Many call bitcoin digital gold but also say it’s a superior form of money to the United States Dollar (USD). It turns out that there are good reasons to back up these claims based on the six basic properties of money.
How exactly Bitcoin (CRYPTO:BTC), the United States dollar (USD), and gold stack up against one another can be debated. But I believe bitcoin has made objective improvements on what makes money so useful around the world.
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The six properties of money
If an inventor were to sit down and devise a perfect form of money, he or she would try to optimize the money along six properties, or dimensions. Those properties are: durability, portability, divisibility, uniformity (or fungibility), limited supply, and acceptability. Let’s look at these properties and how they affect the utility of money.
1. Durability
Money should not degrade over time. Money that degrades over time (physical bills, or tarnishing metals like silver or copper) would in turn mean that the bill or coin is worth less over time. Gold does not degrade over time, which makes it extremely durable to the elements and destruction and thus an ideal metal to use for money. Paper USD is obviously vulnerable to fire, ripping and tearing, although much of the USD has been digitized.
But the most durable form of money would be distributed, digital information – like Bitcoin. Bitcoin is durable because it is a purely data-based form of money. Bitcoin is essentially a ledger system wherein different, unique addresses have balances of bitcoin. This ledger (called the blockchain) is replicated on hundreds and thousands of computers all over the world in order to guarantee its persistence. Destroying any bitcoin whatsoever requires an attacker to simultaneously destroy every computer with the bitcoin blockchain saved on its hard drive, making it very resistant to hackers or any other type of attack that could compromise its security – and therefore durability.
2. Portability
Money should be easy to transfer from one place to another. The distance between two parties should not be a limiting factor for individuals wishing to do business with another. Nor should any permissions or restrictions from being able to transfer. One must consider restrictions such as capital controls when measuring the portability of money. If you need permission to send dollars, or your digital dollars are being stopped or seized, then the portability of your money is significantly hampered.
Therefore the best form of money can travel at the speed of light at a moment’s notice. Permissionless, information-based money like bitcoin is the most portable. Some critics of bitcoin might point to bitcoin’s low transaction (roughly five transactions per second, or tx/s) speed as evidence of its lack of portability. But an innovation known as the lightning network (formalized in 2015, and implemented in 2017) accelerates the transaction capabilities of bitcoin to millions of transactions per second, which elevates bitcoin as the most portable form of money.
3. Divisibility
The more that money is able to be split into smaller parts, the more it can accommodate the various scales of commerce within a society. While the dollar can only be divided into 100 pieces, and shaving bits of gold is difficult and inconvenient, a single bitcoin can easily and instantly be divided into 100 million pieces called satoshis. This degree of divisibility gives a high degree of flexibility to any user of the money, rich or poor.
4. Uniformity (Fungibility)
It is important for every unit of currency to be interchangeable with the next. For example, every $1 bill is worth the same as every other $1 bill. A non-uniform money supply can be subjected to coin-clipping, or someone could dilute the metals that make up a coin as is the case with gold and silver based money. Units of information based money like the digital USD and bitcoin are verifiably the same as any other unit. This leads to easy, efficient, and cheap exchange as neither party needs to spend time verifying the authenticity of the money being exchanged.
Since both the bitcoin ledger and the coins within it are tamper-proof information, secured by vast amounts of energy, it is immune to coin clipping, counterfeiting, and excessive money printing.
5. Limited supply
There is debate as to whether or not a limited supply of money is optimal for an economy. A student from the school of Keynesian economics may argue that the ability to print money on demand helps stimulate the economy in times of depression. Whereas a student from the Austrian school of economics may argue that the money supply should be static and free from third party intervention, regardless of intent.
I take the side of the Austrian school, and so I favor the limited supply of gold, and the absolutely finite supply of bitcoin. A limited supply of money means that the value of money can not be diluted by third parties which leads to the end users of money keeping more of their accrued wealth. It also means that the holders of money are likely to see their savings increase, rather than decrease in the case of an inflationary form of money, as can be the case with the USD. With bitcoin, there is an absolute fixed supply of 21 million coins. Right now, 18.9 million coins are currently in circulation, with the remaining 2.1 million expected to be mined over the course of the next 120 years. When the last bitcoin is mined, the circulating supply will have reached the cap of 21 million coins.
6. Acceptability
A good form of money should be as widely accepted as possible. Otherwise, what good is money if you cannot exchange it for food, water, shelter, or transportation?
Admittedly, bitcoin lacks in its current acceptability, with gold and the USD having near universality anywhere you go on the planet. Right now, about 2.5% of the world’s population uses, holds, or accepts bitcoin. Based on past technological adoption trends, I surmise that once bitcoin reaches between 8-10% adoption, we could see a rapid uptick in global acceptability. Given the current pace of adoption, I expect this to take place within the decade.
Bitcoin is becoming money
I believe bitcoin has made improvements on money in at least five of the dimensions of money: limited supply, divisibility, durability, portability, and uniformity. To expect bitcoin to have global recognizability and acceptability just 13 years after its inception is unreasonable. Instead I prefer to look at the trend of growing acceptability. Currently, that number sits at about 2.5% of the global population. This number has been growing steadily year-over-year with no sign of slowing down — indicating to me that bitcoin is in the process of becoming a legitimate form of money.
While bitcoin has innovated and improved on five of the six dimensions, it will definitely take time before bitcoin is widely accepted as money on a global level.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
