What is money?
Money is anything that people agree to use as a medium of exchange for goods and services. It’s a universal tool that helps humans assign and transfer value.
Money works as a unit of account (to measure value), a store of value (to keep wealth over time), and a medium of exchange (to make buying and selling easier). Examples include coins, paper currency, and even digital assets like Bitcoin.
How does money have value?
Money has value because people agree it does and are willing to accept it in exchange for goods, services, or other assets. Its value comes from trust—trust that it can be exchanged for something tangible or useful, whether it’s food, clothing, or a car.
For physical money like coins and paper, value is backed by governments declaring it legal tender, even though it has no intrinsic worth. Digital money, like Bitcoin, derives value from scarcity, demand, and its ability to function in a secure, decentralized system. Ultimately, the value of money lies in the confidence and usability it provides in any financial exchange.
What is considered to be money?
Throughout history, different things have been used as money, from gold and silver to shells and beads. Today, government-issued currencies (like the dollar, euro, or yen) are the most recognized forms of money—referred to as fiat money.
However, money is evolving. Beyond physical cash, we now use digital money, such as bank transfers and mobile payments. Bitcoin and other cryptocurrencies are also becoming widely recognized forms of money for storing wealth and conducting transactions in the digital age.
Is Bitcoin money?
Yes, Bitcoin is a form of money, but it’s very different from traditional options like fiat currency or gold. Bitcoin is entirely digital and operates on a decentralized network, meaning it is not controlled by any government or financial institution. It allows fast and secure peer-to-peer transactions across the globe.
Bitcoin also has unique qualities that make it stand out, such as its fixed supply (21 million coins) and the ability to divide it into tiny fractions. While not everyone accepts Bitcoin yet, its use as a medium of exchange and store of value is growing rapidly, especially in the realm of digital finance.
Understanding the Traits of Money: Bitcoin, Gold, and Fiat Currency
Money has a fundamental role in society—it makes trade and commerce possible, simplifies transactions, and holds value over time. But not all forms of money are created equal. Their usefulness depends on certain traits. By understanding these traits, we can better evaluate how different types of money—Bitcoin, gold, and fiat currency (government-issued money like the dollar or euro)—perform.
Below, we'll explain the key traits of money and analyze how Bitcoin, gold, and fiat currency measure up to each one.
1. Verifiable
Money must be easily verifiable to confirm its authenticity. This helps prevent fraud and ensures trust in transactions.
- Bitcoin (High): Bitcoin’s verification relies on its blockchain technology. Every transaction is recorded on a public ledger, allowing anyone to verify its authenticity. This system makes Bitcoin highly verifiable.
- Gold (Moderate): Gold requires physical inspection or specialized tools to verify its purity and authenticity. This process can be inconvenient, making it moderately verifiable.
- Fiat (Moderate): Fiat currency uses features like watermarks and holograms to prevent counterfeiting. While moderately effective, these measures aren’t foolproof, and sophisticated counterfeits remain an issue.
2. Fungible
Fungibility means every unit of the money is interchangeable with another of equal value. This is crucial for seamless transactions.
- Bitcoin (High): Each Bitcoin, or fraction of it, is identical in value and function, making Bitcoin highly fungible.
- Gold (High): Pure gold is also fungible—one ounce of gold is identical to another ounce of the same purity.
- Fiat (High): Fiat currency is uniformly standardized by governments, ensuring high fungibility across all units.
3. Portable
Money should be easy to transport so it can be used for transactions anywhere.
- Bitcoin (High): Bitcoin is exceptionally portable. It exists digitally, and you can carry billions of dollars’ worth on a mobile device or even in your memory (via private keys).
- Gold (Low): Gold is heavy and bulky, making it challenging to transport, particularly in large amounts.
- Fiat (High): Physical cash is relatively portable for small to moderate sums, and electronic transfers make fiat viable for larger transactions.
4. Durable
Durability is key because money needs to withstand physical or environmental wear and tear over time.
- Bitcoin (Moderate): Since Bitcoin is digital, it doesn't degrade physically. However, it depends on technology and electricity, which can fail.
- Gold (High): Gold is one of the most durable materials; it does not corrode or degrade, making it excellent for long-term storage.
- Fiat (Low): Paper money and coins can be easily damaged or destroyed, leading to lower durability.
5. Divisible
Good money should be easily split into smaller units for transactions of varying sizes.
- Bitcoin (High): Bitcoin can be divided into incredibly small fractions (down to 100 millionths of a Bitcoin, called a "Satoshi"). This makes it highly divisible.
- Gold (Low): Dividing gold requires melting and recasting, which is expensive and impractical.
- Fiat (Moderate): While fiat is divisible into cents or pennies, there are limits, such as the inability to divide cash beyond the fixed denominations.
6. Scarce
Money needs to be scarce to maintain value; endless supply diminishes its worth.
- Bitcoin (High): Bitcoin has a hard cap of 21 million coins, ensuring its scarcity and value over time.
- Gold (Moderate): Gold is naturally scarce, but new mining can increase supply slightly.
- Fiat (Low): Governments can print unlimited amounts of fiat currency, leading to inflation and diminished scarcity.
7. Established History
Money with a long, proven track record inspires trust and confidence.
- Bitcoin (Low): Bitcoin has only been around since 2009, so its history is relatively short.
- Gold (High): Gold has been used as money and a store of value for thousands of years, giving it a well-established history.
- Fiat (Moderate): Fiat currency has been in use for centuries, but many examples exist of fiat systems collapsing, such as hyperinflation in Zimbabwe or the Weimar Republic.
8. Censorship Resistant
Censorship resistance refers to the ability of money to be used freely, without interference by third parties like governments or banks.
- Bitcoin (High): Bitcoin is decentralized and allows peer-to-peer transactions without intermediaries. It’s difficult for governments to censor or block its use.
- Gold (Moderate): Gold is physically owned, so it’s resistant to censorship. However, large gold transactions are subject to regulation and seizure.
- Fiat (Low): Government fiat systems are highly controlled. Authorities can freeze accounts or block transactions, making fiat the least censorship resistant.
9. Unforgeable Costliness
Money should require effort or cost to produce, ensuring its intrinsic value and preventing easy forgery.
- Bitcoin (High): Bitcoin’s proof-of-work mechanism requires energy and computational power to produce. This “unforgeable costliness” makes it highly secure.
- Gold (High): Mining and refining gold require significant time, energy, and resources, giving it inherent value.
- Fiat (Low): Fiat currency is cheap to produce—central banks can print it with ease, undermining its intrinsic value.
10. Openly Programmable
Programmability means the money can be customized for specific purposes, opening new possibilities for use.
- Bitcoin (High): Bitcoin and its blockchain enable programmable features like smart contracts, allowing for automation and innovative applications.
- Gold (Low): Gold is purely a physical asset and cannot be programmed.
- Fiat (Low): Fiat lacks programmability. While digital banking systems allow some automation, fiat itself is not programmable.
11. Decentralized
Decentralization means the money operates without central control. This ensures fairness and reduces the risk of manipulation.
- Bitcoin (High): Bitcoin operates on a decentralized blockchain, with no single point of control or failure.
- Gold (Moderate): While no one “controls” gold, its physical nature makes its storage and movement dependent on centralized systems.
- Fiat (Low): Fiat currencies are heavily centralized, controlled by governments and central banks.
When we compare Bitcoin, gold, and fiat currency across these traits, it’s clear that each excels in different areas. Gold’s long history and durability solidify its place as a reliable store of value, while fiat’s current dominance lies in its convenience and adoption.
Bitcoin, however, emerges as a new form of money that ticks the most boxes on this list. Its advanced portability, divisibility, and scarcity, combined with technological innovations like decentralization and programmability, make it a strong contender for the future of money. See the table summary below.
The Traits of Money in Bitcoin, Gold and FIAT Currency
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