What Is Money?

Before you can think clearly about Bitcoin, you need a working definition of money. Most people use the word without one. This is a problem, because the word is doing several jobs at once.

Carl Menger, the founder of the Austrian School, defined money as the most saleable good in a society — the good that could most readily be exchanged for other goods, across the widest range of counterparties, with the smallest loss in value. Under this definition, money is not designated by a government. It emerges from the market, through repeated acts of voluntary exchange.

The Three Functions

Conventionally, money is said to serve three functions: medium of exchange, store of value, and unit of account. These are not separable. An asset that fails at any of them is not fully money.

• Medium of exchange — the function that allows an economy to move beyond barter. You accept money in exchange for your labour or goods because you know you can use it later for something you want.
• Store of value — the function that allows you to defer consumption. If money loses value rapidly, you cannot save in it, and you cannot plan.
• Unit of account — the function that allows prices to be compared and contracts to be written. All other prices in an economy reference the monetary unit.

Any serious monetary good must perform all three. Over history, the goods that have been selected as money — gold, silver, large stones, certain shells — were the ones that performed all three better than the alternatives.

The Properties That Make a Good Money

Empirically, the goods that have functioned as money have shared six properties. These are not arbitrary. They are the features that make an asset useful for the three monetary functions.

• Scarcity — if new units can be produced cheaply, the good cannot store value
• Durability — if the good decays, it cannot be held across time
• Portability — if it cannot be moved, it cannot be exchanged across distance
• Divisibility — if it cannot be split into small units, it cannot price small goods
• Fungibility — one unit must be interchangeable with any other
• Verifiability — the receiver must be able to confirm authenticity without trusting the sender

Bitcoin satisfies all six. So does gold, though Bitcoin exceeds gold on portability and divisibility. Fiat currency satisfies portability and divisibility well, but fails on scarcity and increasingly on verifiability.

Why This Matters Before Bitcoin

When you understand what money is supposed to do, and what properties it needs to do it, the Bitcoin discussion stops being about price. It becomes a straightforward comparison of assets against a clear specification. Which monetary good satisfies the six properties best at scale? That is the question. The answer is the one the market is gradually converging on.