What is Money?

Source: www.coindesk.com

Given that Bitcoin and other crypto currencies are once again a topic of discussion, either as investments, hedges for inflation, or for some other reason, I have been reflecting on what constitutes “money”. In my view, there is also a misconception arising from a failure to draw a distinction between digital money and crypto currency. Below follow some thoughts:

In order to discuss whether something is “money”, however, we need to bring the concept of money back to an a priori (first principles) basis and answer the question — what is “money”?

In principle, it is a method of assigning value to disparate items and services. According to the Federal Reserve Bank of St. Louis, “money” serves three functions[1]:

1) Store of value

2) Unit of account

3) Medium of exchange

Consider current digital money, in this case digital representation of fiat, as an example. In this case, think of anytime you have used Venmo, PayPal, Zelle, or any other method of payment that did not require physical cash. This digital money exists as code on bank balance sheets, representing units of a specific currency. It does satisfy the three stated requirements for consideration of money, but it does not in its entirety reside in the physical realm. Furthermore, digital money is accepted because it represents fiat. Fiat, in many places, was at one point backed by specie (gold, silver, platinum, etc.) although it is not any longer. Furthermore, why does specie have any value? By and large, few of the precious metals have industrial uses and none of them produce a dividend or revenue stream. Ergo, what happens in the event that someone attempts to “pay” with “money” that is no longer accepted — to take the extreme example, would someone or a merchant accept payment in cowry shells?[2] As such, fiat is worth something because it is backed by a government, we are told it has value, and everyone around us believes it has value.

In the case of cryptocurrencies, some of them certainly satisfy the three requirements. $BTC is infamous for its use on Silk Road, but some goods and services, including Teslas, can now be purchased in $BTC, thereby satisfying the medium of exchange requirement. Additionally, MicroStrategy, Tesla, and others adopted $BTC as a reserve asset on their balance sheets[3][4], thereby satisfying the first and second requirement simultaneously. Furthermore, $BTC appears to have additional value because its cryptography and transparency provide a “trusted” alternative to the current system while Ethereum’s ($ETH) smart contract feature provides an optional benefit that $BTC does not. To that end, there are other altcoins that are attempting to solve for the existing deficiencies in established cryptocurrencies.

Why, however, is a specific choice of money valuable? In short, because others choose to value it as such.

#bitcoin #money #btc #ethereum #eth #cryptocurrency

[1] https://www.stlouisfed.org/education/economic-lowdown-podcast-series/episode-9-functions-of-money

[2] https://en.wikipedia.org/wiki/Shell_money

[3] https://ir.microstrategy.com/news-releases/news-release-details/microstrategy-adopts-bitcoin-primary-treasury-reserve-asset

[4]https://www.cnbc.com/2021/02/08/tesla-buys-1point5-billion-in-bitcoin.html

Disclaimer: The above does not constitute a recommendation or solicitation to purchase or sell any securities or cryptocurrencies referenced herein. As of the time of this writing, the author may have positions in some of the abovementioned securities or cryptocurrencies.

The above article is a reproduction from the original post on 21 March 2021 on LinkedIn (https://www.linkedin.com/pulse/what-money-eduardo-r-abreu/?trackingId=YSJHUeLhTOCQjyIIr7orTw%3D%3D)

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Crypto enthusiast. Passionate about bringing crypto’s disruption to traditional finance. Background in corporate strategy & business development

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Eduardo Abreu

Eduardo Abreu

Crypto enthusiast. Passionate about bringing crypto’s disruption to traditional finance. Background in corporate strategy & business development

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