What Is Money?

For many people, their first sense of Bitcoin is that it is magic internet money—something easily ignored and certainly not worth the time needed to understand it. Many of the people I talk to about Bitcoin say that their “plan” is just to ignore it until it goes away. As we will learn throughout this book, that isn’t really an option. Most people also laugh when presented with their first opportunity to exchange “real money” for bitcoin. But bitcoin is real money; better money than any of us have had in our lifetimes—and it is so much more.

Both Bitcoin the network and bitcoin the digital token can be hard to define because they don’t just replace one thing and make it better. Bitcoin is the new, better version of gold from the ground and the paper dollar bill. Bitcoin is also the new, better version of your savings account, your checking account, and even your credit card. It is also the new, better way to send money internationally and to buy a cup of coffee down the block. Bitcoin doesn’t just replace the hard asset money and the currency—it also replaces the payment rails, the political monetary policy, and even the central bank—all in one fell swoop.

To truly understand Bitcoin, you must first understand what it aims to replace: money. What is money? Oddly enough, despite its centrality to almost everything we do, we rarely pause to consider the question. But we have to if we really want to understand what Bitcoin actually is.

In its most fundamental form, money is any object that serves some combination of the following purposes:

1. A medium of exchange (folks can buy stuff with it).
2. A unit of account (people can reliably use it to price things).
3. A store of value (you can buy stuff with it later).

Over the years, many objects have been used as money: shells, salt, large stones, gold, and even $20 bills. Depending on the circumstances, even cigarettes or ramen packets can serve as money. This demonstrates how and why people converge on different forms of money based on their needs and the technology available at the time.

To be a good form of money, an object must have some combination of intuitive properties economists have long recognized:

1. Durability: It must last and not deteriorate.
2. Portability: You must be able to move it around.
3. Divisibility and Aggregability: It must work for small and large purchases.
4. Fungibility: Units of the money should be uniform.
5. Scarcity: There can’t be too much of it if it’s to retain value.
6. Acceptability: People need to want it as money.
7. Verifiability: It should be hard to counterfeit.

Using these properties, we can see that some forms of money (like gold) have performed well historically, while others (like bananas) fail immediately.

In a direct comparison, Bitcoin excels over the $20 bill in many categories. For example:

• Bitcoin is more Durable, Portable, Divisible, Scarce, and Verifiable than dollars.
• While dollars currently outperform Bitcoin in terms of Acceptability, this gap is narrowing as more institutions accept bitcoin.
• Economically, Bitcoin is natively digital and programmable, giving it advantages as a form of money for the future.

Bitcoin also out-competes other forms of money, like gold, across many of these same categories. This makes Bitcoin “the best money humans have ever created.”

It is important to clarify what money is not. To be a good form of money, something does not need to:

• Have a physical form (most modern dollars are digital and not physical).
• Have intrinsic value (money functions better without competing purposes).
• Be issued by a government (historically, many forms of money existed without any government involvement).

Criticisms against Bitcoin often focus on these aspects, but they are based on misunderstandings of the fundamental nature of money.

The seven properties of good money are intuitive and understood by people without formal economics training. Over time, people naturally gravitate toward better forms of money. Bitcoin’s emergence as “better money” will likely lead to greater adoption in the future. As shown by historical examples like gold, society tends to embrace the most useful and reliable forms of money.

Ultimately, Bitcoin offers an opportunity to decouple money from government control, providing a better monetary system for humanity’s future. Absent coercion, people will choose Bitcoin because it is simply a better tool for economic exchange and value preservation.