← Articles·14 August 2019

A Primer on Money

What is money? This is a huge question with many possible answers and thousands of pages written on it. Here's a summary for those who don't want to read thousands of pages.

Money is a Communication Tool

It’s often very difficult to explain to people what Bitcoin is. The main reason for this is that the answer is deceptively simple but highlights a larger problem. The answer is that Bitcoin is money and the problem that it highlights is that most people have no idea what money is.

Fundamentally, money is a communication tool. It communicates value between people so that direct barter of goods and services is not necessary.

Talking about money as a communication tool for value, we also need to understand what value means. Value is “that which we want to have”. It is inherently individual and one person may value something more than a different individual does. Our reasons for value are tied to our individual positive feelings either directly, “this thing makes me happy” or indirectly, “this thing saves me time on something I don’t like so much, so I can spend more time on things I do like”.

In order for money to be an effective communication tool, it needs to be represented by something. In the modern world, we have physical and virtual representations of money. You can imagine for example a one-euro coin, a twenty-euro note, the value in your bank balance, and the number written on a small pad of paper representing your table’s current bar tab. The commonality with all of the above is that they’re represented in the same unit – in this example, euro. This brings us to a second concept: “currency”.

Currency is the metric we use for money. In other words, the way we measure “how much money”. There can be many different currencies, but not different metrics within a currency. One euro in one place or form is always equal to one euro in another place or form. Whether we have ten euro stored in a bank account, ten one-euro coins, or a ten-euro note, it’s considered the same amount of money. This brings us to the third concept: the representation of a currency, also called the “currency medium”.

The currency medium – whether physical or virtual – has properties that affect its suitability as a currency as well as how we use it in its role as a communication tool.

Unless a thing is ‘declared’ as a currency by a government or similar (we’ll discuss that later), it will usually go through several phases and hold aspects from these phases as it becomes a currency medium.

The first phase is as a collectible. Collectibles are things that people want to have and collect more of. In other words, collectibles are things that some people value.

The second phase is as a store of value. Once a thing is being collected by those who value it, it inherently becomes valuable to hold on to it whether you personally value it or not. Because of some specific properties of it that we’ll talk about soon, you expect its value to those other people to either stay the same or increase over time and thus you hold on to it for the future.

The third phase is as a medium of exchange. Once everyone around you is also holding these things, you can exchange them with each other for other goods and services. That they might one day be given to collectors is almost forgotten, as the currency now has value in and of itself for the purposes of conducting commerce rather than speculation.

The fourth and final phase is as a unit of account. The collectors are completely forgotten and now the value of goods and services is directly measured in units of this thing. Some currencies may at this point also lose their ability to be a store of value, however to understand how that comes to be, we need to cover a lot of other ground first.

Currencies therefore are things that often start off as collectibles and develop into a medium of exchange for goods and services priced in these things (i.e. a unit of account). They are also usually – but not always – stores of value.

In order for currency to be a good metric, it needs to have properties regardless of its medium. The greater the number and degree of these properties that a currency medium has, the better suited it is to representing the currency and the lack of properties may limit something’s ability to be used as a currency medium.

The commonly considered properties with some examples are:

Property	Definition	Examples
Fungible	That one of the things is equivalent to another one of the things in terms of value and also preferably (but not necessarily) indistinguishable.	Houses have low fungibility as they vary in size, quality, and location. One house is not the equivalent of another. Barrels of oil on the other hand are highly fungible as one barrel of pure oil is equivalent to another.
Non-consumable	That the thing doesn’t get “used up” (whether used as money or another use) and instead remains within the system.	Oil is consumable for many different purposes, which is one of the things that makes it a valuable commodity, but not a good currency. Gemstones are generally non-consumable, as even when made into jewellery they can be later reclaimed.
Portable	That the thing can be transported easily.	Sand is very easy to transport; often unintentionally if you’ve taken the kids to the beach. Boulders are very hard to transport, despite really just being very large grains of sand.
Durable	That the thing doesn’t get worn out over time and in the course of being used.	Tissue paper is not very durable. If we tried using it as currency, we’d often find ourselves poorer through common everyday accidents such as spilled water, sweating, or just pulling it out of your pocket too quickly. Diamonds are very durable. It’s very hard to destroy a diamond unless you really try.
Divisible	That the thing can be broken into smaller amounts.	Oil is highly divisible. I can give you a hundred litres or one millilitre without too much difficulty. Paperclips are not highly divisible. While I can easily give you one or a hundred, it is much more difficult to give you 22.75 of them.
Verifiable	That the thing can be shown to be real and not counterfeit.	Diamonds are very hard to fake. Making something that is not a diamond but has all of the various testable properties of a diamond will generally cost you more than a diamond would. “Spring Water” is very easy to fake. You can bottle filtered tap water and people can’t tell the difference.
Transactable	That the thing can be easily used in exchange for goods and services (when accepted). This is often dependent on other properties such as divisibility but may also be influenced by other properties that aren’t listed.	Diamonds are difficult to transact with because of their size in relation to their value. Even if you could subdivide a diamond enough, paying for a candy bar with diamond dust is not an easy experience. Facebook Likes are easy to transact with because they are virtual and so can be used to transact almost anywhere in the world to someone else almost anywhere else in the world.
Scarce	That the thing is not abundant nor easily created new.	Uranium is very scarce and very difficult to create. Paper is abundant and also quite easy to create.

Note that none of the examples for these properties is particularly useful as a currency medium, since even where they may be good in one or two properties they are often catastrophically bad in others. Facebook likes may be highly transactable, but they’re also not divisible, only weakly verifiable, and – most importantly – not scarce.

Hopefully we now have a better understanding of what “money” is, what a “currency” is, and what a “currency medium” is. To help keep it straight in your mind, we can sum it up with the following series of statements:

Money is the communication of value using a conceptual tool called a currency.
Euro, dollars, and Bitcoin are currencies.
A euro coin is a physical representation of the euro and thus coins are one currency medium employed by the euro.
A euro value stored in a bank account is a virtual representation of the euro and thus bank balances are another currency medium employed by the euro.

Types of Currencies and a History Lesson

In early money, currency was equivalent to its representation. The properties of currency were the same as the properties of the currency medium.

According to archaeological evidence, one of the first currencies used was likely seashells. Far from the ocean in central Africa, seashells are relatively rare to find naturally and at the time – tens of thousands or maybe even hundreds of thousands of years ago – the technology to counterfeit them didn’t exist. Looking at the other properties that make something a good currency medium, we can see quite quickly that shells aren’t a bad choice for a tribe of early humans in central Africa. They’re quite good in terms of being fungible, non-consumable, portable, verifiable, transactable, and scarce. They really aren’t so durable or divisible, but six out of eight is a pretty good start.

Seashells of course aren’t something someone actually wants to have under normal circumstances. They have to be understood as a representation of value – that is, money – before their properties as a currency even come into play.

There are two main ways that a currency can come into being: by consensus and by decree.

Consensus currency is usable as money because everyone agrees that it is. That is, there is no individual or group that demanded it be considered usable as money, it simply became adopted as such because its properties were sufficient for it to be a usable currency and the people using it agreed for that to be the case.

Currency by decree comes into being because an authority claims it to be so and the society that follows that authority accepts it as the case. Currency by decree is often called fiat, but this is actually slightly incorrect. The word fiat comes from the Latin verb fieri – to be done – and is best translated as the command “let it be done”, however applied to currency, it doesn’t relate to the initial decree for its existence, but rather the power over the creation of more of it.

No one can simply declare more gold, air, water, corn, or frogs into existence, no matter how much political power they wield. These things can be created – some more easily than others – but all require energy to be put into their creation and thus they have a strict upper limit based on the available supply of energy. Generally, these things are referred to as commodities. A commodity is defined as a basic good that is interchangeable with other goods of the same kind. Or, put in the terms we’ve already used, it’s a good that is fungible. Currencies based around commodities are commodity currencies.

Fiat currencies on the other hand have potentially unlimited supply at no fixed energy cost per unit. The creation of a thousand new words in a language doesn’t require a thousand times the energy of one new word. Equally the creation of a million new dollars in a bank database doesn’t require any more energy than the creation of a single cent.

Inherently, this is the only difference between commodity currency and fiat currency, however as we will soon see, this is significant enough on its own.

Initially, all currencies were commodity currencies. This is even true for early national coins such as the Roman Denarius. Being made of nearly pure silver, the Denarius was worth exactly as much as its weight in equivalent purity silver. The “coin” was simply an easy way to identify how much silver it was without the necessity to weigh it. Thus, the true currency was the silver and the Denarius coin was the common medium for it.

In the first century, Emperor Nero realised that debasing the Denarius with cheaper metals would allow for the creation of wealth “at no cost” and allow him to pay off his debts more easily while still remaining wealthy. The Denarius had become so standard as a currency in its own right, no one even paid attention anymore to its relationship to the silver it was made of.

For a while this worked, however more so in Rome where money could be treated more abstractly without too much attention being paid. As the outlying parts of the empire began to understand the deception, they – still considering the silver to be the true currency – began to charge more for their goods in order to get the silver that they wanted. The Denarius, without ever being formally redefined, had shifted from a commodity currency to a fiat currency.

Two centuries later, the Denarius was 0.02% silver, and considered worthless outside of Rome. The Roman empire collapsed soon after.

In the thirteenth century, Kublai Khan brought China under Mongolian control. He bought vast amounts of goods and hired many soldiers for wars. He even traded significantly with Europe through contact with the Venetian explorer Marco Polo. How did he finance these many purchases? He simply printed new currency at essentially no cost to himself; or in other words, he used fiat. Kublai Khan had learned this trick from his grandfather Genghis Khan’s contact with the Jurchen people in the late twelfth century.

The Jurchens had used copper coins, similar to the Roman silver Denarius. They had however learned to overcome the problem of carrying large amounts of heavy coins around by the invention of proxy currency. Proxy currency is the first instance where a distinction needed to be made clearly between a currency and the currency medium. In the case of the Jurchens, it was a printed paper note called a Jiaochao, and can be considered the world’s first banknote.

The Jiaochao was redeemable at the official printer for the coins that it represented and so was much more convenient to carry and use in trade as if it were the coins that it represented. In modern terms, we refer to this as a currency that is backed by something else. As long as the currency medium truly is backed by the commodity as promised (and this can be proved, as we’ll discuss later), this is still a commodity currency, as the currency itself hasn’t changed, simply a new medium has been added.

Of course, it didn’t take long for the Jurchens to realise that if people treat the Jiaochao as if it is currency itself rather than just a currency medium, then there’s really no need to actually own all of the coins that it represents. Very few people claim them anyway, since the paper is “just as good”. Just as happened with the Denarius in the Roman Empire, the Jiaochao suffered severe inflation as more and more were printed and they became worth less and less. Eventually, they were not accepted at all and the public only accepted copper and silver for trade.

Kublai Khan knew this history from his grandfather, but didn’t care. His goal wasn’t financial stability but instead to finance his empire-building at no personal cost. His notes – declared as backed by silver, where there really was little to none – also suffered severe hyperinflation and by the mid-fourteenth century (after his death) were rejected entirely.

Throughout the centuries that followed, many more attempts were made at creating proxy currencies and the inevitable fate of all was to lose their commodity backing followed by hyperinflation.

In the early eighteenth century, the French enlightenment philosopher Voltaire observed that:

“Paper money eventually returns to its intrinsic value: zero.”

This was shortly after the “livre tournois” – France’s first attempt at a paper money – had suffered hyperinflation and become worthless in less than twenty years from its creation; something Voltaire had witnessed and experienced first-hand through his adolescent and formative years. As a response, the government had created monetary stability again by precisely fixing an exchange rate between gold and silver and then declaring the exchange rates of coins minted using these metals.

Unfortunately, those who fail to learn from history are condemned to repeat it (Winston Churchill). Only one generation later, the French government again tried to create a fiat paper currency – the “assignat”. 13000% inflation and a rather well-known revolution later, Napoleon Bonaparte restored France to a gold standard with the introduction of the gold-backed “franc”. This remained stable – and the basis of a solid monetary union with other nations – until the franc was removed from its gold-backing at the start of the twentieth century, after which it lost 99% of its value in the space of a single decade.

Since then, the world has seen countless fiat currencies be declared and fail. The Papiermark of the Weimar Republic in the 1920s, the Greek Drachma in the 1940s, the Bolivian Peso in the 1980s, the Zimbabwe Dollar in the 2000s, and the Venezuelan Bolivar in the 2010s, just to name a few.

The US dollar was originally a gold-backed currency, but began to be decoupled from gold in the 1930s, finally being completely decoupled in 1971. In the 48 years since then, the dollar has lost over 82% of its purchasing power ($2.50 in 1971 went about as far as $20.00 now on equivalent goods and services).

The economic theories of John Maynard Keynes described in his many writings – most notably his 1936 “The General Theory of Employment, Interest & Money” – are often used as a justification for why this is somehow different to all of the failures of unbacked currencies of the past. To Keynes’s credit, the dollar hasn’t collapsed quite as quickly after having its backing removed as other currencies in the past, but it is worth keeping the size of the US economy in mind as well. As you will recall, the Roman Denarius took nearly two centuries to fail completely and it was only slowly debased rather than having its silver removed entirely.

The euro was created as an unbacked fiat currency from conception and has decreased in value following a similar pattern to the US dollar in its twenty-year history with the only differences being visible when comparing the two directly instead of against purchasing power.

Another Look at the Properties of Currency

Why honestly (rather than deceptively, like Kublai Khan) move away from commodity currency to begin with?

To answer this question, we need to go back and take another look at the properties of a currency and see how a typical commodity currency – gold – compares to a typical modern fiat currency – US dollars.

Property	Gold	US Dollars
Fungible	Coins may have different things printed on them, but 1g of gold is 1g of gold. Fungibility: 9/10	Printed dollars have serial numbers but no special value is placed on them. Digital dollars – being virtual – are completely indistinguishable. Fungibility: 9/10
Non-consumable	Gold can be used for non-monetary purposes, but is almost never consumed in the process and is reclaimable. Non-consumability: 9/10	Dollars are virtual (printed dollars are only one medium) and thus are definitionally never consumed. Non-consumability: 10/10
Portable	Gold is a physical commodity and so cannot be transferred electronically. It is also heavy and so larger amounts are very cumbersome. Portability: 2/10	Dollars can be transferred electronically and come in many denominations easing physical portability also. Portability: 9/10
Durable	Gold is very non-reactive and is difficult (but not impossible) to degrade or destroy. Durability: 9/10	Physical dollar bills and coins can be destroyed relatively easily deliberately but generally last a long time and can be replaced when obviously showing wear if they’re passed through the right hands (i.e. a bank). Digital dollars are hard to destroy due to backups, double-entry accounting, and other similar practices however it can be done. Durability: 7/10
Divisible	Generally speaking, gold is easy to divide, but due to its scarcity, the value is such that divisibility becomes an issue. Attempting to divide, measure, and handle milligram and microgram amounts of gold for small payments is impractical. Divisibility: 4/10	Physical dollars can be divided down to 1/100 – called ‘cents’, which is too large for micropayment scenarios at the current dollar value, but fine for most traditional commerce. Digital dollars can be subdivided further – potentially infinitely – however most systems don’t provide for accuracy levels much better than 10^-4. Divisibility: 7/10
Verifiable	With the right equipment, gold can be verified very precisely. However, such equipment is expensive and so only practical when dealing with larger values. The technology to produce something that looks like gold and weighs the same as gold is relatively simple to procure and employ. Verifiability: 5/10	Both physical and digital dollars are relatively easy to counterfeit when dealing with smaller values as there is little infrastructure in place for fraud detection. Verifiability: 4/10
Transactable	Due to a combination of its divisibility, portability and (positive) scarcity, gold is inherently difficult to transact. Transactability: 2/10	Physical dollars are easy to use for local transactions and digital dollars are generally easy to use for transactions at a distance as there are a plethora of payment service providers. However, as payment service providers are distinct and separate from the currency itself, they can be coerced (legally or illegally) into blocking or altering transactions. Transactability: 8/10
Scarce	There is only a limited amount of gold on/in the earth and it takes increasingly more effort to get at it as the easiest supplies are naturally mined first. However, the exact total supply is unknown; the supply rate is variable and unpredictable; and with newer technologies (e.g. asteroid mining, or nuclear synthesis), total supply may be considered potentially unlimited. Scarcity: 8/10	Physical Dollars can be created at very low cost with no relation to the face value. Digital Dollars can be created at essentially no cost with no relation to the amount created. The only thing preventing infinite money creation is the decisions of those with the power to create it. Dollars – by design of the economic system they’re in – have a permanent, ongoing, uncapped supply increase. Scarcity: 1/10

It’s worth noting that these values – especially for gold – are measured as of today with a view to the future. In the past, properties such as scarcity and verifiability would have achieved much higher scores.

The properties where we see the largest differences between gold and US dollars are: portability, transactability, and scarcity. US dollars are far more portable and transactable than gold; but gold is much scarcer than dollars.

Gold worked well when the majority of commerce was local and the prices of anything would typically fall in a range of not more than around 104 (the most expensive item typically bought and sold in daily transactions isn’t more than ten thousand times the price of the cheapest item).

In our modern world however, we have significant non-local commerce and our typical price range for daily commerce is closer to 106. These aspects make gold – and every other traditional commodity currency – highly unsuitable for use as money.

Fiat currencies on the other hand – primarily by virtue of their ability to be represented non-physically – are much more suitable as they can be represented in many forms including digitally and thus don’t suffer the same portability and transactability issues. They initially seem like a great solution to these problems and in many ways are even a naturally developing solution as we learned from our history lesson.

A Closer Look at Scarcity

We learned in our history lesson that many fiat currencies of the past “hyperinflated” and we also see that ‘moderate inflation’ is generally defined in Keynesian economic systems as being a positive thing.

That leads us to ask: Does unbacked fiat always lead to the problem of hyperinflation? And if so, why? And when will the US Dollar and Euro suffer this fate?

Sometime after the first massive financial crisis of the 20th century, a story was created that it was caused by “too much scarcity” of commodity backed currency, rephrased in terms of liquidity. Liquidity is simply how quickly and easily currency can be accessed, moved around, and converted to other forms. Liquidity can also be local: Pokémon trading cards are highly liquid in many comic shops and schoolyards, but not very liquid at all elsewhere. It correlates closely with – but is not identical to – the currency property transactability. While aspects may be tangentially related to scarcity, conflating the two is most certainly a fallacy and sadly one that is taught in many economics classes even today.

A lack of scarcity is the simple – and obvious – reason that fiat currencies generally suffer this fate. It is possible to imagine a scenario where a benevolent dictator declares a fiat currency and institutes monetary policies of strict scarcity but it’s a hypothetical only and could only last as long as the people in charge continued to decide it to be so. In reality, no fiat currency has true scarcity and never can because even if it does not get inflated, it can be inflated.

Here, we need to side-track to a small lesson about markets. A market is the entire economic activity of a specific group, a specific area, a specific set of goods and services, or so on. When used with the definite article, “the market”, it is simply the aggregate of all markets; that is, the entire economic activity of the world as a whole.

All markets are constantly in flux. As new people are born, they tend to grow. As people die, they tend to shrink. As new technologies create new value for less energy input, markets grow. As wars disrupt the free flow of money, they shrink.

The monetary value of a currency can be summed up as the size of the market they address divided by the total amount of it that exists (known as the currency’s supply). That is, if the market consists of a hundred widgets (and no other goods or services) and there are two hundred units of the funbucks currency that can be used for these widgets, the natural value of funbucks is such that one widget costs two funbucks.

No one can truly calculate the total size of any complex market as there are simply too many factors to address. That doesn’t mean it can’t be modelled more generally though and we can use simplified cases as thought experiments to provide us with a generalised understanding of the more complex reality.

If the supply of funbucks is increased 5% yearly, then over a little over 14 years there’ll be twice as many funbucks as there were before. If the total market is the same (still one hundred widgets), then the effect is that funbucks aren’t as valuable as they were before. I used to be able to get two widgets for four funbucks, but now I can only get one.

The apparent increase in supply in relation to the size of the economy is called inflation. It’s important to note that this not the same as the real increase in supply. The inflation that occurs with a doubling of the money supply is identical to the inflation that occurs with a fifty percent decrease in the total market.

Keynesian economics fundamentally argues for an increase in the currency supply in order to stimulate economic activity. If I want widgets and I know that my funbucks will get less of them in the future than they do now, I’m encouraged to spend my funbucks instead of saving them. This keeps the widget manufacturer in business, who can pay his staff, who also buy widgets. Everyone is happy.

Except they’re not… this is another myth taught in economics classes around the world. In reality, this is a masked variant of the well-known broken window fallacy. A glazier who pays a boy to break windows in the village may certainly be drumming up business for the glazier who then spends his earnings at the baker, the butcher, and the tailor but what’s forgotten is that the money they paid to the glazier to fix their broken windows could have been used directly and without the cut taken by the glazier and the boy.

Inflation by artificially increasing the currency supply is the same thing, only that the “glazier” and the “boy” are more hidden and thus overlooked by many economists. Inflation certainly does encourage spending, but money doesn’t enter the economy evenly. When new euro are created by the European Central Bank, you don’t find you suddenly have more in your pocket or your bank account. But they do. They create the money and then spend it on goods and services. These goods and services are available at the price established by the currency supply prior to the new creation act. Over time and several transactions, this new supply is naturally incorporated into the market and prices adjust. You even get an increase in your salary to keep up with inflation and may not think much of it. Sure, things used to cost less, but you used to earn less, so it’s the same. Except somehow, it doesn’t balance out. The price of things has increased more than salaries have. The extra value has been taken. Looking back to the broken window fallacy, it’s now clear where the money went: the creators of the currency supply – doing so at no cost to themselves – are taking the role of the “glazier” and their employees, contractors, suppliers and more are the “boy”. They are taking their ‘cut’ out of the market for free and pointing at the increased market activity as if it’s a good thing.

As new technologies are constantly being developed and populations grow, it’s easy to understand why most markets also appear to be in a constant state of growth. If a market grows, then to maintain a state of inflation, the currency supply has to grow faster. Most controlled currencies are targeted at two percent total inflation, which means an increase in the money supply of larger than that during market growth.

However, nothing grows forever. Even with new technologies, markets must eventually stop growing or shrink. It should be expected that there will be times of growth, times of a level size, and times that it shrinks. In a perfectly controlled currency supply targeting a specific rate of inflation, this could theoretically be managed through the destruction of currency. This however is where the system breaks down – very, very painfully.

The creation of money financially benefits those who are empowered to create it. Likewise, the destruction of money financially detriments those who are empowered to destroy it. The US Federal Reserve, European Central Bank, and other central banks have costs – the “boy” in the broken window fallacy comparison – and simply can’t afford to destroy money. They’d be unable to continue operations because their entire business model has become “breaking windows”.

What this means is that Keynesian systems – like the one we currently find ourselves in – are completely incapable of dealing with any market state other than growth. The only way to even try to stave off economic downturns is through even greater inflation. Since currency creation is typically implemented in the form of new debts (e.g. the bank loans a million dollars that did not previously exist, thereby creating a million dollars), this is often dressed up in the form of low (or even negative) interest rates to stimulate lending.

It is hopefully obvious to the reader that even when successful on the short term, the only possible long-term result of this is eventual hyperinflation. As for the final question at the start of this section, no one can reasonably calculate with any accuracy when it will happen to the dollar and the euro, only that it will happen and over the last two to three decades have arguably already seen the first clear signs of the end.

The Properties of Bitcoin

Now we know more about the properties of currencies and how traditional commodity currencies compare to fiat currencies, it’s finally time to look at Bitcoin and see how it stacks up.

Property	Bitcoin
Fungible	Bitcoin are defined virtually within UTXOs (unspent transaction outputs) in a globally shared ledger. They are generally fungible, but due to having different histories, it is theoretically possible to value one specific UTXO differently to another. This is not practically implementable due to the ease with which the UTXO set can be obfuscated and hidden, despite arguments about “blacklisted” coins and some interest in “fresh” coins. Fungibility: 9/10
Non-consumable	Bitcoin’s blockchain can be used for non-monetary purposes such as immutable data storage, but inherently only when performing financial transactions and therefore at a financial cost. Non-monetary uses of the blockchain don’t “use up” (or even “lock up”) any bitcoin in the process and therefore bitcoin are never consumed. Non-consumability: 10/10
Portable	Bitcoin can be transacted globally on the Bitcoin network. They don’t actually “move” but their value is moved by the writing of an entry to the database using a private key that proves ownership of specific UTXOs. These private keys can also be transported in storage media such as paper, electronic devices and communication channels, and human minds allowing for the effective transport of bitcoin either with or without a person over essentially any distance and with levels of security vs practicality chosen by the person transporting it. Portability: 10/10
Durable	Bitcoin can be sent to a “burn address” where no one has a known private key, or the owner of a private key may lose it such as through the destruction of an electronic device and/or all physical and digital representations of that private key. This doesn’t actually destroy any Bitcoin, it simply makes them inaccessible, however for the purposes of measuring durability it is reasonable to consider these Bitcoin as “gone”. The only way to truly destroy any bitcoin after creation is to destroy all bitcoin by removing every copy of the Bitcoin ledger globally and concurrently. This is beyond anyone’s technical capability as the ledger is not required to be stored on computers (there may be a printer somewhere printing the entire ledger… this simply can’t be known). Bitcoin can also be willingly (or accidentally) not brought into the supply by miners building blocks that do not reward themselves the full amount that they are entitled to and this has happened in the past. However, for all cases where bitcoin can be either destroyed or at least rendered inaccessible, it is usually through a conscious act or a single instance of an error. During ‘normal use’ Bitcoin are highly durable and have no aspects where they could be considered to ‘wear out’ or ‘become lost’ during an ordinary transaction. While many bitcoin were lost during the early days of the network, the amount of new lost coins has become vanishingly small over time. Durability: 8/10
Divisible	Bitcoin are currently divisible to 10⁸ places in transactions written on its blockchain. This can be changed with little difficulty if there is consensus for the need to do so. Additionally, Bitcoin are infinitely divisible in transactions taking place off the blockchain, but agreement must be reached for how those transactions are settled on the chain. The Lightning Network for example allows divisibility to 10¹¹ places if desired, using rounding to the nearest 10⁸ when performing settlement on the blockchain. Divisibility: 9/10
Verifiable	Bitcoin written on the blockchain are publicly verifiable for any user, anywhere, any time. Ownership of bitcoin in second-layer networks such as the Lightning Network are verifiable between the two ends of each channel that makes up the network, but only the sum total of the channel is known publicly. That the Bitcoin exist and are not “fake” is verifiable by both ends of any transaction as – due to the nature of the technology – the values requiring verification are fully within their channel even when the transaction partner is outside of the channel. Bitcoin stored by 3rd party custodians are usually not easily verifiable if transacted fully within the custodian’s system, but this is not a property of Bitcoin but rather that of the custodian (similar to someone promising that they are holding dollars or gold for you but not really doing so). Transactions from the custodian to outside of the custodian are fully verifiable. Verifiability: 10/10
Transactable	Bitcoin is extremely transactable at any scale. It is possible to imagine issues with on-chain confirmation in a future scenario where humans have colonised the solar system and we have greater than ten light-minute communication distances, however that problem may be solved by side-chains and is not a problem that affects our current economy’s requirements. Bitcoin even provides transactability well beyond what any other currency in the past has been able to do. With Bitcoin it is easy to imagine true microtransactions and streaming-money functionality that are impossible with older currencies. Transactability: 10/10
Scarce	Bitcoin is strictly limited to a number defined by its issuance schedule. This is exactly 20999999.9769 BTC, but more commonly described as “21 million”. These are added to the market at a strictly mathematically defined rate, whereby over 85% of the total supply has already been added and of the remaining 15%, 14% will be added over the next twelve years. The remaining 1% will be added over around a hundred years. Scarcity: 10/10

Bitcoin has perfect or near-perfect scores on every property. Notably, it avoids the problems of commodity currencies by being perfectly portable and perfectly transactable. It also avoids the primary problem of fiat currencies by being perfectly scarce.

So far, we’ve been using these properties without considering if there are further properties that make something valuable. Bitcoin has some significant differences to other currencies that are also worth considering when deciding on its value as a currency.

Property	Definition	Gold, Dollars, Bitcoin
Sovereign	Sovereign currencies are those where their use is mandated by the force of a nation-state. How important this is for a currency depends on the strength of the nation and its ability to influence markets outside of itself.	US Dollars are backed by the force of the US government. If you want to trade with the US, they can demand that you do so in US dollars. Neither gold nor Bitcoin are currently backed by any nation directly. Gold often is accepted for trade by many nations. Bitcoin is beginning to be formally recognised by some nation-states and subdivisions of nation states. It can be used in several US states as well as one canton of Switzerland to pay taxes and has a specific legal framework in New Zealand for the payment of salaries. It can in no way however be said to be backed by any of these states. Dollars: 10/10Gold: 3/10Bitcoin 1/10
Decentralised	Decentralised currencies are those that have no central points of control and therefore no central points of failure. A decentralised currency is – by definition – an incorruptible currency as there is no individual or group of individuals with the power to change aspects of its supply, behaviour, or transactions against the will of the user. No user has any more ‘might’ within the system than any other (even where they may have might outside of the system; such as governments and economically important participants).	Neither gold nor dollars are decentralised at all. Gold’s fundamental aspects are governed by physics and the nature of reality. Dollars’ fundamental aspects are governed by the US Federal Reserve, which may get some pressure from the people and government of the United States to provide certain properties, however it is ultimately up to them. Bitcoin is decentralised by design. Its fundamental aspects are governed by each economic participant individually, with the broad consensus being used to describe the current ‘canonical’ state of the system. Individuals may choose to abide by entirely different rules from each other, however if they do, they may find that no one else accepts their transactions. Dollars: 2/10Gold: 1/10Bitcoin 10/10
Programmable	Programmable currencies are those that are inherently able to perform logical operations within the framework of the currency itself and not through an external system.	Gold is not programmable as fundamental physics doesn’t allow for conditional statements outside of the reality in which the matter exists. Dollars are not programmable, although can exist within digital systems that allow for programmability, giving them some ability to be acted on as if programmable; however only to a very limited extent. All Bitcoin transactions are built a scripting language that is also capable of building self-contained escrow systems, fundraisers, multi-party transactions where no participants are required to trust each other, and much more. It is not a turing-complete language and thus may be considered less than perfectly programmable, however this is also a design decision for the safety of the network. Dollars: 1/10Gold: 0/10Bitcoin 8/10

Sovereignty is currently a clear win for the US dollar over gold or Bitcoin, however it may not be enough to make up for the other shortcomings of the currency and may even cause a reduction in the power of the nation directly if they choose to remain inflexible as while the strength of the currency is backed by the force of the nation, it’s also true that the force of the nation is – at least in part – backed by the strength of the currency.

In terms of Decentralisation and Programmability, Bitcoin is the clear winner as neither dollars nor gold have any significant aspects of these properties at all.

A Bitcoin Economy

A person’s desire for goods and services now is different to their desire for those goods and services later. This is called Time Preference and plays an important role in the discussion around markets that was introduced earlier when discussing the scarcity issue of fiat currencies.

If I’m out in the city late at night and really need to sleep, then I will have a high time preference for a hotel room or a taxi home. I don’t need one later, I need it now.

Similarly, people don’t have to buy the latest mobile phone – one from the previous generation will work fine and can still do everything it could do when it was new only a year or so ago – but many people are still more than willing to pay more for the new features and capabilities now instead of waiting until the latest device is cheaper when the following generation comes out. Other people however might have a lower time preference and consider instead to get the previous generation of device.

Time preference for specific goods and services isn’t a thing that can be calculated precisely but certainly can be clearly illustrated.

In the first example, a taxi home now might be something I’m willing to pay fifty euro for. If waiting an hour for a taxi at a cheaper price were an option, how much cheaper would it need to be? Maybe I might feel that twenty euro would be worth that wait. What about a week from now? Well, that’s worthless to me. It has no value.

In the second example, how much cheaper would the previous generation have to be for the person with the higher time preference to buy it instead? How much more expensive would the previous generation have to be for the person with the lower time preference to select the new model instead? I don’t know, but I can guarantee you that Apple and Samsung have calculated this as an aggregate across their customer bases in their sales planning.

Currencies themselves also have time preference and this is what is being manipulated by the artificial control over currency supply and ultimately the rate of inflation. As the money devalues, it pushes my time preference for goods and services up. I want to spend my money sooner and experience the value of goods and services that are paid for later as being higher than it would have been with no inflation.

In an economy with a fixed currency supply like Bitcoin, time preferences for each good and service are allowed to sit at their ‘natural’ levels for each person.

As already described, markets sometimes grow, are sometimes steady, and sometimes shrink. We’ve also learned that bitcoin can become unavailable through deliberate or accidental loss. That means that it should be reasonable to expect that in an economy based on Bitcoin, the currency should experience periods of inflation, stability, and deflation.

This is often cited as a concern with Bitcoin since Keynesian economics teaches that deflation is inherently a problem by causing people to ‘hoard’ (better called ‘saving’) their money instead of spending it, which – through lower spending – further shrinks the market, and ends up in a “deflationary spiral” until everything collapses. Despite this theory being cited as an inevitability, history has never actually seen it happen and many economists argue that it’s an unrealistic myth.

The general expectation with a fixed supply economy is that when the market experiences growth, the currency will appear deflationary and thus discourage unnecessary spending through lowering people’s time preference for luxury items. Their time preference for basic requirements of course remains unaffected; no one will stop eating for months with the expectation that they can buy more food later. People with very high time preferences for specific luxury goods – such as in the mobile phone example – may still not have their time preference pushed to the point that they delay spending and the companies that produce these goods will also adjust their prices accordingly in longer periods of deflation.

Of course, the preference for saving over spending will put some pressure on the market against growth. That may lead it to stop growing if the growth is not sustainable. At that point, the market is stable, and deflation stops.

At some point, for any number of possible reasons, the market may shrink. When this happens, the currency will appear inflationary and thus encourage spending through increasing people’s time preference for luxury items. This is the opposite case from deflation and equally applies an opposite pressure against the shrinkage of the economy.

Unlike in systems where the currency supply is manipulated, a fixed supply economy is self-stabilising and will not experience runaway inflationary or deflationary effects due to the opposite pressures that each of these causes puts on the people interacting with the market.