Characteristics of Money

With the recent stratospheric spike in Bitcoinprices in terms of USD ($19,600 on 17–12–17), I have been involved in several conversations where there is a clear misunderstanding of what Bitcoin is. People are fixated on its “assetvalue. Others criticize the fact that it is “worthless”. I then ask them: How much is the cash in your wallet really worth? What makes it be worthy of value? If you went to a deserted remote island with no stores, ATM’s, etc., what would you prefer to have from these two options:

  1. $100 in one-dollar bills?
  2. A lighter, a utility knife, and a plastic tarp to cover yourself

I suspect you would choosenumber 2, since the amount of fire you can get from burning the 100 pieces of printed paper money is not much. I would rather take my chances in finding dry leaves of any sort, and having a method of making fire easily the first days, while I build some more permanent shelter. Some might still argue that you can keep the dollar bills in case a ship passes by so you can “pay” for your rescue somewhat. The chances for that scenario puts your rescue outside of your sphere of control. So, why is money no longer worth anything in this situation? Simple. It no longer is a medium of exchange, because there is nobody to exchange it with! You can still use it as a means of storing value. Even then, if you spend 40 years or longer on this remote island, eventually this will no longer hold true because of inflation, money printing or more recently “Quantitative easing”. So, the only “true” worth would be as a unit of account. You can still use it to keep tab of some resource (food,water, etc) gathering process. Even then, I think I’d prefer to make marks on a rock or piece of wood. Something that will not be blown away with the wind.

Fundamental truths about money

Can we agree on this? Money must be at least:

  1. Medium of exchange
  2. Unit of account
  3. Store of value
Characteristics of Money
Characteristics of Money

Good. Now that we have agreed upon that, what the hell does this have to do anything with bitcoin?

Is Bitcoin a medium of exchange? YES

Can you count things and express them in terms of Bitcoin? YES

Can Bitcoin store value? YES

Many will argue with me: NO! It cannot, it is worthless!

Intrinsically, a piece of code sitting on a computer is worthless until it does something useful, but when someone finds this piece of code useful, and puts it to work on something useful (like creating a medium of exchange, counting things and representing the value of other things), all of a sudden it becomes valuable. Analogous to our 100 one dollar bills becoming useless and thus worthless in the “remote island scenario”, the computer code becomes useful and thus worthy in the “everybody has the ability to be connected on the internet scenario”.

What makes something useful as money?

So far, we have established how thing scan gain or lose valueaccording to their usefulness. But, what qualifies anything as useful? And more to the point, what makes anything useful as money?

We all know that several things have been used throughout history to fulfill the role of the triad of fundamental truths about money:

Mayans used cacao beans.

Greeks, Romans used salt to barter for slaves or pay sal(t)aries. Even today, the nomads of the Danakil plains in Ethiopia

We all know about Gold. It has represented the fundamental truths about money since time immemorial. It still does today as jewelry and just by itself.

These three main monetary units have pros and cons:

  1. Durability: Gold is durable, and you might argue that salt is, but cacao beans are not.
  2. Divisibility: Salt is quite divisible, then cacao beans come in second, and surely gold is hard to divide, unless everybody has sophisticated gold-cutting machines.
  3. Uniformity: I suspect that gold wins in this category, then salt(depending on whether you want sodium chloride, or potassium nitrate, which is also asalt), and lastly, a cacao bean, which as nature would have it, can yield a plethora of variations of a cacao bean depending on where it is grown.
  4. Limited supply: We can all agree thatgoldis truly in limited supply, you have to mine the thing, or fly out to other solar systems and do the same with the added cost of bringing it back. Salt is the next limited, except for the fact that the large amount of salt in the ocean, and with a couple of inventions to extract salt at record speeds from the ocean or mines it no longer is scarce, eventually, you might be able to extract all the salt in the oceans, reaching a limit, but climate change would no longer be the buzzword for doomsday stories, the topic would be “global desalination”. Cacao beans might seem unlimited, and truly, even if we plant each square centimeter of soil on the planet with cacao trees, the trees have theoretical unlimited production capability (until an asteroid hits us or the sun explodes). So, cacao beans are not limited, then salt, and gold is the only one with a limited enough supply to reign in this category.
  5. Portability: Depending on the price of things, cacaobeans and saltwould seem more portable, but gold can be quite portable if you can exchange many things for one coin. Then we can argue about the size and weight of the piece of gold, and certainly, if you want to buy a house or property, it is a bit cumbersome to carry truckloads of salt, cacao beans, or a wheelbarrow full of gold ingots. Doesn’t it seem kind of weird that we are arguing about the portability of something depending on the price of things and capacity of carrying the actual money or store of value? Why don’t we just write pieces of paper representing these items?
  6. Acceptability: If you wanted to go to your localmarket or a local restaurant to buy food, I suspect that cacao beans would be readily acceptable (depending on the market, and how much demand is there for raw materials for chocolate), so gold would be more readily and universally acceptable than cacao beans and salt.

As you can see, each of our “competitors” for proper money fail in some areas, rendering them as semi-adequate monetary units. Of all of these only gold can be considered a fairly good monetary unit. So we are forced to live with its drawbacks: Not too portable, not easily divisible. This works great for storingvalue, but I have never seenpeople carrying gold ingots or coins or jewelry in wheelbarrows around. Aside from how cumbersome it is, others can easily steal it by rendering you unconscious.

Additional Characteristics of Proper Money

So far we have defined money as:

  1. Medium of exchange
  2. Unit of account
  3. Store of value

Things become useful as money if they have:

  1. Durability
  2. Divisibility
  3. Uniformity
  4. Limited supply
  5. Portability
  6. Acceptability

We established that gold is the best at representing these roles and characteristics, except for its pesky lack of portability and divisibility.

My proposal

Before we get to my proposal, let us consider how the geniuses (really, they were) decided to issue pieces of paper representing the amount of gold held by a third party called a bank. Yes, up to a certain point, each dollar, or other currency, gave you the opportunity to withdraw an amount of gold from the bank that wrote the piece of paper. What a genius right? YES! It solved the portability and divisibilityproblem.

At some point, there was so much confidence in the system, that everyone decided that they would let the value of the piece of paper float (not be tied to a physical piece of gold sitting on a bank somewhere). This happened around 1944, with the Bretton-woods agreement. This gave rise to fiatmoney.

Fiat Money

Originates from the latin for “it shall be”. Wait. Fiat Money = It shall be money. Oh! it’s like we used to do when we played as children, where we cut pieces of paper and drew numbers on them representing different denominations, and agreed that a piece of paper with a 1 drawn on it shall be one unit of currency. The piece of paper with a 5 drawn on it shall be five units of currency. The piece of paper with a 50 drawn on it shall be fifty units of currency… and so on. You get the drift. We played market or monopoly happily with these printed pieces of paper, and we all had fun while everyone agreed that it shall be what was supposed to be. Pretend play was awesome! You could have hours of fun pretending. As long as only a certain amount of pieces of paper were made, agreed upon by everyone , the game worked wonderfully.

Until that cousin or friend who figured out, that to “win” at monopoly or in purchasing everything from the market seller, he could secretly make more pieces of money. Now, inflation was no longer what happened to balloons before parties, it became a valid concept when that cousin kept winning at monopoly or cornering the market by buying everything. Everyone else, who honestly “earned” their play money could no longer afford to buy a play house, or play veggies because the cousin with all those bills could outbid everyone in buying them. Making it impossible for others to purchase it back.Counterfeit moneybecame a serious problem.

So, another genius solution to this problem: let’s make the bills tamper-proof and set some clearly agreed-uponrules. Now, nobody will be able to print fake money. Good. Has it worked? well, at the time of this writing, I did a cursory search on google for the terms counterfeit money, within the news category, and a search returned 1,310,000 results. The first five headlines: “How to spot counterfeit money and what to do if you encounter it”, “Police Seek Counterfeit Money Suspect In Eden Prairie”, “Man wanted after attempted use of counterfeit money”, “Police looking for men using counterfeit money at stores in Norfolk”, “Woman Arrested Second Time For Passing Counterfeit Money: Police

So, here we are in 2017, humans have landed on the moon (and haven’t returned since ? ), we are landing rockets upright coming back from space, we are creating all sorts of new technologies, but… we still have not figured out how to stop counterfeit money?

So, as tamper-proof and agreed-rule rich this printed money is, they still print counterfeit bills. Those thieves!


Let’s give this responsibility to the honest cousin. Let’s make sure that only his signature makes bills valid, (which can still be counterfeited by the black sheep cousin or friend). The problem still largely rests on the papermoney which can be easily counterfeited. This is the problem that the Fed or other monetary authority must confront: counterfeit bills. So, even if we give the money printing capacity to the honest (?) cousin or friend, the counterfeit problem will still happen.

Ok. So let’s assume that our honest and smart cousin now makes a really cool, extremely robust tamper-proof piece of paper money. Finally! problem solved! right?

Sure, the problem is solved if our cousin or friend is honest at every point in time, and follows the agreed-rules of money creation. But what if one day, our cousin is tempted to overprint money, or “bend” the rules just a little bit? No harm done if we print just a couple of more bills or we bend the rules just a “tad” one day. But what happens if our honest cousin, after several cycles of “bending” the rules and overprinting is no longer honest? Where is the line drawn? When does the cousin or central bankstop being honest? Now the processprocess of monetary emission by a supposedly trustworthy party has become inconsistent. Inflation resulting from this can now come not only from counterfeiters, but from those in charge of printing the money. If you don’t believe it’s possible, just look at Zimbabwe or Venezuela in recent years.

WOW! What a bummer! now we cannot even trust the people we entrust with the printing and maintaining the money. Those agents entrusted to care for our best interestsregardingmoney bend or break the rules, and the ones who pay the cost are the users of that money. This is known as moral hazard. If you stop reading here, the world will continue to be a bleak, sad, depressing place. No money meets these characteristics today. So, let’s solve this moral hazard issue.

Proposal for added characteristics of money

Now we have established that it sometimes can be hard to verify whether the money is authentic. Not all users will agree on proper use, and then some are ok with the fact that those in charge of printing it will bend the rules, and when they do they will do so frequently and erratically. This gives rise to my proposed characteristics to be added to the definition of money:

7. Verifiability: Money authenticity must be verifiable.

8. Agreeability: Users of the money must all agree on a simple yet clear set of rules for its usage

9. Trustworthiness: Money creation must be done by a highly trustworthy party.

10. Consistency: The monetary emission and management must be consistent, each and Every. Single. Time.

Good! We now have 10 characteristics in total. The concept of money is becoming clearer with each line I type. These characteristics will resolve the moral hazard issue we bumped upon earlier. But, is that sufficient?

Is it only me or have you noticed that we try to resolve a problem and we somehow end up creating new ones? Going back in time to childhood seems like a very inviting prospect! Let’s go back to pretend play for a bit, maybe we can figure out some more clues from our times as kids.

Pretend Play and its benefits.

When discussing fiat money and how fiat means “it shall be” I remember all the pretend games we play as kids. Aside from the marketgame, consider another game: “I shall be the doctor and you shall be the patient”. Let’s face it, we keep pretending until we are adults. Consider a short speech at my graduation party: “When I was younger I pretended to be a doctor, and my sister pretended to be the patient, today, I stand here after just receiving my medical degree to practice as a [insert specialty here]. Many thanks sister”. Here is where fake it ‘till you make it becomes relevant. (Just to clarify, I am not a doctor, never played doctor with my sister, su that was also pretend play, only to make a point!)

Inventing something or faking something is crucial in the developmentprocess of humans or anything we do. You have to believe or imagine that you are a doctor-caliber kind of human to go through medical school (attend classes, study long hours, do your practice training, etc.). You have to believe you are an astronaut-caliber kind of human to go through astronaut training and fulfill an actual role manning spaceships or the International Space Station. So, fiat money is fakemoney, but real enough that large transactions are carried out every single day. Fiat money began as an invented idea, until someone made it true. However, inconsistency in how we fake its use and rules governing it, renders it less verifiable, consistent and trustworthy.

So, to continue circumventing the problem of gold’s lack of portability and divisibility we have the unfortunate choice of choosing amongst “fakecurrencies: Fiat money or cryptocurrencies.

Since nothing in this universe is perfect, we have to settle for a choice that is sufficient to satisfy the condition of being the least fake amongst the two choices offered. Let’s figure out which one is less fake and pick that one.

Sufficiently less fake for me means that which portrays its characteristics in a consistently verifiable manner. The more consistent something is portraying desirable characteristics, the more I will believe in it. Let’s face it, nothing is guaranteed to last forever (except diamonds, and why then do we not use them frequently as money?) but for the duration of the existence of something, a duration for which it consistently shows the ideal characteristics of money, it ends up being enough of somethingto be labelled as true.

To eliminate the concentration of representatives or agents that can also bend this truth, a decentralized approach to manifesting this truth and reinforcing it is necessary. It is crucial that a majority of the users of any money agree on all of the characteristics, throughout the duration of the existence of this money.

This is exactly what is driving the “price” of Bitcoin these days:

Paper or electronicfiat money handled by agents which exhibit moral hazard is no longer sufficient to meet the characteristics of desirable money, therefore users of money have lostfaith in it.

Add Three and One more

With that, I concluded that ideal money needs to have three more characteristics and one more fundamental truth added to it:

11. Sufficiency: The money must portray these characteristics in a sufficient manner to just exceed the characteristics inherent in an alternative monetary unit.

12. Willable: Those using it have to desire the inherent characteristics of that particular money type into existence, thus driving its desirability

13. Monodispersity: The userbase must be fairly homogeneous, preventing concentration of money in groups that can null any of these characteristics invalid.

The fundamental truth to be added is:

Faith by users

Fatih is defined as the trust of confidence in someone or something.

Money must have the complete trust or confidence of those who use the money, that it will retain all these characteristics in the future.

The naysayers

To those who criticize how “fake” Bitcoin is, I hope you realize just how fake the paper money can be too. And it’s fakeness doesn’t make it worthless. The same applies to all the cryptocurrencies out there. The “irrational exuberance” or “euphoria” for Bitcoin is intrinsically driven by the concepts expressed above. The concepts themselves do not guarantee that any cryptocurrency will never lose value, but in human history, this particular instrument or device called a cryptocurrency with its specific set of rules is the closest thing to act with these characteristics. Thus it’s stratospheric increase in value.

Keeping Score

So now we have thirteen characteristics and four fundamental truths about money. Are we done? I think one more characteristic is necessary for a 95% perfect definition of ideal money. The characteristics must hold despite attempts at violating them! We then conclude that integrity is a crucial characteristic. I define integrity in this context as:

The ability to maintain its characteristics in the face of opposition and attempts to violate them. It is also the ability to modify those characteristics when the well-considered judgement of all of the moneyusers dictate it.

So, we add one last characteristic:

14. Integrity: The money must maintain these characteristics in the face of opposition and attempts to violate them. The ability to modify these characteristics when the well-considered judgement of all the users of the money dictate it must be retained.

Final Score

Bitcoin has faked it till it made it, as the best definition of money, faster than fiat currency ever did. Time and history will be the final judge on whether it really was a better definition of money.

It is the best definition of moneynow, but there are those who seek to destroy it or limit it, for the clear and obvious reason: it poses a threat to their position as agents with control, which eliminates their prospect of counterfeiting and thus gaining advantage from it. For time and history to judgeBitcoin (or cryptocurrency) as the best” definition of money of this century, it has to survive these attacks.

It is my belief that Bitcoin is well suited to survive these attacks, precisely because it performs in the best manner yet known, the embodiment of four fundamental truths and fourteen characteristics of ideal money.

Bitcoin: The Ideal Money

Four Fundamental Truths of Money

  1. Medium of exchange: Bitcoin is already being widely used as a medium of exchange.
  2. Unit of account: Being a numerically based currency, it is a fairly solid unit of account, from One Bitcoin and beyond, to less than a Bitcoin with up to eight decimal point divisible units, or satoshis.
  3. Store of value: You obtain bitcoin today, and tomorrow you can use it to buy something else, without it having lostvalue.
  4. Faith by users: The growing number of clearly countable transactions of Bitcoin shows how much faith is being placed on it. Those who use Bitcoin have trust and confidence in it. More so than other currencies. on 17–12–17, there were 450,000 transactions done with Bitcoin. Compare to 81,700 on the same date in 2014, and only 220 per day in 2010.

Fourteen Characteristics

  1. Durability: Bitcoin is clearly durable. Since you can make infinite copies of the data that represents Bitcoin, this means that it is thus infinitely durable. You could even print the blockchaindataencoded in several laser engraved crystals that will last billions of years. Only a reverse big bang will render this currency’s durability obsolete.
  2. Divisibility: Bitcoin can be programmatically divided into satoshis using integer arithmetic (1 satoshi = 0.00000001 BTC). Since it is not infinitely divisible, this is that .1% thing that will never allowBitcoin to be the perfect currency, only to be outlasted by the cryptocurrency which has divisibility beyond 8 decimal points. Still. It is much better than “only cents”.
  3. Uniformity: Bitcoin is represented by infinitely reproducible computer data with unique identifier keys and the secure blockchain, thus allowing for a highly uniform and consistent characteristic.
  4. Limited supply: The computer algorithm running in every node that uses bitcoin knows beforehand that only 21,000,000 Bitcoins will ever exist. You would have to hack 51% or more of the computer nodes running Bitcoinwallets or miners to change this. I think this is going to be very hard to do.
  5. Portability: You can write your bitcoinwalletnumber on a piece of paper, laser engraved superman crystal, or as most mortals do: on a computer or mobilephone. You can transact with anyone who has the latest copy of the blockchain as yourself, and can verify with others that you can spend the money you say you have. As long as we have networks, ways to connect our devices to them, Bitcoin will be as portable as your smartphone or even a smaller device that functions similarly.
  6. Acceptability: If everyone using Bitcoin also accepts it, then this is the perfect coin. It is also easy to become someone who accepts it, no need to get sophisticated bank issued credit card accepting machines or signing tons of papers. The high transactionvolume mentioned above shows how acceptable it is has become.
  7. Verifiability: The authenticity of Bitcoin and transactions of the network can be verified given its distributed node architecture, providing high Byzantine fault tolerance. A system that provides this fault tolerance is capable of resolving the Byzantine generals problem.
  8. Agreeability: Users of the money must all agree on a simple yet clear set of rules governing the money. Bitcoin provides this by having no centralized authority, but rather confirming changes by a majority of nodes signalling voting for or against proposed changes.
  9. Trustworthiness: Money creation in Bitcoin is done by a previously agreed process of miners, and the high Byzantine fault tolerance of the blockchainsystem provides an additional layer of trust.
  10. Consistency:Bitcoin monetary emission results from a clearly known process, happening consistently every moment of its existence.
  11. Sufficiency:Bitcoin exhibits all these characteristics in a manner such that it demonstrates sufficiency over other alternatives such as cocoa beans, salt, gold, fiat money, electronicmoney, etc.
  12. Willability:Bitcoinusers have been desiring its inherent characteristics into existence since 2009, thus continuing to drive its desirability. Bitcoin’s motto could be summed up as: “Faking it till making it since 2009
  13. Monodispersity: Bitcoin’s miners and users are fairly homogeneously distributed. As more participants enter into using Bitcoin, they help disperse the miner size, and dissolve individual concentrations of bitcoin accumulation. More users means less possibility of a majority controlling the currency and rendering any of these characteristics null.
  14. Integrity: Bitcoin maintains these characteristics in the face of opposition and attempts to violate them. The distributed system of voting inherent in the cryptocurrency permits the modification of any of these characteristics through decisions of the majority of nodes using Bitcoin. Decisions are considered well-considered judgement through the agreement of most of the users of the money. Only those using bitcoin agree what it’s best for their currency even in the face of outside influence or duress.

The Future

I believe that Bitcoin will continue being the cryptocurrency of “last resort” and will continueincreasing in value as referred to by the prices of other fiat currencies, cryptocurrencies and goods. Other currencies might take some of this away, but the primacy rule for this cryptocurrency will have it be the go-to cryptocurrency for many years.

I can’t foresee all the details, but this is my best effort attempt at making sense of what is going on. I might be wrong about many of the things I just wrote, but I will let time be the best judge. I’ll probably be laughing at some of the things I mention, and will surely have overlooked many others.

At least I have a clearer definition of what money is, and I hope you and many others will agree with it.

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