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Back to Basics: Understanding Money

For those who have been this space for a while, sharing ideas in chat groups, going to meetups, and reading daily articles when you are meant to be doing work, it is easy to forget that it’s only a small percentage of the world who actually cares and/or actually understand what is going on. And those who have chosen to go down the rabbit hole, it takes time to understand the nuances and where the value lies in this whole space. The speed at which the crypto sphere sentiment changes, even between the seasoned veterans, further demonstrates how steep this learning curve is.

So it is only fair for those sitting on the sidelines or just heard of Bitcoin as some internet currency, to not understand where the value lies — or even if there is any.

At Coin Hunter, we have slowly been putting together a document aimed at those sitting on the fence, the ones who want exposure to this new asset class, but don’t have the time to follow the trends. It is hard for those new to the space to understand some bespoke sharing economy blockchain that uses RFID chips to tag transactions and rewards its customers with loyalty points… Instead, we want to push new investors right back to the start and not even think of the different competing cryptocurrencies, but what the technology could provide as a whole. This is best achieved by examining at the most straightforward use case first. Money.

Any attempt at understanding Bitcoin, one must first understand money. Anyone who disputes Bitcoin’s potential without first properly taking time to understand what money even is — at least on a high level — are not doing their due diligence. If one is to argue why something isn’t something, one would do well to understand what that something is in the first place. It doesn’t mean the someone who understands the complexity of money has to agree, but the establishment of common ground is essential in any debate. So let’s take a look at this common ground, “What is money?

Money is such a part of everyday part of life, and for those of us lucky enough to not experience an event as punishing event as hyperinflation or systemic corruption, our relationship with money is usually is quite simple. It goes along the lines of “I want more money” rather than ”what is money” or “why do we have money?’

This article is aiming to provide a light understanding of money to see if Bitcoin can be classified as money. If so, we see a potential investment opportunity.

The Google definition of money:

google-definition-money

The definition is pretty straightforward but lets it break it down into three main functions.

  • A medium of exchange (I get paid in money for my work)
  • A unit of account (I know what and how much I can buy with my money, how much I am worth)
  • A store of value (I will collect more of it, to obtain better things)

bartering

Perhaps a more philosophical definition could be, money is a human coordination mechanism. Maybe it’s not that philosophical as it essentially means “money makes the world go around”, a saying we are all familiar with.

Even if money is not at the centre of your world or your ‘Being’, it dictates your life one way or another. It is something us humans have recognised since the beginning of civilisation. This notion is substantiated by the fact that nearly every culture, every society, at every point in known human history, has conceived a form of money or at least designed a basic system to transfer value between parties.

So if we know money has taken many forms throughout human history, we can begin to see that the value that people place on it has nothing to do with the actual physical value (in most cases) of the money but instead money is valuable merely because everyone needs to use its functions throughout society. Money is valuable because everyone else will accept it as a form of payment, a unit of account and a store of value.

I.e. If I found myself shipwrecked on a mysterious island with a backpack full of gold, I might think that I’d have some bargaining chips for whomever I came across. Use my gold to leverage some food, a weapon or a means of transport. What happens when I stumble across a tribe who perceived gold to be a useless, a shiny evil stone. Let’s say I discovered that this tribe uses pearls as a form of wealth and money across the tribe. They tell me that can provide me with a canoe for ten pearls. If I can’t convince them that my backpack full of gold is worth significantly more than ten pearls, well I best get diving…

This example can currently be used as a point against Bitcoin, and it would be fair to do so. This article isn’t trying to push Bitcoin, just merely illustrating understanding the properties of money and how a lot of it comes down to perception. But say I were to convince the tribe that gold, for whatever reason, was a better use of money than pearls, it might take some time before the whole tribe or island population drops the pearls and covets gold.

Let’s take a look at actual history rather than the island. The time it took for the general public to accept ‘paper money’ over coins was 400 years and I am sure there many people saying “No one accepts it, therefore it’s useless”, but we all know how that turned out…

Forms of Money

Money has taken numerous forms throughout history and the notion of a new type of money — Bitcoin — is not actually that unique if you take a millennia-long worldview perspective.

Where things get interesting is that the origins of money actually cannot be precisely traced. Why? Well, because many civilisations used the concept of money before writing was invented. Unfortunately unlike Homer’s ‘Oddessy’, the story and history of money was not told around the campfire — surviving until somebody thought to put pen to paper.

So what’s the consensus around the origin of money then?

Barter.

Before coinage, it is commonly accepted that things were bartered in ancient markets that could be described as a medium of exchange. These included livestock and grain — things directly useful in themselves — but also merely attractive items such as cowrie shells or beads were exchanged for more valuable commodities.
A fascinating and vital idea proposed by anthropologist David Graeber in his book ‘Debt: The First 5000 Years’, is that debt is probably the oldest means of trade, with cash and barter transactions being later developments. Graeber argues that someone having to go to the marketplace with a commodity or item that somebody else actually wants at that precise moment in time and exchange it for the good you precisely want, is not a realistic way society operates. He provides evidence throughout different cultures that debt ledgers (basic accounting system of debit and credit), — even virtual in some case — actually functioned as money is many societies. The importance of the word ‘ledger’ will become more evident the more you understand blockchain technology, as all blockchains are fundamentally just decentralised digital ledgers.

old-ledger

Some of forms of money throughout human history are:

  • Debt / Ledgers
  • Barter
  • Livestock & Grains
  • Cowrie Shells (Pacific and Indian Oceans)
  • Metal Coins
  • Modern Coinage (Gold & Silver)
  • Leather Money (China)
  • Potlatch (Gift exchange in North America)
  • Beads
  • Paper Currency
  • The Gold Standard
  • Fiat currency — today’s currencies. Definition: Fiat money is a currency without intrinsic value that has been established as money, often by government regulation
  • Digital Money
Properties of Money

As we can see, mankind has been extremely creative in our invention of money, perhaps simply because of necessity being the mother of innovation.
The why we societies need money can be found in the aforementioned functions of money, the transfer of value, unit of account, and the store of wealth. These ‘functions of money’ could be argued to be more objective elements of money than the ‘properties of money’, or the properties of good money.

As we are fundamentally coordinated by the transfer of money to one another, it would be safe to assume that the instrument that coordinates us, money, is robust in design, trustworthy and generally accepted. Anything can technically be money, a precious shell to a piece of paper, so we must examine the properties to discover what makes ‘good money’.

What makes one money better than the other’? It is when we begin to answer these questions, the fundamental investment opportunity of Bitcoin becomes more apparent.

Let’s have a look at some basic principles that money should contain. Admittedly, this is where the topic begins to get more subjective. Each will have their own headings, subheadings, and weightings between them. We have attempted to extrapolate what we believe are the core principals good money should inhabit.

  • General Acceptability

We have covered this. Peers, businesses and governments must accept this as a form of money.

  • Durability

It must last the test of time. The more indestructible, the better.

  • Portability

You should be able to easily take your value with you wherever you go. From the corner to across international borders.

  • Divisibility

The more divisible, the more options there are for products and prices within different denominations.

  • Fungible

Fungibility is the ability of a good or asset to be interchanged with other individual goods or assets of the same type. Assets that are fungible are exchangeable for each other and simplify the exchange and trade processes, as fungibility implies equal value between the assets. I.e. we don’t want my $1 coin somehow being worth more than your $1 coin for whatever reason.

  • Uniform & Recognisable

Uniformity of money calls for a standardisation of money so that it looks the same. This means it is harder to counterfeit and it will be more commonly accepted.
Limited Supply or at least Transparent Supply

“Your money is not worth the paper it is printed on”. Hyperinflation. What good is money if supply begins to vastly outweigh demand?

  • Stability of Value

One hopes their money or their value is worth roughly the same from day to day.

Comparisons of Money

It starts to become evident that when we break down the properties of money, that blockchain technology provides a natural progression for money in the Digital Age.

Our graphic (still in draft stage) attempts to compare Bitcoin vs Fiat vs Gold on an extremely high level. In our comparison, we are using Bitcoin as a blanket for all cryptocurrencies, and USD as a blanket as a Fiat currency. Though we have taken into account hyperinflation that many other currencies have experienced and put that into my assessment of fiat currency.

As this is a high-level assessment of the properties of each form of money, we understand certain complexities require their own debate. We will address these complexities in a different document. These include gold becoming digitised, Fiat on the blockchain and how Bitcoin falls short on arguably the most quintessential properties of money, Acceptability and Stability. Rome wasn’t built in a day…

For now, though, the “What even is money?” is critical to understand before we break down the comparison. This notion rarely taught outside of those pursuing economic and commerce degrees, but if we are on the brink of discovering ‘the people’s money’, the people best arm themselves with a firmer understanding of this question.

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