Money: Value, Functions and Characteristics

How Money Creates Value

• Money facilitates trade by eliminating the need for coincidence of wants in bartering.
• Specializing skills and trading efficiently increases productivity and economic growth.
• Money serves as a store of value, allowing individuals to save earnings for future use.
• Long-term planning and investment are enabled through this function, driving economic development and wealth creation.
• Money provides a standard measure of value.
• Comparing prices and making informed economic decisions is made easier.
• This enhances market efficiency and helps with resource allocation.

Functions of Money

• Money functions as a durable, portable, fungible, and divisible medium of exchange.
• Money serves as legal tender to buy/sell goods.
• Money serves as a reliable store of value and liquidity.
• Money must have a predictable demand and supply.
• Money provides a unit of account of measure, goods valued in dollars.
• Money must have stability

Characteristics of Sound Money

• Acceptability: Currency must be accepted.
• Scarcity: Currency cannot be made at any time; it would have no value.
• Portability: Must be easy to carry and convenient.
• Durability: Must be able to last.
• Divisibility: Must be easily divided into smaller amounts.
• Uniformity: Must be similar.
• Sound money has a limited supply and a verifiable authenticity.
• Sound money has transferability and liquidity.
• Sound money is legal tender

Why Bitcoin Is Important

• To understand why Bitcoin is needed, it’s necessary to understand the current financial system and the problem that Bitcoin addresses.

History of Money

• Throughout history, money has appeared in many different forms, including:
• 6000 BC, barter
• 3000 BC, seashells
• 800 AD, paper money
• 1800's, the Gold Standard
• 1950, credit cards
• 1971, Fiat Standard
• 1990, digital Transfer

Money and Trust

• There is the question if people can trust the people or systems who control the money supply.
• Centralized monetary system requires trusting banks and governments to keep money safe and not devalue it via excessive creation and/or inflation.

Limitations Beyond Trust

• Fiat money has additional limitations, including
• Banks & stock exchanges closed on weekends.
• It is prone to theft and requires disclosure of personal information.
• Fiat uses outdated technology and entails high transaction costs and lag.
• Bank access is required to participate in financial activity.

Problems with USD

• In 1971, the USD was taken off the gold standard and moved from a commodity-based to a credit-based system.
• US dollars represent Fiat currency with an infinite supply.
• Record inflation and debt result.

Money Supply and Inflation

• Money supply is the amount of money in circulation, including notes, coins, and bank deposits.
• Increasing the money supply faster than the growth in real output will cause inflation.
• More money chasing the same number of goods causes firms to raise prices.
• If the government prints more money, it increases cash in economy.
• Households would have more money, increasing their demand for goods and services.
• If the amount of goods for sale remains the same, firms would see a big rise in demand for limited supply.

Increase in Money Supply Since COVID

• The M2 money supply increased approximately 40% from January 2020 to early 2023.
• M2 is a broad measure of money in circulation.
• The M2 measure also reflects money's function as a store of value.

What Can You Get for $1?

• The purchasing power of the U.S. dollar has fallen sharply over the last century due to rising inflation and money supply.

Problems with the Global Financial System

• Banks must guarantee funds are available, prevent double-spending, and facilitate transactions, which requires trust.
• Risks include hacks, single points of failure, government seizing or freezing accounts, privacy issues, and delays in fund availability.
• There are 7 major flaws including:
• Billions of people globally remain unbanked.
• Global financial literacy remains low.
• High intermediary costs and slow transactions.
• Low trust in financial institutions and governments.
• Rising global inequality.
• Currency manipulation and censorship.
• The build up of systemic risk

A New Financial Solution

• The question is posed if Bitcoin can solve these existing financial problems.

The Birth of Bitcoin

• Bitcoin was created in 2008 as a response to the 2008 financial crisis.
• The crisis revealed inherent issues and limitations of the traditional banking system.
• On August 18, 2008, the domain name bitcoin.org was registered.
• On October 31, 2008, Satoshi Nakamoto shared "Bitcoin: A Peer-to-Peer Electronic Cash System" using a peer-to-peer network.
• The paper outlined methods to create a system for electronic transactions (trustless): eliminating banks and centralized institutions.
• On January 3, 2009, the bitcoin network came into existence when Nakamoto mined the genesis block (block number 0).
• Nakamoto received a reward of 50 bitcoins.
• In December 2010, Satoshi Nakamoto disappeared.

Bitcoin as a Currency

• Gold is durable and verifiable.
• Bitcoin is durable, divisible, fungible, portable, verifiable, and scarce.
• Fiat is divisible.

Bitcoin vs. Fiat (Dollar)

• Bitcoin is a commodity currency backed by a finite, predetermined amount of an asset.
• Bitcoin is independent of any government, state, or financial institution.
• Bitcoin is transferable globally without the need for a centralized intermediary.
• Bitcoin has an unalterable monetary policy

Decentralization

• Traditional financial markets rely on third-party and trusted intermediaries, where all transactions go through a centralized entity.
• With cryptocurrency, trust is placed on a network of peers.
• All transactions are validated by a network of peers, rather than a single point of contact.
• Bitcoin was the first use case of blockchain, which inspired DeFi, crypto, altcoins, and stablecoins.
• Blockchain technology also led to many more business applications beyond cryptocurrencies, such as smart contracts.

Money facilitates trade by eliminating bartering. It increases productivity and economic growth, and serves as a store of value, enabling long-term planning and investment. Money also provides a standard measure of value, making informed economic decisions easier and enhancing market efficiency.