Characteristic of Money and Crypto

Characteristic of money

Like what we have discussed in the previous chapter, “The evolution of money from seashell to cryptocurrency”, humans try to find a better form of money from time to time. The best form of money can store value across time and space and should not be inflating or deflating in value in a sudden.

Money then needs to have these characteristics:

• Durable – money should not be perishable or easily destroyed.
• Verifiable – money should be easy to be verified for its authenticity
• Divisible – money needs to be easily divisible into smaller units
• Fungible – money needs to be interchangeable with another in equal quantity. For example, because diamonds have different shapes and forms, each diamonds have different values, making them hard to be used as money.
• Scarce – the supply of money needs to be limited, or not easy to obtain. Otherwise it’s easy to inflate the supply.
• Acceptable – money needs to be accepted in many regions or have an established history so it can store value for a long period.
• Censorship resistant – it should be hard for the government or corporations to prevent the owner of the money to keep or use it.

We can compare bitcoin, fiat money, and gold from these characteristics:

Durable

Gold is the winner in terms of durability. Gold coins that were found in ancient times still hold value until today. Fiat cash can wear out in time, but most of the money right now is stored digitally the same as bitcoin.

Portable

Bitcoin is the winner in terms of portability. Bitcoin private keys can hold billions of dollars and can easily be transported either through an app or hardware wallet. The bitcoin transaction can be transmitted to anyone in the world, and the settlement is also final within minutes, in comparison to fiat money that can take days or even weeks. Gold is the least portable because it has a heavy physical weight. It is costly to transfer gold from one place to another. So whenever gold was transferred, they only transfer the title but not moving the gold itself.

Verifiable

Bitcoin also is the winner of verifiability. Gold and fiat money can be verified using UV lights, density tests, nitric acid, etc, but it is not practical nor accessible to everyone. Criminals have advanced technology in counterfeiting gold and bank notes making it even harder to differentiate them from the real ones. Bitcoin is verified through mathematical certainty, the owner of bitcoin also can verify his/her bitcoin ownership through cryptography.

Divisible

Bitcoin is the winner of divisibility. Bitcoin can be divided into a hundred millionth of bitcoin. Fiat money can be divided into only cents which is usually into a hundredth (1/100). Gold is even harder to divide because it has physical form.

Scarce

Bitcoin has a fixed limited supply. There will be only 21,000,000 bitcoin ever be created. This what makes bitcoin is way more superior to gold or fiat money. Gold is considered to be scarce. But whenever the gold’s price rose, people will be incentivized to find more gold, once there is more supply of gold, then the price will go down again. Fiat money’ supply is unlimited – a country can print as much currency as its government thinks is necessary.

Fungible

Bitcoin is the winner of fungibility. Bitcoin is fungible at the network level because everything is digital and stored within the bitcoin program. 1 BTC holds the same value as two 0.5 BTC. Fiat money is also quite fungible, a $20 notes can be exchanged with two $10 notes that won’t lose their value. But when a new money design is introduced or notes are being taken away from the market, fiat money can become non-fungible. For example, the Indian government decided that 1000 rupees’ notes are no longer valid or acceptable. This made 1000 rupees note is not fungible and unusable. Gold is the least fungible. Even though you would think that one gram of gold is indistinguishable from another gram of gold, different gold bars in fact have varying market prices depending on the producers’ brand, the motif/design imprinted on the bar, and serial number. For example, the price of 100g Argor-Heraeus Cast Gold Bar is different from 100g Perth Mint Gold Bar and 100g Credit Suisse Gold Bar.

Acceptable

Gold is the winner of acceptability. Gold has been used as money since the 3rd century. The Fiat money regime started in 1971 when the US decided to stop pegging USD to gold. Bitcoin is the youngest monetary network that was born in the 2008-2009 financial crisis and is touted to become the next digital gold – the price of bitcoin is volatile as its network of acceptance is still in the growth phase.

Censorship-resistant

This is a new characteristic of money that is important in the modern age. Bitcoin is the winner as censorship-resistant money.  If you want to transfer billions of dollars worth of bitcoin, you can transmit it to the bitcoin network without any permission. No person or entity can stop that transaction. Fiat money is prone to censorship, banks can close or freeze your account if they suspect suspicious activities. Gold can also be censored. In April 1933, the United States government also confiscated gold owned by its citizen through Executive Order 1602

What makes Bitcoin special?

Additional key characteristics of bitcoin that is distinct from gold or fiat money is:

Openly programmable

Unlike fiat or gold, bitcoin is a computer program that is open source. Any developers can view the code of bitcoin and then contribute to the development of bitcoin. Developers can also create an application that utilizes the bitcoin blockchain without requiring any permission. Bitcoin is like the internet of value, where anyone can use the internet and build an application on top of the internet.

Decentralized

Fiat money and gold are controlled by the government. Even digital money such as Ovo or Gopay is controlled by corporations. Bitcoin is true decentralized money. This key characteristic helps bitcoin to be censorship-resistant and scarce.

From these comparisons, we can see that bitcoin gives people an alternative way to store value. Bitcoin has its own pros and cons, and people can use both gold, fiat, and bitcoin together to store value however they see fit.

Conclusion

Bitcoin, gold, and fiat money have their own unique characteristics that are different from one another. Cryptocurrency like bitcoin can become the solution to many disadvantages of gold and fiat money. Bitcoin is still considerably new but it can improve the way we store value in the digital era.

Sources:

The Bullish Case for Bitcoin – Vijay Boyapati

Planting Bitcoin – Dan Held