Cryptocurrency as Money Part 2: What is Money?

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This post is the second in a three-part series about Cryptocurrency as money. Read the first part – History of Money. Subscribe to our newsletter to get updates about the future posts on this series!

What is money? 

There are a fair amount of answers to that. You might be inclined to think of the balance in your bank account, paper bills you carry in your wallet or those coins stuck in your couch cushions that’d probably amount to a cool few bucks if you actually dug them all out. 

Economists have a working definition that essentially defines money as anything that meets the following requirements: It’s a medium of exchange, it’s a unit of accounting, and it’s a store of value. That’s it. Within those boundaries, there’s a variety of kinds of money, but they all hit those points. But what do each of those things mean, what would cryptocurrencies count as, if we’re counting them as money, and, probably most importantly in the current economic debate, does cryptocurrency count at all?

Well, let’s start with the easier ones first. 

There are three kinds of money we need to worry about: Commodity, fiat, and fiduciary. Commodity money is just that, money backed by a commodity – typically gold or other precious metals. Fiat money is money that isn’t backed by anything other than the word of the government, it’s power is the fact that you legally must accept it as a form of compensation for goods and services across any given country. Finally, there’s the kind of money cryptocurrency would be, provided it is considered definitionally money, fiduciary money. This is essentially money that isn’t backed by something like gold or the word of any government (so it isn’t required to be accepted anywhere), but a statistically significant portion of the population will accept it in exchange for a good or service. It’s basically just something treated like money by most people, and so, effectively, it is. 

But, that assumes these things hit the three requirements of being money. 

The three requirements to be money are straightforward enough. A medium of exchange is, in essence, something someone could theoretically use to perform a transaction. This could be anything, the barter system we talked about last week is a system that operates with arbitrary mediums of exchange – i.e. anything can be traded for anything else, as long as someone wants it. Honey for a sickle, wool for a jacket, wheat for new shoes, literally anything can be a medium of exchange, so long as it gets exchanged for something else. 

The next is being a unit of accounting, which is slightly more complicated. This means that someone could use the medium of exchange to directly identify the value of a good or service, which is where the barter system falls apart as money. The power being a unit of accounting is standardization, we all generally know how much the average cost of an item is – for example, the average cost of a coffee being around three dollars – so we know when you say you bought a twenty dollar coffee, it must’ve been rather fancy in some way, or if you got a coffee for fifty cents, it must not have been particularly good. You can’t do that with bartering, as there’s no standard value to anything. Honey might be worth its weight in gold to me, but it’s just honey to you. 

Finally, there’s being a store of value. This is essentially the function of money as an asset that can be stored, retrieved and used again at a later date with similar value. Put simply, it’s something with future purchasing power. The twenty-dollar bill you have in your wallet will probably be worth approximately the same twenty dollars now as it will in five years. This point on which cryptocurrency is typically debated – if it acts as a store of value. Provided it does, it’s easily a kind of money, but due to it’s fluctuating values (nearly 20% every month, either direction!), some say it’s not. 

But, this begs the question: Does it work as a store of value? By extension, does that mean cryptocurrency is money at all? 

Well, the answer to that is… Rather inconclusive. Some say it does, some say it doesn’t, and next week, I’ll be showing you both sides of the argument. The hope, there, is that you might be able to form your own opinion on if it is or isn’t, and see where it might go in the future.

Read part 3 – Is Bitcoin a store of value?

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