What is Money? (and does bitcoin fit the criteria?)

[Paleus]

Original post made at www.diginomics.com, currently looking for journalists and content contributors.


The need for money comes from the idea that we live on a planet with finite resources. Human desire is not limited, yet resources vary by scarcity and availability. Therefore, it is necessary to have a medium to exchange those resources which are finite. A unit of exchange is necessary to allocate resources among a population with theoretically limitless desire. Money itself is neither good nor evil, rather a necessary tool in a properly functioning economy.

Currency is a unit which can be used as a medium of exchange; it is something people trust to hold value because it is attributed general acceptance for food, shelter, and other basic necessities. Trust that the currency will be accepted makes up the most important factor when it comes to the survival of a particular money supply. When this trust erodes, the currency is in danger of being debased and people will no longer take it seriously. Currency could then be described as a collective agreement. When there are enough people who settle on what holds their trust, that which they agree upon becomes secondary. History has provided us of countless examples of this being true. Whether it be cigarettes, animals, precious metals, artifacts, and now computer code, money remains a collective agreement established by its user base.

Aristotle, the Greek philosopher, defined the characteristics of a valid currency comprising of four core aspects:

1. Durability

Money must remain in the same state it was originally created in. It cannot change or be destroyed by the forces which use it. In relation to bitcoin, they are almost perfectly durable. Bitcoin cannot be changed as each coin is based off computer source code. However, bitcoin can be lost quite easily in the event of a forgotten password, mishandled storage, or a fork in the protocol.


2. Portability

Since bitcoin is a digital currency, it has no physical cumbrance and, therefore, is portable to anyone with a wallet address capable of receiving payment. There is no burden in sending bitcoin across borders because it serves as a frictionless and agile transfer of value. You can cross a border with $1 billion in bitcoin using a brainwallet and no number of patrol agents or cash-sniffing dogs would be the wiser.


3. Divisibility

Bitcoin is made to be infinitely divisible by design. Currently, we use 8 decimal places to represent smaller fractions of an entire bitcoin. The unit of account down to the last of the 8 decimal places is known as a satoshi, in reference to the mysterious founder. If there is ever a need to extend the amount of decimal places, the developers and community can come to an agreement and make necessary changes. Bitcoin is perfectly divisible.


4. Intrinsic Value

The argument most commonly heard against bitcoin is that it lacks intrinsic value. That is, the currency has no desirable features and no value in and of itself. Outside of the acceptance trust, currency usually holds little or no intrinsic value; there is no value inert to the unit when it is presented simply for what it is. Anything other than trust would be considered a bonus to intrinsic value. The industrial uses of precious metals, however limited, are intrinsically valuable.

Investors are correct in asserting that the bitcoin unit of currency itself has no intrinsic value outside of trust. To make the claim of intrinsic value with bitcoin, we must make the distinction between bitcoin the payment network and bitcoin the unit of account capable of being spent. Both are known as bitcoin, but to not recognize the difference would be a hazardous miscalculation.

The reason bitcoin has “perceived” intrinsic value is because of the technological capabilities of the interconnected network which acts to send payments. The intrinsic value of bitcoin comes from the technological innovations built into the network usability. The protocol brings incredible functionality. The functionality is intrinsically desirable. As more people take time to understand the technological advantage of bitcoin, more people will come to accept it as payment. In doing so, the value will grow as trust is engrained. Considering bitcoin is a payment system which is made open to a scarce number of coins, the bitcoin unit of account commands a market price. Because bitcoin is both useful and scarce, it is valuable.

Bitcoin, as is with fiat currencies, reveals the fact that the only thing which assigns currency value is the assurance it will be accepted as payment when the need for exchange arises. With more trust comes more value, and the cycle stabilizes itself. Fiat currency gains its intrinsic value from government’s laws and regulation. The compliance on these laws rests with the credibility and authority of the governance which issues them. Bitcoin gains its credibility because it is a cryptographic form of money based on mathematical approaches to the laws of science.

The term “bit”, as in bitcoin, is a basic unit of information relating to digital communications. This unit of information (a bitcoin) resides on the blockchain and has its ownership assigned to a wallet address. What bitcoin as a system truly represents is a global database of financial information. To use the name “bitcoin” is nothing more than clever branding tactics and a proverbial play on words describing numismatic information.
The term “fiat” is a revealing description as well, this time of paper currency. In Latin it literally means ”let it be.” — a government-created currency which sounds as though the only thing holding it in place is confidence in the authority issuing. Such a currency, which sounds as though it has been buckling under the weight of illusion, is waiting for something more real to come along and relieve it of its temporary purpose. No fiat currency has ever stood the test of time, nor has it been designed to.

In this sense, the concept of decentralization of power also gives bitcoin value. The idea of the money being owned and supported by only the people who use it instead of a central authority makes the currency viable and at the will of those it exists to serve. In a world where circumstances and events are becoming increasingly interdependent, consolidation of power is unfavorable to dispersal of such power. If the currency fails to serve these needs, the people have the power of choice to use a different money system, and bitcoin will debase. It is no longer necessary to have the state manage, manipulate, and control money.

5. Originative

I would like to build off Aristotle’s concept of a valid currency by proposing a fifth characteristic: originative. Considering bitcoin comprises nothing more than computer software, it is easy to see how a copycat currency could come along at any time, tweaking minor aspects of technical specification in order to make it superior. This we have seen to be a common practice among alternative cryptocurrencies, but very few currently have the infrastructure and competitive advantage necessary to co-exist with bitcoin. Is this infrastructure built around bitcoin enough to give it a lengthy first mover advantage?

For a currency to establish itself, it must have the necessary time and exposure to its user base to establish collective agreement of its acceptance. In order to do so, the currency must be originative, and refrain from being carbon copied in a way that would introduce a similar money supply with slightly altered characteristics. Unless a new money supply is created that has a unique, sustainable use case for the cryptocurrency in circulation, it represents nothing more than a speculative investment. With current competing cryptocurrencies, only those which serve a definite purpose and those with a dedicated community behind them will have long-term outlook. It would make for an interesting argument for which tweaks in bitcoin’s technology make it viable, and which is nothing more than marketing fluff. There is only need for projects being built which introduce a new use-case scenario for a supply of cryptocurrency being circulated. Whichever emerging cryptocurrencies this describes is up to the investor to determine.

Fiat currency does not need to concern itself with being originative because its value is tied to the political, economic, and social decisions the issuing authority makes. Government issued currency can survive and prosper along with almost identical other supplies of currency because it represents an already established and centralized economy. Digital currencies on the other hand however, have no boundaries, no issuing authority and no established economy which to assess its value against. Fiat currency is tied to a centralized force, bitcoin is without geographical or political limitation. Therefore only one digital currency designed for monetary uses will survive and establish itself in the long run. The cryptocurrency which establishes itself as the benchmark of the digital domain will be the one with the highest degree of trust and the most innovative technological features. The infrastructure and first mover position give bitcoin a temporary but sustained advantage. In the way currency relies on trust, this makes bitcoin king. It can be seen in price movements that when bitcoin makes a move, the other cryptocurrencies make a similar, exaggerated move. When bitcoin sneezes, the others catch a cold.

TP

[Beliathon]

Bitcoin is money, because bitcoin rewrote the rules of money. The old definitions are no longer relevant. They are obsolete, just like the old forms of money. Throw them away.

[ikydesu]

bitcoin still currency.

currency = Money.

[thecast]

Indeed. It is real money, FIAT Ben Bernakle magic papers isnt.

[Vessko]

Aristotle's criteria actually explain why gold has properties that make it convenient to use as money. They are not, however, the criteria defining what money is.

In order for something to be money, it must match the following 3 criteria:

1) It must be a medium of exchange. That is, a sufficiently large group of people must be willing to accept it in exchange of arbitrary goods and services. Bitcoin definitely matches this criterion. The "sufficiently large" part is somewhat vague, but it is used to explain why, for instance, cigarettes, which are used as a medium of exchange in some very limited groups, do not match this criterion. If something matches only this criterion, it is called currency. It is not the same as "money". So, Bitcoin is definitely a currency. That's why it is called a "cryptocurrency" and not "cryptomoney".

2) It must be a unit of account. That is, when you conduct a business, you must keep your books in it, you must use it to pay taxes, etc. The various fiat currencies match this criterion. Bitcoin does not.

3) It must be a store of value. That is, its buying power must be relatively constant over relatively large lengths of time. This doesn't mean that it is not allowed to fluctuate (especially over short periods of time); this is impossible to achieve in a free market. A typical example is gold - 25 centuries ago an ounce of gold bought approximately the same amount of bread it buys today. Neither Bitcoin, nor the various fiat currencies match this criterion. Something that goes from $120 to $1200 or from $1200 to $400 within a few months is not a "store of value". (And before you object that this view is US dollar-centric, calculate the BTC/Wheat, BTC/Oil, BTC/anything ratios and you'll get the same nonsense.) Of course, Bitcoin has had a very short life for us to determine with confidence whether the present situation will continue or whether it will stabilize - we'll need decades of trading history. My personal opinion is that even if the speculative swings disappear, the buying power of Bitcoin will not stabilize. This is because it is deflationary by design - the total number of Bitcoins is fixed but the amount of goods and services in the world keeps increasing as long as there are productive beings inhabiting it. So, once the speculative swings subside (if this is even possible - I've read articles explaining why, in the case of Bitcoin, this is not possible) and it becomes widely accepted as a medium of exchange, its buying power should not remain constant - it should steadily increase roughly at the rate of the global GDP. Unlike Bitcoin, the amount of gold is not fixed; its supply increases by about 1.5% annually, which explains why its buying power has been relatively constant at least during the past centuries when the global GDP has not been increasing dramatically. Currently the amount of available Bitcoins increases due to mining; I am talking long-term, when all Bitcoins that have been economically possible to mine have already been mined and the supply increase becomes virtually nil and even turns into a decrease because of the unavoidable losses.

So, Bitcoin is not money. It is, however, a currency.

Sadly, this also means that money does not exist. For instance, the US dollar matches criteria 1) and 2) but not criterion 3). Gold matches criterion 3) but not 1) or 2). Gold used to be money in the past but it was completely demonetized after 1971.

Regarding the "intrinsic value" part, that's total nonsense. Nothing has intrinsic value - not fiat, not Bitcoin, not gold - nothing. "Value" is not a property that can be intrinsic to anything. It is always subjective - it is in the eye of the beholder. A glass of water has different "value" to you depending on whether you are dying of thirst in the desert or drowning in the ocean. Only objective properties can be "intrinsic" - properties like molecular weight, melting point, etc. For instance, the hashing algorithm used by Bitcoin is an intrinsic property of Bitcoin.

[shawshankinmate37927]

Regarding the "intrinsic value" part, that's total nonsense. Nothing has intrinsic value - not fiat, not Bitcoin, not gold - nothing. "Value" is not a property that can be intrinsic to anything. It is always subjective - it is in the eye of the beholder.

Yes, we now know that Aristotle was wrong regarding the concept of "intrinsic value" thanks to the subjective theory of value.

Although, I would say that only one of the functions of money has to be met for something to be considered money.  Different forms of money can be used to fulfill each of those functions.

[QuestionAuthority]

You forgot a few:

(1) It must be durable, which is why we don’t use wheat or corn or rice.

(2) It must be divisible, which is why we don’t use art work.

(3) It must be relatively convenient at least for everyday purchases, which is why we don’t use lead or copper.

(4) It must be consistent, which is why we don’t use real estate.

(5) It must possess value in itself, which is why we don’t use common rocks.

(6) It must be limited in the quantity that is available, which is why we don’t use aluminum or iron.

(7) It should have a long history of acceptance, which is why we don’t use molybdenum or rhodium.

(8 It must be fungible, which is why we don’t use shoes, clothes or any unique item.

Only GOLD and SILVER fit all eight characteristics.

[Vessko]

Only GOLD and SILVER fit all eight characteristics.

You are confusing the criteria determining what makes something suitable for use as money with the criteria determining what is money. I do agree that gold seems to be the best candidate to use as money (silver not so much because of its wide industrial use). However, this is just my opinion. It is irrelevant. What is relevant is the reality - and the reality is that, presently, gold isn't money, since it is not used as a medium of exchange.

As a libertarian myself, I firmly believe that the free market (and not governments) should be left to decide what is money. While I do think that it will choose gold, for the reasons you listed, it doesn't have to be so. It could be Bitcoin or seashells - I don't care, as long as it is the free market that chooses it.

[franky1]

within the first paragraph you started peeling off in the wrong direction, money has nothing to do with helping exchange a resource that is finite(limited).

beef, vegetation, labour are not limited, thus using money in exchange for this has nothing to do with finite resourses, but has to do with desire/demand/needs. money is a 'unit of measure' tool which a community agree on as representing a measure of wealth.

a bank note is simply a unit of measure, which people can easily attribute to multiple things. such as they can easily convert that measure to be:
4 loaves of bread for a $10/£10/€10 banknote
4 litres of milk for a $10/£10/€10 banknote
45 minutes of minimum wage labour for a $10/£10/€10 banknote

money is simply a simple tool that allows a community to swap anything between each other by using an agreed unit measure, to avoid arguments or conflict about value.

in prisons cigarettes are a form of money. in russia vodka is a form of money. yes in both cases the communities would actually swap resources or thier time for a pack of cigarettes or a bottle of vodka.

tulips, sea shells, rocks with holes, sticks with notches carved out, etc was money a couple centuries ago. as long as a community agree to something helping them measure a value of one item for another, its money.

all money needs is this
1 consensus of a community that the unit measure (value) is X
2 easier to use as a middle ground compared to direct swap of resource (durable)

now lets move onto the misconceptions
'intrinsic value' is a term assigned to a resource. yes resources can be used as money, but money does not need intrinsic value
'tangeable' is a term for being physical, yes physical units can provide an easy display of holdings, but money doesnt need to be physical
'finite' having a known limit to its supply helps money have a demandfor it, but thats more about hoarding that unit for increased value in future

the truth is money only needs the 2 characteristics, the other terms and buzzwords simply help increase the size of community acceptance, increase the value the unit measures at, increases lastability that a community would trust/use it for.

yes gold has atleast 8 key buzzwords, which helps it stand the test of time, helps golds value change for investment purposes, but gold is not durable.
bitcoin has atleast 8 key buzzwords, which helps it stand the test of time and helps change bitcoin value for investment purposes. also it IS durable.

the problem with bitcoin and why some dont consider it as true money, but consider it as an investment/asset is because of:
1. people when they see bitcoin they dont instantly measure it against how many loaves of bread of how many weeks of rent it can purchase, they seem to still convert it to a bank note measure and then attribute it to how many resources it can purchase. (this needs to change)
2. although bitcoin can be easier to use compared to paypal, banknotes, international wire transfers. the measure of bitcoin is volatile and does not help people come to a agreed consensus of value to avoid argument/conflict over how much resource it can purchase (this needs to change)

i personally do try my damned hardest to attribute 1 btc to be worth X weeks of rent/loaves of bread, but until bitcoins volatility stabilizes to a steadily and predictable deflation, there will also be the case to have to use fiat measures to then assign resource value to bitcoin, else my landlord will keep complaining ive not paid enough or paid too much rent week by week, month by month.

if we all started to say bitcoin is equivalent to 2 weeks cost of living the whole world can then work out in their head how much bread/milk they can buy without the reliance of bank note measures inbetween

[zetaray]

Is a fiat bill money? Are the numbers in your account money?

Definition of "Money" is boarder now, it often involves a "promise" - a promise to pay the bearer/owner of an object. I think the classic definition is outdated now and can only be used as a reference. Bitcoin is an asset and has a resale value. It is reasably liquid, so it is money in my view.

[Meni Rosenfeld]

(3) It must be relatively convenient at least for everyday purchases, which is why we don’t use lead or copper.

"Convenient" isn't a fundamental property, it's something that follows from the other required properties, such as portability, divisibility and fungibility.

(4) It must be consistent, which is why we don’t use real estate.

What do you mean by that?

(5) It must possess value in itself, which is why we don’t use common rocks.

No, money does not need to have value beyond the value it gains by virtue of being a commonly used currency. If a thing satisfies all the requirements for good money, and is therefore used extensively as money, it will automatically gain value.

[QuestionAuthority]

(3) It must be relatively convenient at least for everyday purchases, which is why we don’t use lead or copper.

"Convenient" isn't a fundamental property, it's something that follows from the other required properties, such as portability, divisibility and fungibility.

(4) It must be consistent, which is why we don’t use real estate.

What do you mean by that?

(5) It must possess value in itself, which is why we don’t use common rocks.

No, money does not need to have value beyond the value it gains by virtue of being a commonly used currency. If a thing satisfies all the requirements for good money, and is therefore used extensively as money, it will automatically gain value.

3) By convenient I mean portable. We could use lead but carrying a dollars worth would be a little inconvenient.

4) It needs to have the same value everywhere it's used. If you used real estate the values would change by location. 2.5 dunams of land in Tel Aviv is not the same as 2.5 dunams in Jaffa.

5) Money, in my view, should have some value other than just pieces of paper. Of course money doesn't "need" to have any other value. It only needs to be recognized as a medium of valuable exchange. That's why my government and yours can pass off these little pieces of toilet paper to us and call it money. In the wake of any government financial collapse the people holding gold will still have something of value somewhere in the world. That could be true of Bitcoin someday. If Namecoin really took off the Bitcoin system would have a value besides the exchange value of the Bitcoin itself.

[Meni Rosenfeld]

4) It needs to have the same value everywhere it's used. If you used real estate the values would change by location. 2.5 dunams of land in Tel Aviv is not the same as 2.5 dunams in Jaffa.

Consistent value is a derived property which follows from portability. Anything which is liquid and which can be easily teleported anywhere, without technical or regulatory complications, will have the same value everywhere (though it might be hard to see, as the other things which you would buy with it can have different values).

Real estate is an extreme case which has 0 portability. So much so that I'd say it becomes an issue of fungibility. 2.5 dunams of land in Tel Aviv is a fundamentally different thing than 2.5 dunams of land in Jaffa. There is no interchangeable unit "dunam of land", in the same way that an apple is an apple wherever it is.

[vipgelsi]

More physical bitcoin notes will get the general public involved.  they will relate to it like money then.

[QuestionAuthority]

4) It needs to have the same value everywhere it's used. If you used real estate the values would change by location. 2.5 dunams of land in Tel Aviv is not the same as 2.5 dunams in Jaffa.

Consistent value is a derived property which follows from portability. Anything which is liquid and which can be easily teleported anywhere, without technical or regulatory complications, will have the same value everywhere (though it might be hard to see, as the other things which you would buy with it can have different values).

Real estate is an extreme case which has 0 portability. So much so that I'd say it becomes an issue of fungibility. 2.5 dunams of land in Tel Aviv is a fundamentally different thing than 2.5 dunams of land in Jaffa. There is no interchangeable unit "dunam of land", in the same way that an apple is an apple wherever it is.

Yes, that's all I meant. It is an extreme example but still fundamentally different from just portability and fungibility. You can make land portable with deeds of sale. You could attempt to make it fungible by classifying land as "fertile growing land", "fishing waterfront", "ocean view" etc. but there is no way for a deed to show if a mentally unstable neighbor is building bombs across the street.

[shawshankinmate37927]

Only GOLD and SILVER fit all eight characteristics.

I agree that gold and silver are excellent forms of money, but bitcoins outperform precious metals in several of the necessary characteristics of money. For example, bitcoins are more easily divided than metal.  Bitcoins can also be more portable, because they don't have any weight and it's easier to get them through metal detectors and bureacratic checkpoints.  Bitcoins are also more scarce than gold or silver because there is the 21 million BTC limit.  The market knows EXACTLY how many BTC are in existence at any time.  We can only ESTIMATE how much gold and silver exist.

Other advantages that bitcoins have over metals is that bitcoins are easier to confirm as legitimate and are impossible to counterfeit and harder to steal or seize (assuming adequate security measures are used).

[GenieBTC]

More physical bitcoin notes will get the general public involved.  they will relate to it like money then.

That is correct. But who will fund that?

[franky1]

More physical bitcoin notes will get the general public involved.  they will relate to it like money then.

That is correct. But who will fund that?

bitcoin notes have been tried and tested.
right now not many people in the same neighbourhood are bitcoiners to be swapping bitcoin notes.
right now there is no way to prove or trust the person that printed the bitcoin note did not keep the privkey. to empty once it passed several hands
right now theres no way to remove that trust, without centralising/insuring it.

so bitcoin notes have been found to be only useful as
bearer bonds: glamorised paper wallets basically
gift vouchers/cheques: use once and then dispose of once funds are swept off the address and confirmed

[Q7]

Something which i see has a value attached to it based on its uses, in terms of rarity due to supply factor, something safe and will facilitate easy trading and exchanging

[waser12]

The bitcoin has a value like a money.