Characteristics of Money
A couple months ago, a friend recommended a podcast episode by Lex Fridman. This specific episode entitled “Philosophy of Bitcoin from First Principles” featured Robert Breedlove, a freedom maximalist, ex-hedge fund manager, and philosopher in the Bitcoin space. Robert Breedlove co-authored a book in 2020 called Thank God for Bitcoin: The Creation, Corruption and Redemption of Money. On the podcast, Lex and Robert talk about the definition and characteristics of money.
According to the Austrian School of Economics, money is defined as a universal medium of exchange. This was a brand new concept for me and it prompted me critically think about all the different forms of money around the world. Then listening to the discussion about monetary characteristics, I came to the conclusion that Bitcoin was far more than just a cool new way to digitally send money around the world. It has all the characteristics of money, but it can be more beneficial than fiat currency, depending on the characteristic.
Other definitions of money:
- A social device for moving value across space and time.
- Money is the most marketable good.
What are the five characteristics of money?
How resistant the money is to the elements or other threats over time. Bitcoin and its network operate in a decentralized fashion, therefore it is extremely resilient and durable. All of the computers in the world would have to be destroyed to completely eradicate Bitcoin.
The ability to easily store move money. Bitcoin can be easily sent within minutes around the world from a phone, tablet, computer, or ATM. Bitcoin can also be stored anywhere as it is pure information. As long as there are Bitcoin nodes and miners running, Bitcoin can be stored. Also, private keys to access Bitcoin wallets are easily stored on USB thumb drives or hard drives.
The ability to easily divide money into smaller portions. In the case of bitcoin, 1 Bitcoin can be broken down into 100,000,000 smaller units called a Satoshi. Because Bitcoin can be easily broken down into smaller amounts, anyone can purchase and own Bitcoin. Instead of attempting to buy one Bitcoin for more than $30,000, one can buy smaller amounts of Bitcoin for technically less than one penny (USD). Lowest possible Bitcoin denomination – ₿0.00000001 BTC ~ $0.00036 USD (Price – June 6th, 2021)
Today, Bitcoin is recognized as a form of payment around the world. You can pay for everyday items using a Bitcoin debit card, send it to friends, make deposits at banks, transact through exchanges, and withdraw money from a Bitcoin ATM. Many businesses accept Bitcoin as an alternate method of payment. Venmo, PayPal, and Cash App all offer options to purchase and send Bitcoin. Bitcoin has been around for more than a decade and now large institutions like Square, Tesla, and MicroStrategy all hold Bitcoin on their balance sheets. Over time, Bitcoin has become more and more recognizable and acceptable around the world.
Scarcity (Limited Supply)
Scarcity occurs when there is more demand than a supply. Specifically with Bitcoin, there is a fixed supply of 21 million Bitcoin. Bitcoin can’t be duplicated or counterfeited, therefore the supply will never change. This makes Bitcoin resistant to inflation, it is impossible to increase the supply. Bitcoin mining rewards are also cut in half every 4 years. Today, approximately 900 Bitcoin are rewarded to miners around the world per day. In 2024, only 450 Bitcoin will be rewarded per day. Because of this diminishing reward over time to mine new Bitcoin, demand will increase every 4 years.
After listening to the podcast for a second time, I solidified my understanding that Bitcoin has all the characteristics of money. Then if portability is compared between the US Dollar or gold, Bitcoin is provides a more elegant solution. $1 million in cash is physically a great sum of money and the same amount of gold would weigh an incredible amount. Transporting this amount of US Dollars or Gold would not be feasible without industrial equipment or an armed security escort.
With Bitcoin, one can digitally store as much or as little as desired. It could also be argued that Bitcoin could be more durable say to the US dollar because of the resilient decentralized network. One would have to destroy the entire internet to destroy Bitcoin, whereas physical US dollars can be easily burned. There are many benefits of Bitcoin, especially considering the deflationary nature of the asset. Although it has drawbacks, it does present an alternative option to store value.
To recap: What are the Characteristics of Money?
- Durability – How resistant the money is to external factors over the course of time.
- Portability – The ability to move and store the money with ease.
- Divisibility – The capacity to divide money into smaller portions for more ownership.
- Recognizability – The ability for money to be widely recognized and accepted as a form of payment and store of value.
- Scarcity – When there is a finite amount of a money and a larger demand than there is supply to satisfy.
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Find this article out in the community:
Podcast – Robert Breedlove: Philosophy of Bitcoin from First Principles | Lex Fridman Podcast #176 – https://www.youtube.com/watch?v=HrehEWYj16s&t=6204s
Book – Thank God for Bitcoin: The Creation, Corruption and Redemption of Money – https://read.amazon.com/kp/embed
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Photo by Tombark from Pixabay – https://pixabay.com/images/id-2730220/