Bitcoin: The 6 Properties of Money

November 29, 2022
November 29, 2022
Bitcoin: The 6 Properties of Money

Quick Answer: There are 6 properties of money: durability, portability, divisibility, uniformity, scarce supply, and acceptability. Understanding how different forms of currency fit into the 6 properties is crucial in understanding bitcoin’s value as a currency. In short, bitcoin excels in 5 out of the 6 properties.

What is Money?

Why are some objects used as money but not others? What makes a form of money “good money”? These may seem like rudimentary questions, but these are questions that not many people have deeply considered.

 

For instance, might someone accept banknotes, a gold coin, or crypto as money, but not a bag of rocks or seashells? What is it about certain objects that make them better suited to be used as money compared to others?

 

To truly understand this problem, we must start from the first principles, which entails examining history, starting with how money originated in the first place. 

 

Among certain ancient tribes in parts of Africa and Southeast Asia, seashells were indeed used as money. For small economies, a seashell-based monetary system might work, but at scale the problems quickly become apparent. 

The problems with using seashells as money become apparent very quickly.

 

Seashells are fragile and can break. In large enough numbers they can be heavy and hard to move around. They're only available at the seashore and are hard to access for anyone who isn't close by. Seashells are diverse and a "good" seashell to one person might not be as good to someone else. It’s hard to divide seashells into smaller pieces if someone is trying to spend less than one seashell at a time. People who live by the sea might not care about sea shells because there are so many seashells around. People who don’t live by the sea may have never seen a seashell and may not accept them as money. 

 

Economists who have examined the problem have concluded that for a form of money to be considered “good money”, it needs to satisfy 6 properties, namely: Durability, Portability, Divisibility, Uniformity, Scarce Supply, and Acceptability.

 

When Satoshi Nakamoto, the mysterious creator of Bitcoin approached this problem, he created Bitcoin with these properties in mind such that Bitcoin would seek to maximize all of the 6 properties. Let's go through a description of each property and explore how Bitcoin fits into them.

Durability 

Durability describes an asset’s ability to resist degradation either in purchasing power or physically over time. For instance, if one used any type of food product such as bread for money, the bread would mould and no longer have any value in a short period. Thus, the asset itself degrades and is not suitable to be used as money. 

 

Fiat currencies, although durable against physical degradation, are not resistant to degradation in purchasing power due to inflation. Historically, gold has been known as an example of a durable asset since it resists both physical degradations and preserves value over time.

Portability

Portability describes the ability of an asset to be transported across physical distance. If one wanted to trade with another person located somewhere far away, how easily would they be able to take their asset with them to trade? 

 

When it comes to portability, gold is at a massive disadvantage due to its bulkiness and weight. Fiat currencies excel in portability because of their ability to be carried in the form of cash or simply electronically transferred with a wire transfer. 

Divisibility 

This property describes an asset’s ability to be divided into smaller chunks. If one tried to buy coffee with gold, it would be extremely difficult since the price of a cup of coffee would represent less than a gram of gold. One would have to measure out a tiny fraction of a gram of gold to exchange for the coffee. Thus, gold ranks very low in divisibility. An example of an asset that is way more divisible would be fiat currency.

Uniformity

Also sometimes called “homogeneity”, this property describes the difference between one unit of an asset and another unit of the same asset. For example, a dollar bill is equivalent to and should be the same compared to all other dollar bills as long as they are the same currency. Thus fiat money, in general, can be described as being “uniform”. It is easy to see why this would be important in transactions as neither transacting party would want to worry as to whether each of the individual coins, bills, or seashells used in the transaction are equally valuable.

Scarce Supply 

Items that are abundant are not “good money”. Imagine if we used rocks as money, in which case anyone can just walk outside, pick up a rock, and trade it for goods and services. An asset needs to be at least somewhat scarce so that real work has to be done to acquire more of it. In the case of gold, it is a rare element that is hard to come across. Gold is often trapped deep underground, and may be mixed with other cheaper elements which need to be refined to extract gold.

Acceptability 

Acceptability describes an asset’s recognizability and a given group of merchants’ willingness to accept it as payment. For example, gold and US Dollars are among the highest-ranked currencies when it comes to acceptability since they are almost universally accepted around the world. 

6 Properties of Money and Bitcoin

Evaluating Bitcoin against the 6 properties, one will find that Bitcoin outperforms all other currencies in almost all categories. 

 

Durability

Bitcoin ranks higher than all other assets in durability due to it being decentralized and only existing in a digital form. This means that physical degradation does not apply to Bitcoin since it does not exist physically. Due to its decentralized nature, it is also incredibly difficult to destroy as it would involve finding and erasing or corrupting every single copy of the Bitcoin blockchain, of which there exist thousands of copies stored on nodes that are located all over the world. 

Portability

Bitcoin is incredibly portable as bitcoin transactions do not require any institution or government to facilitate, and value can be sent to anyone located anywhere in the world in just a few minutes. One can also “transport” bitcoin by putting it in a private wallet secured by a seed phrase in which case moving the bitcoin simply entails remembering the seed phrase. 

Divisibility

The smallest unit of a bitcoin is called a “satoshi” or “SAT” for short, which represents 100 millionths of a bitcoin. At current prices of around $20,000 USD per BTC, a SAT would be worth somewhere around $0.0002. If in the future the price of bitcoin explodes upwards and a SAT becomes too large to accommodate small transactions, it is easy for the Bitcoin community to implement a small code change to add an extra decimal point and redenominate bitcoin to have smaller units. 

Uniformity

Bitcoin is uniform as it is digital. One can be sure that 1 BTC will always equal 1 BTC. This uniformity extends to Bitcoin addresses. There is nothing inherently different about a Bitcoin address which holds 1000 BTC to a Bitcoin address that holds 0.0001 BTC. The network does not care about the balance contained within a Bitcoin address so long as the transactions coming to and from it are valid. Bitcoin will always be perfectly uniform. 

Scarce Supply

Bitcoin is limited to a maximum supply of 21 million. 21 million divided across a world population of close to 8 billion people currently makes Bitcoin incredibly scarce. This limited supply is inherent to the code and cannot be changed. This property is what makes bitcoin similar to gold which also has a limited supply and is scarce.

Acceptability 

This is one area where gold and US Dollars still outrank Bitcoin. Bitcoin is not a universally accepted form of payment for many industries. With this being said, acceptability for Bitcoin is improving over the world. El Salvador and the Central African Republic are respectively, the first two countries in the world that have made bitcoin legal tender within their borders. 

 

Properties Unique to Bitcoin

Apart from the 6 properties, bitcoin brings to the table two more properties that are significant which are not usually not heavily emphasized by economists but are nevertheless important.

Non-sovereign 

This property describes an asset that is not reliant on any centralized authority, such as a government, to give or enforce its value. Similar to bitcoin, gold is another example of an asset that is not reliant on the government for it to be valuable. Fiat currencies would be the opposite of non-sovereign (i.e. sovereign) because the value of fiat is wholly dependent on the government that issued it. Even assets like real estate are considered sovereign because a person’s ownership of a house or piece of land is dependent on the government’s ability to enforce one’s ownership. 

Hard to Confiscate

This is a property that is unique to crypto assets such as bitcoin. With bitcoin that is held on a non-custodial wallet (i.e. where the bitcoin holder themselves are in control of the private keys), the bitcoin becomes extremely hard to confiscate. 

There is no known way for any third party to confiscate crypto assets in a non-custodial wallet without the password or seedphrase. Physical assets such as land or gold can easily be confiscated by the government or a hostile outside force. Although many people in developed countries generally trust that their government will not confiscate its citizens’ assets for lack of sufficient reasoning, this is not the case everywhere in the world. Even in developed countries, there is always the chance that some special circumstances may occur that could lead to the government forcibly confiscating one’s wealth. 

 

Note that this is in contrast to bitcoin held on an exchange on behalf of the bitcoin’s true owner since anything digital that is centralized in nature (including fiat cash sitting in a bank account) can still be confiscated. Bitcoin held in a wallet with a seedphrase is also not immune to someone forcibly threatening the bitcoin holder to reveal their seed phrase under duress (also known as the “$5 Wrench Attack”). 

 

However, there do exist multi-sig solutions that help mitigate this issue. “Multi-sig” is short for “multiple signatures” and describes any method where a private key, or set of private keys, is secured by more than one party. For instance, one can generate 3 seed phrases where any 2 out of the 3 seed phrases are needed to move the bitcoin. The bitcoin holder can retain one of the seed phrases and give the others to different trusted parties who don’t know each other. This mitigates the threat of someone stealing the seedphrase or threatening the bitcoin holder with physical violence to reveal the seedphrase since one seedphrase is not enough to access the funds. 

 

Closing: Understanding the 6 properties of money and how bitcoin fits into the picture is crucial in understanding how bitcoin has the potential to revolutionize and democratize finance. If you’re ready to get started, Newton is a low-cost onramp into the world of bitcoin.

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