SAN FRANCISCO, United States — Money is generally misunderstood, which contributes to the confusion about bitcoin as a digital currency. If you acknowledge that money is simply a language to communicate value and you evaluate bitcoin objectively on the six important characteristics of money that are taught in a basic economics course, you quickly realise that bitcoin stacks up well against any form of money that has ever existed.
The Six Characteristics of Money
Scarcity: Money must be scarce for people to want to hold it over time. When Satoshi solved the double spending problem and established rules for the money supply of bitcoin (a fixed amount of units and a predetermined, fair way to distribute the units), he made bitcoin uniquely scarce. If you consider traditional money that exists on ledgers throughout the world today, it can easily experience unit increases. Bitcoin is the first unit for transferring value that is digitally scarce.
Durability: Durability is important because people will only use a language that persists over time to communicate value. Bitcoin is computer code that exists on a distributed ledger maintained and secured by thousands of computers across the world. Relative to traditional paper money that governments issue and any other form of money that has ever existed, bitcoin is the most durable. You can mathematically prove that bitcoin will persist over time.
Divisibility: Divisibility is important because the more divisible money is, the more efficiently that money can be used and the more people it can reach. At the moment, a bitcoin can be divided into a hundred million pieces. 1 Satoshi (smallest unit at the moment) is equivalent to $0.0000022493. Future protocol changes could introduce amounts smaller than a Satoshi, so bitcoin is known to be infinitely divisible.
Fungibility: Bitcoin is less fungible than all forms of money that have previously existed. While every unit of gold is exactly the same and every US dollar is very close to the same, each bitcoin has its own unique, traceable history. Depending on who you ask, the fungibility of bitcoin is either a great thing (if you are a regulator) or a bad thing (if you are a criminal).
Portability: Bitcoin can be sent anywhere in the world instantly, with the same ease as sending an email. It is more portable than any form of money that has ever existed. This is important because when a language for communicating is global and seamless, it is more effective as a medium of exchange.
Recognisability: The distributed computers in the network keep track of all of the units and who owns what on the ledger. It is much more difficult and costly for the central bodies that control flat currencies to keep track of who owns what. In that sense, bitcoin is far more recognisable than any currency before it.
50 years from now, I believe economists will add one other important characteristic of money to this list: programmability. Unlike any other language for communicating value that has come before it, bitcoin is programmable. Developers can enable new behaviours with programmable money that have never been possible with traditional money, like machine-to-machine payments. While there is a long road ahead, I believe these seven characteristics will ultimately lead to bitcoin maturing into good money.
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