Introduction to Cryptocurrency and Money
Cryptocurrency is a new kind of technology and financial tool. While it shares some features of money, it feels different. Some experts call cryptocurrencies “money,” but is that correct? Can we truly call cryptocurrencies money? Are they different enough from traditional money that we need to change what we think money is?
What is Money?
Before we decide if cryptocurrencies are money, we need to understand what money is. Money has certain properties that make it useful. Here are the main properties of money:
- Medium of Exchange
- Unit of Account
- Portable
- Divisible
- Durable
- Fungible
- Store of Value
- Relative Scarcity
Medium of Exchange
Money must be easy to exchange for goods and services.
Unit of Account
Money must help us compare the value of different goods and services.
Portable
Money needs to be easy to carry and move.
Divisible
Money should be easy to divide into smaller parts.
Durable
Money must last a long time without getting damaged.
Fungible
One unit of money should be the same as another unit of money.
Store of Value
Money should keep its value over time.
Relative Scarcity
Money should not be too common; there should be a limited supply.
How These Properties Came to Be
These properties were discovered over thousands of years through billions of trades. Merchants realized these properties were necessary for smooth trading. Removing even one property made trade harder. This is why gold and silver have been used as money for so long.
In the past, people used many different forms of currency. Through experience, they learned which properties were best for trading value. Over time, gold and silver became the most common forms of money because they had all these properties. Other metals like copper are used too, but mainly for very small transactions.
Key Takeaway
For something to be money, it must have all these properties. If it lacks even one property, it is not money. This is important to remember when we talk about digital money.
Cryptocurrency and Traditional Money Properties
Now, let’s look at whether these properties apply to digital money, like cryptocurrencies. Here are the properties of money again:
- Medium of Exchange
- Unit of Account
- Portable
- Divisible
- Durable
- Fungible
- Store of Value
- Relative Scarcity
Applying Traditional Money Properties to Digital Assets
Do these properties apply to digital transactions? The answer is yes. All these properties are important for digital money too.
Portable
A digital asset must be portable to allow for quick and easy transactions.
Divisible
A digital asset must be divisible. Otherwise, it would be like a collectible, not money.
Durable
A digital asset must be durable, meaning it should be secure from hackers and government interference.
Fungible
A digital asset must be fungible. One unit of the digital asset should be the same as another unit.
Unit of Account
A digital asset must serve as a unit of account to assign value to goods and services.
Medium of Exchange
A digital asset must be a good medium of exchange to facilitate transactions of any size.
Relative Scarcity
A digital asset must be relatively scarce to protect its long-term value.
Store of Value
A digital asset must be a good store of value, keeping its value over time and space.
Exploring Digital Monetary Properties
There are over 20,000 cryptocurrencies today. What makes a cryptocurrency? Simply put, a cryptocurrency is a currency used to pay for goods and services. Its defining feature is that it’s digital and not controlled by any single party.
Decentralization
Decentralization means no single party controls the cryptocurrency network. No one controls the issuance of the assets, and no single party can influence the network. This is important for security and trust in digital money. In an adversarial environment, decentralization protects the network from attacks.
Privacy
Privacy is crucial for digital money. Without privacy, digital coins can be tracked and traced, compromising their fungibility. Cryptocurrencies with public ledgers, like Bitcoin, lack privacy, making each coin’s history unique. This means 1 Bitcoin is not the same as another Bitcoin. Privacy ensures that digital coins remain fungible.
Scalability
Scalability refers to the ability of a network to handle increased demand. If a network cannot scale, transaction fees can skyrocket, making it unusable for small transactions. For a digital asset to be a good medium of exchange, it must be scalable. Some cryptocurrencies, like Bitcoin Cash and Monero, have shown they can scale while keeping fees low.
Absolute Scarcity
Absolute scarcity means there is a fixed supply of the cryptocurrency. Bitcoin, for example, has a fixed supply of 21 million coins. While this makes the asset more valuable over time, it may not be practical for everyday transactions. An asset with a fixed supply can experience extreme deflation, making it difficult for merchants to price goods and services.
Programmability
Programmability allows for the creation of smart contracts and decentralized applications on the blockchain. While this is a fascinating feature, it is not necessary for a digital asset to be considered money.
Conclusion
In summary, cryptocurrencies need to have the properties of traditional money to be considered as such. These properties include being a medium of exchange, unit of account, portable, divisible, durable, fungible, store of value, and relatively scarce. Additionally, for digital money, decentralization, privacy, and scalability are crucial.
While many cryptocurrencies exist, only a few, like Monero, have the necessary properties to function as money in the long term. Understanding these properties helps us see how digital assets can fit into the future of finance.
