Attributes that make a good money.
What is money, Anway?
Money is surprisingly a complex subject.
At its core, Money is essentially a social agreement.
Money requires people to trust that the bills in their wallets, the digits in their bank accounts, and the balances on their gift cards are all redeemable in the future for things that they want or need. The seller must agree that the buyer's money is valuable.
Throughout history, societies have experimented with various ways to conduct this agreement, using everything from seashells, salt, and precious metals, to complex central banking systems in use today. Some kinds of money are more sound than others, meaning they hold relative value the best over time. The many shapes and sizes of money in the past, present, and future are a quest of finding the soundest money.
Instinctively, It’s crucial to have the soundest money possible because most people exchange their labor for money which comes to represent a person’s time and effort.
Time is money. In fact, time is the scarcest asset we hold. Money is an abstract concept for our time. We trade time for something that is deemed valuable. Though, value is subjective, how do we agree on what is valuable?
The dimensions of money
In the book “The Origins of Money”, Carl Menger defined the relative ability for a good to be sold in a given market at the time and price desired as a good’s salability, meaning the good is capable of being or fit to be sold.
Naturally, Market participants converge upon the most salable commodity over time, through many transactions.
Menger described the most salable good as that which has the lowest rate of declining marginal utility. A good with high declining marginal utility could be a house — as you only need one and each incremental house purchased provides much less benefit than the initial house purchased.
(Some of the following contents are sourced from “The 7th Property” by Eric Yakes.)
Saifedean Ammous precisely defines a good’s salability across three dimensions which solve 3 different types of coincidence :
Salability across Time - Ability to hold value over time, removing the coincidence of timing.
Salability across Space- Ability to be easily transported, removing the coincidence of location.
Salability across Scales- Ability to be easily grouped and divided, removing the coincidence of amount.
In a free market, the most salable good will be chosen as money, Salability can be broken into three dimensions: time, space, and scales.
The 3 functions of money
1. Store of value - Maintains its value over time.
2. Medium of exchange - is used in indirect exchange for the purpose of exchanging it again, rather than consuming it.
3. Unit of account - is used as a common unit of measurement to determine the market value of goods and services.
As shown in the chart below, these functions occur in chronological order.
Market participants naturally converge upon a good as a monetary medium that best stores wealth through time is most widely accepted across space, and is adopted as a unit of account.
The 6 monetary properties
The monetary medium chosen by societies has differed by availability and evolved as new materials and technology emerged which better fulfill the properties sought in a monetary medium.
The following 6 monetary properties determine a good’s merit for fulfilling the desired functionality as money:
Scarcity: Ability to be Limited in supply
Durability: Can be used repeatedly without losing functionality
Verifiability: Easy to verify the authenticity
Portability: Easy to move across distances
Divisibility: Divided into smaller units
Fungibility: Units are exactly the same as one another
As we can now see the full chart, notice how each dimension is served by a function and each function is served by two monetary properties.
i.e, Across time (dimension) → served by Store of Value (function) → Achieved by Scarcity, durability (2 properties)
Comparing assets and their monetary properties
Now that we know the dimensions, functions, and properties of money, Let’s compare and contrast.
(Some of the following contents are sourced from The Bullish Case For Bitcoin by Vijay Boyapati)
Taking a look at the table above, we can see how Bitcoin, Gold, and Fiat (government-issued money) compare to each other by the 6 monetary properties.
Let’s take each property apart starting with Store of Value properties:
Scarcity:
Bitcoin - One of Bitcoins’ best attributes is its predetermined scarcity. There will only ever be 21 million bitcoin. This supply cap is a feature, not a coincidence. It’s in place to keep a transparent, programmatic outlook of Bitcoin’s issuance schedule from its inception all the way to its future.
Gold - Gold’s supply is currently expanding 1.5-2.5% annually. Gold, while remaining quite scarce through history, is not immune to increases in supply. If it were ever the case that a new method of mining or acquiring gold became economic, the supply of gold could rise dramatically. Examples include Sea floors and asteroids.
So far, there have been discoveries of gold way beyond the current supply of gold. This past week, Uganda’s president announced the discovery of 320,000 tonnes or $12 Trillion of gold found in the country. Even Nasa discovered an asteroid with quadrillions of dollars of gold in it. Note that these are just discoveries that can’t really be quantified (at least not yet) albeit, extraordinary discoveries require extraordinary evidence. Just food for thought, even though gold is scarce, it’s nothing near finite and there can practically be an infinite amount of gold mined. Okay, maybe not infinite because infinity is a concept, not a number; but you get the point, enough for the supply to be strongly diluted. Likely, this won’t happen any time soon though, just a canary in a coal mine, or should I say gold mine (hopefully someone laughed)
Fiat - Fiat currencies, while only a relatively recent invention of history, have proven to be prone to constant increases in supply. Nation-states have shown a persistent proclivity to inflate their money supply to solve short-term political problems.
Especially recently, I mean just take a look into this M1 money supply chart. M1 measures more liquid assets like cash, checking accounts, and traveler checks. It’s up over 500% since January 2020, yes you read that right.
The inflationary tendencies of governments across the world leave the owner of a fiat currency with the guarantee that their savings will diminish in value over time. If you produce something into oblivion, the realized value per unit trends towards 0, it’s math.
Durability
Bitcoin - Since Bitcoin has no issuing authority, it may be considered durable as long as the network that secures them remains in place. Given that Bitcoin is still in its infancy, it is too early to draw strong conclusions about its durability. However, there are encouraging signs that, despite prominent instances of nation-states attempting to regulate Bitcoin and years of attacks by hackers, the network has continued to function, displaying a remarkable degree of “anti-fragility”.
Gold - Gold is hands down the king of durability, hence being used for thousands of years as a store of value. The vast majority of gold that’s ever been mined remains in existence today and will likely be in existence in the future.
Fiat - Governments have come and gone over the centuries and their fiat currencies have disappeared with them. If history is a guide, it would be folly to consider fiat currencies durable in the long term — the US dollar and British Pound are relative anomalies in this regard. We’ve seen this as the average life span of fiat currencies is only about 27 years. At one point, there were 775 fiat currencies, issued and controlled by many governments. Now there are only about 185 fiat currencies (~76% less) as many of them have crumbled over time.
Verifiability
Bitcoin - Bitcoin can be verified with mathematical certainty. Using cryptographic signatures, the owner of a bitcoin can publicly prove they own the bitcoins they say they do. Every transaction ever made, and new transactions, are easily verifiable using a home computer by running a Bitcoin full node.
Gold- Gold is not immune from being counterfeited. Sophisticated criminals have used gold-plated tungsten as a way of fooling gold investors into paying for false gold. This is why gold requires expensive machinery like X-rays and Ultrasounds to verify. However, this still comes with verification errors as we saw in China where 83 tons of fake gold bars ($2.8 Billion) had copper gilded with gold. Other contracts had been made on top of this gold, which led to a series of cascading losses.
Fiat- For most intents and purposes, fiat currencies are fairly easy to verify for authenticity. However, despite providing features on their banknotes to prevent counterfeiting, nation-states and their citizens still face the potential to be duped by counterfeit bills.
Portability
Bitcoin - Bitcoin is the most portable bare asset known to man via private keys. Private keys can represent $10, or even $10 Billion, and can be stored on a tiny USB drive and easily carried anywhere. The keys themselves (12-24 words) can be memorized and mobile in your head or hidden somewhere safe.
Gold- Gold, being physical in form and incredibly dense, is by far the least portable. When bullion is transferred between a buyer and a seller it is typically only the title to the gold that is transferred, not the physical bullion itself. Transmitting physical gold across large distances is cumbersome, costly, risky, and time-consuming.
For example, Germany recently repatriated its $31 Billion, or 743-ton gold reserves, from Paris and NYC which took 5 years at a cost of $9.3M. The process was insane:
- The gold was flown to Frankfurt at a substantial cost.
- Road transportation was avoided because it would put drivers in rise, and they’re too heavy to be moved in substantial volume.
- Lawyers had to pour over contracts to insure that it was covered during the transit (just in case it got lost or stolen). Many insurers only pay out in dollars, rather than the precious metal, potentially leaving the central bank on the hook if the price of gold were to rise between the contract being signed and the bullion arriving safely in the Bundesbank’s vaults.
- All of the bars had to be examined by a 6-8 person team which used x-ray machines and other techniques to evaluate the purity.Fiat- In this Day and age, Fiat currencies, being fundamentally digital, are also highly portable. Though, physical Fiat currencies are fairly mobile but not to a higher degree in larger volumes.
Divisibility
Bitcoin - Bitcoins can be divided down to a hundred millionth of a bitcoin (Satoshis) and transmitted at such amounts.
Gold- Gold, while physically divisible, becomes difficult to use when divided into small enough quantities that it could be useful for lower-value day-to-day trade.
Fiat- Fiat currencies are typically divisible down to pocket change, which has little purchasing power, making fiat divisible enough in practice.
Fungibility
Bitcoin - Bitcoins are fungible at the network level, meaning that every bitcoin, when transmitted, is treated the same on the Bitcoin network. However, because bitcoins are traceable on the blockchain, a particular bitcoin may become tainted by its use in illicit trade, and merchants or exchanges may be compelled not to accept such tainted bitcoins. At this point, Its probably more so impractical to taint individual Bitcoins since most of them have been issued. It’s similar to how 90% of US dollars have traces of cocaine on them, though, this does not hinder its fungibility.
Gold - Gold provides the standard for fungibility. When melted down, an ounce of gold is essentially indistinguishable from any other ounce, and gold has always been traded this way on the market.
Fiat - Fiat currencies are only as fungible as the issuing institutions allow them to be. While it may be the case that a fiat banknote is usually treated like any other by merchants accepting them, there are instances where large-denomination notes have been treated differently from small ones.
For instance, India’s government, in an attempt to stamp out India’s untaxed gray market, completely demonetized their 500 and 1000 rupee banknotes. The demonetization caused 500 and 1000 rupee notes to trade at a discount to their face value, making them no longer truly fungible with their lower denomination sibling notes.
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Thanks,
-Arsh