Is Bitcoin, Gold, or USD the perfect money and store of value?
What properties does the market evaluate and demand the ideal money or medium of exchange?
We list the desired properties and outline which one fulfills the criteria among Bitcoin, USD, and gold.
What is Money?
Money is a medium of exchange and a unit of account – a socially accepted standard unit with which things are priced.
Why do we need Money?
Before the development of a medium of exchange—money—people would barter to obtain the goods and services they needed. Two individuals, each possessing some goods the other wanted, would agree to trade.
However, barter is a very inflexible method of doing business since you both must have something the other party is willing to trade for. Therefore the demand for a medium of exchange arose.
Why do we want Money?
Money give us freedom and options in life how to spend our time.
Perfect Money - From a philosophical Standpoint
We spend time and energy to earn money.
According to the 2nd law of thermodynamics, time and energy can’t be created or destroyed.
Idealistic, we would like to trade our time and energy for something else that can’t be produced or destroyed.
Desireable Properties of Money
For money to be a suitable means of exchange, it should have certain key characteristics.
There are different listings of these key characteristics but there are always a few in common.
Here are some examples
- Lumenlearning lists scarcity, durability, portability, and divisibility as the key characteristics
- Economic lowdown podcasts series lists durability, portability, divisibility, uniformity, limited supply, and acceptability as the key characteristics
- Toppr lists acceptability, portability, durability, divisibility, homogeneity, recognizability, stability
Perfect money must last for a long time without losing its value. Gold is durable, while vegetables are not.
- Gold lasts over time since it is an essential element.
- A USD dollar bill or coin is also stable.
- Bitcoin is digital and will not change at all over time.
People should be able to carry or transfer money from one place to another. Otherwise, it’s hard to use them as a medium of exchange. Gold is portable in smaller amounts, while USD is portable in more significant amounts.
An essential factor in reducing the transportation cost is to increase the demand for a specific medium exchange.
- Gold is only portable in small amounts since its a heavy metal
- USD is portable in small and medium quantities but not in large quantities.
- Bitcoin is digital and portable in any amount.
Good money must be divisible to buy a smaller unit of something. For example, gold’s divisibility is limited, while USD is divisible down to cents.
You must be able to buy a coffee but also be able to buy a house.
- Gold is not divisible since you can’t cut a part because you want to buy a coffee.
- USD is divisible, but you must trust the counterpart to have a change for you.
- Bitcoin is divisible down to Satoshis (0.00000001 Bitcoin) and can be used to transfer for any good and service without needing a change.
Scarcity - Limited Supply
Scarcity is one of the essential characteristics of money. This is not purely a supply function, but the demand has to outstrip the supply.
For example, oxygen is essential for our lives, but there is no price since the supply outstrips the demand.
On the other hand, diamonds are expensive but not very important, but the demand outstrips the supply.
Money must be scarce since market actors tend to favor the least elasticity supply (The probability change due to other actors).
Historically, sea shells, cattle, glass beads, and gold have all functioned as money in different periods. Gold was probably the closest to perfect cash for them since the supply was almost predictable but very expensive to transport and secure.
- Gold is scarce but not perfectly insufficient since there is mining production. Still, a cost is associated with minting new gold, which limits the supply.
- The USD is not scarce since a central authority controls the supply, and it can be printed at almost zero cost.
- Bitcoin’s supply is predetermined and capped. There can never be more than 21 million Bitcoin. In addition, people lose their private keys differently, almost making Bitcoin a deflationary asset.
Each trading party of a transaction must be able to verify and recognize the money to accept the transaction without any hesitation. You can look for specific watermarks to verify a USD dollar bill. Also, you can feel the paper and check the UV marks. However, to feel the article needs particular skills, and the UV marks require specific equipment. Gold can be verified but requires thorough knowledge and equipment.
One important thing to increase the usage and demand of a particular kind of money is to reduce the verification/acceptance/recognizable cost.
- Professionals can verify gold but not the average Joe
- A professional-made fake USD bill is tough to discover, and you might need UV light and other equipment.
- Anyone with a computer connected to the internet can verify a Bitcoin transaction. In addition, no one has managed to create a false Bitcoin transaction (double spend).