What makes money good? [Crypto indexing part 5]

Some things are more money than others.

Read part 4 here.

The fact that some things are more money than others, is actually obvious from the definition of money, because some items (or some verifiable records) function better than others. Seashells cannot be used as money on a beach, and cows are worse than silver coins. Since money works because — and if — we believe in it, there are clearly some set of properties money should have. For something to function well as money, it should be:

• Scarce, so its value is upheld over time.
• Durable, so it can be used multiple times.
• Portable, so it can be carried around.
• Divisible, so that small payments can be made.
• Fungible and uniform (meaning that all units are interchangeable and have the same purchasing power) because otherwise parts of the money will be taken out of circulation.
• Easy to verify but difficult to fake, so that accepting it is easy but fooling others with fake money is difficult.

Intrinsic value is not a property of money, rather, the lack thereof. A paper bill is not worth anything in and of itself. The value comes from the fact that humans agree to accept it as a means of payment for valuable goods and services.

Metal coins is one form of fiat money. Photo by Josh Appel on Unsplash

Is Bitcoin good money?

Bitcoin is scarce, durable, portable, divisible, fungible, uniform, easy to verify and hard to fake. Gold and fiat, by contrast, only possess a few of these properties.

            Gold   Fiat   Bitcoin
----------- ------ ------ -------
Scarce      Yes    No     Yes
Durable     Yes    Yes    Yes
Portable    No     Yes    Yes
Divisible   No     Yes    Yes

Gold is not portable due to its weight, and not divisible without special equipment. Fiat currencies like USD and EUR need not be scarce because a central bank controls the money supply. History is filled with examples of hyperinflation due to hefty increases in the money supply.1 Bitcoin is scarce because its money supply is currently fixed to 21 million BTC, and every BTC is divisible to 100 million pieces. Bitcoin is durable and portable since it is digital.

More content from the author

Jacob Lindberg, the author of this post, is the founder & CEO of Vinter — an index provider and data analysis firm specialized in cryptocurrencies.

This blog post is a part of our intro blog series on crypto indexing. Read part 6 here:

Bitcoin is a global network of value transfers