This is one article in a collection of 52 articles published weekly throughout 2023 on the basics of Bitcoin. The series is intended for people unfamiliar with Bitcoin or people wishing to enhance their understanding of the fundamentals that underpin the technology. Please contact us, if you have any questions or comments.
Last publication we explored the question of what is money? In the article we discussed three functions that are required for money. The three functions of money are: (1) a unit of account; (2) a store of value; and (3) a medium of exchange. These three functions can be further dissected into eight traits of money: (1) verifiable; (2) fungible; (3) portable; (4) durable; (5) divisible; (6) scarce; (7) established history; and (8) difficulty to forge. These eight traits are discussed more thoroughly in two seminal articles by Vijay Boyapati titled The Bullish Case for Bitcoin and Dan Held titled Planting Bitcoin Sound Money (sanum pecuniam). The remainder of this paper will briefly explore these eight traits. However, throughout the series readers should keep these traits in mind when thinking of Bitcoin’s potential value in the future.
- Verifiable – A sound money will be able to prevent counterfeit imitations of the money in question. The fiat currency system goes to great lengths to prevent counterfeit bills from entering the system often through complex watermarks. Bitcoin transactions can be verified with absolute certainty thanks to the mathematical pillars that serve as the technology’s foundation.
- Fungible – A sound money will have each unit of currency be equivalent. The first 50 bitcoin ever mined have the equivalent value to the most recent bitcoin mined. A bitcoin, or a Satoshi (the smallest denomination of bitcoin), is indistinguishable from any other bitcoin or Satoshi in the ecosystem.
- Portable – A sound money should be easy for an individual to carry and transport. Billions of dollars of bitcoin can be stored on a USB port or even, theoretically, in somebody’s head through the memorization of passcodes. However, we would highly discourage that.
- Durable – A sound money will not erode due to elements or the passage of time.
- Divisible – A sound money should be divisible into a smaller unit without losing value. Each bitcoin is made up of 100,000,000 Satoshis.
- Scarce – A sound money has to be scarce. If there is an infinite supply of an item that was being used as a form of money, it obviously would not have much value, particularly if that infinite supply was accessible at a low cost. In 2140, the 21 millionth bitcoin will be mined. The bitcoin supply is 21 million bitcoin.
- Established History – A sound money has to have an established history. As we discussed in our previous publication, money is a belief system. As an item serves effectively as a money for a longer time, the belief system in that item continuing to be a sound money strengthens.
- Difficulty to Forge – A sound money has to be difficult to forge. As we will discuss more extensively as the series progresses, as a result of the mathematical pillars that serve as the technology’s foundation and the computing power behind the Bitcoin network, anyone attempting to forge bitcoin transactions would need an unfathomable amount of energy.
Our next publication in the series will begin to explore the basic details of Bitcoin. But please keep in mind these eight traits of money as we explore Bitcoin and think about how these eight traits apply to the US dollar, the currency that is currently used as the global reserve currency. As always, feel free to contact me with any questions or comments.
