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Characteristics of Money
In our last two weekly updates we discussed the origins of money and the evolution of money. Over time many goods have served the role of money however, during monies transitions from collectible to store of value to medium of exchange and eventually to becoming a unit of account, its characteristics are constantly challenged. Historically there have been 5 characteristics that have enabled certain types of money to stand the test of time. This week we will discuss these characteristics.
A store of value money needs to be durable. The durability of money refers to the fact that it can be used repeatedly without wear and tear i.e. it must not be perishable or easily destroyed. Paper money is an example of money that doesn’t last very long if used often. The money we currently use has become more durable because the majority of it is digital, therefore it is easy to use and transfer without damaging it.
Money must be easy to transport and store. It must also be possible to secure it against theft or loss. This property allows money to be used to facilitate trade across long distances and across borders. Even a great store of value asset like gold falls short in this category, it would currently be impossible to jump on a plane with a billion dollars of gold in your bag. If you did want to transfer it in a secure way across a long distance the cost would be exceptionally high.
Money needs to be easy to verify as authentic. If money is easy to authenticate it will allow for a more seamless trade experience as it gives humans more confidence when engaging with another. It also increases its acceptability as people across the globe will be more inclined to do business with it if they have confidence in what it is. Gold and paper money have been known to be counterfeited and therefore can pose a problem when engaging in business with it.
Money must be fungible in order to solve the coincident of wants problem. Fungible goods are items that are interchangeable because they are identical to each other for practical purposes. Commodities, common shares, options, and dollar bills are examples of fungible goods.
The good must be easy to subdivide. While this attribute was less important in early societies where trade was infrequent, it became more important as trade flourished and the quantities exchanged became smaller and more precise.
As Nick Szabo termed it, a monetary good must have “unforgeable costliness”. In other words, the good must not be abundant or easy to either obtain or produce in quantity. Scarcity is perhaps the most important attribute of a store of value as it taps into the innate human desire to collect that which is rare. It is the source of the original value of the store of value.
Its difficult to converge on a form of money that possess all of the above characteristics, gold is our best example of a good that ticked all the boxes of sound money. This is why gold has been a stable store of value for thousands years.
Notable Articles and News Stories This Week:
Deutsche Bank Says Investors Increasingly Prefer Bitcoin Over Gold as Inflation Hedge
Jim Reid, the managing director and head of global fundamental credit strategy has stated: “There seems to be an increasing demand to use bitcoin where gold used to be used to hedge dollar risk, inflation, and other things”. As bitcoin continues to perform well and prove itself as an inflation hedge this sentiment should only increase over time.
Read more here
First Company-sponsored Bitcoin Retirement Plans Launched in the US
A US-based digital asset management company DAiM has launched the country’s first employer-sponsored 401K retirement plans that support bitcoin. According to DAiM they are helping companies “create a 401(k) plan that offers several recommended model portfolios of varying risk to traditional assets and allocation of up to 10% to Bitcoin”. According to their COO, it has been impossible to “invest in bitcoin while working at a company without taking a penalty or quitting your job until now”.
Read the article here
Matic Becomes the First Outside Ethereum to Launch Native Chainlink Feeds
The smart contract platform Matic has become the first blockchain outside of Ethereum to use the Chainlink network to feed data directly into its blockchain. Chainlink is considered a chain agnostic service and therefore can be used for many different blockchains. This further proves Chainlink’s use case and its attempt to bridge the real world and blockchain. In order to understand oracles and what Chainlink does you can read an article previously published by Etherbridge here.
Read about it here
Preston Pysh Explains Bitcoins Four Year Halving Cycle
Whilst we all have the option to look, to seek to understand, it’s often easier not to. Bitcoin, Ethereum and distributed ledger technology are complex systems that require significant due diligence. At Etherbridge we aim to lower the barriers of understanding this fast-growing digital economy.
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This is not financial advice. All opinions expressed here are our own. We encourage investors to do their own research before making any investments.