these things, and to pigeon-hole it as such is a disservice to those trying to understand this new monetary technology.

Bitcoin is still on it’s store of value journey as more people figure it out, but will soon be used widely as a medium of exchange. As the volatility of its value continues to decrease with time, it will quietly take over as the best unit of account as well.

Bitcoin is just money. Save in it, spend it, replace it. Rinse and repeat.

Bitcoin wins if and when we use it as such.