What is Money?
We need to break the money down to its simplest definition and characteristics in order to compare it to cryptocurrencies.
Money is a medium of exchange – it is something everyone is willing to accept in exchange for goods and services. Although money has taken many forms over time, currently it’s most commonly seen as bills and coins (fiat currency). Before fiat, people used to barter. The practice of literally exchanging goats for timber.
What makes money? It has 3 primary functions:
1. Means of Payment
2. Unit of Account
3. Store of Value
1. Means of Payment
Means of Payment is by far the most important. If money is accepted by the general population as an unconditional means of payment, then it is valuable to society. Money enables citizens to work together for the common good. It must be accepted by as a means of payment by everyone. Everyone has to agree that it is valuable.
2. Unit of Account
A unit of account is something that can be used to value goods and services. In other words, it’s a measurement for value. A unit of account has three important characteristics relevant to money.
Divisible – A unit of account can be divided so that its component parts will equal the original value. If you divide a dollar into four quarters, the total value of the four quarters still equals a dollar. Likewise, if you cut a bar of gold in half, the two pieces together will equal the same value as the original bar as a whole.
Fungible – One unit is viewed as the same as any other with no change in value. A dollar is the same as any other dollar, and 12 ounces of 24-carat gold is no different than another 12 ounces of 24-carat gold. On the other hand, all real estate is unique, and diamonds vary by color, cut, clarity, and carat.
Countable – A unit of account is also countable and subject to mathematical operations. You can easily add, subtract, divide, and multiply units. This allows people to account for profits, losses, income, expenses, debt, and wealth.
3. Store of Value
To act as a store of value, money must be reliably stored and retrieved. It must be predictably usable as a medium of exchange when it is retrieved. Additionally, the value of money must remain stable over time.
These three functions are critical to remember when we get to the next section. Your mind must already be racing about the volatility of Bitcoin and other tokens. The fact that not everyone has accepted Bitcoin must also give you a sleepless night or two.
In the next section, we analyze cryptocurrencies and determine if they are money.