What is Money?

We don't often hear this question or ask it ourselves. But have we ever wondered? At least once?
We probably use money at least once a day every day, whether for grocery shopping, paying bills, or for leisure. Yet we have never asked ourselves what it is, why we use it, and why we use this particular form of money, in our case the Euro.

Basic Questions About Money

How is money born? Who decides what money is? Why are there so many different forms? What makes one form of money better than another? These are all quite simple questions when you think about it; we would ask similar ones if we were to choose a new car, for example.

The Car Example

What type of engine does it have? How much does it consume? What is the manufacturer? What are the safety features? In this specific example, what we naturally do is choose the best car after evaluating all its characteristics, but we don't do the same for money. We just use it.

Why Understand Money

What do I care about how money works? In the end, I just want to buy the car; I'm not interested in becoming a finance expert. And besides, it's easy: with money, you buy things. End. What else is there to know?

Well... let's start by debunking the first myth: to understand money, you don't have to be a finance expert or have a degree in economics. And since we use money every day, it might make sense to dedicate a few hours of our life to learning at least the basics.

To understand money - or rather, the technology behind money - it takes the right questions and a bit of critical thinking. So I start from the initial question: what is money?

Money as Technology

Easy: money is one of the oldest technologies invented by man, born to solve a fundamental problem: the need to exchange value reciprocally. Want to buy the car? You exchange it for money. But why specifically with money and not, say, with a cow? Because the dealer probably won't accept it as payment, and here we can highlight the first characteristic of money: acceptability.

The Fundamental Characteristics of Money

Acceptability

Money must be widely accepted and recognized by everyone to be useful, and that's why we don't use cows. The more a form of money is accepted, the more usable it will be and thus better than alternatives that few would want.

Portability in Space

Moreover, a cow would be very difficult to carry in your wallet, leading us to the second characteristic of money: portability (in space).
A good form of money should be easily transportable from one place to another, even for large amounts, or even better, regardless of the amount.

Divisibility

But suppose the dealer wants to accept my cow as payment and I can transport it at the time of purchase- what happens if that car is worth not a whole cow but half? Dividing it is certainly not easy, whereas - guess what - divisibility is a very important characteristic of money. It is essential to be able to use the same form of money to pay tiny amounts like a coffee at the bar or larger amounts like a house.

Durability

And then the half cow I have left would rot if I didn't use it to buy something right away. Therefore, a good form of money should also last over time, highlighting another characteristic: durability. If I earn money today, I don't want it to rot tomorrow, otherwise I would have worked for nothing.

Fungibility

Then what would happen if the cow I want to use to buy the car is sick or malnourished? A healthy cow would certainly be worth more. But a good form of money should consist of identical units, indistinguishable from each other. This property of money is called fungibility. For example, all 1€ coins are identical in shape, weight, size, and color to be more easily distinguishable from fakes.

Verifiability

Unfortunately, however, there are very well-made fake coins, and this can sometimes make it difficult to notice the problem. Another characteristic of a good form of money is verifiability. The easier it is to be certain that the money in front of you is legitimate, the more it will be used and accepted willingly.

Portability Over Time (Store of Value)

Another characteristic that makes money particularly desirable is its ability to maintain its value over time: portability (over time). I'm talking about very long time horizons, like savings for retirement or inheritance to leave to children. The form of money that devalues the least over time is certainly the most appealing for those who want to save.

Scarcity

We're almost there; only one is missing, probably the most important. It's the characteristic that more than any other makes a certain form of money better than others. I'm talking about scarcity. The scarcer a form of money is, the more desirable it will be. For example, gold is more desirable than iron also thanks to its known scarcity, just as rare stickers are more desirable than those everyone has duplicates of.

Knowing Money to Evaluate It

That's it. You haven't become a stockbroker. You haven't earned a degree in economics. But now you know the characteristics of money. You are perfectly capable of evaluating the form of money you use.

Evaluating the Euro as a Form of Money

Let's try evaluating the euro, for example.

Euro: Strengths and Weaknesses

• Acceptability: in the European Union, its use is mandated by law, so it is fully accepted, at least locally.
• Portability (in space): banknotes don't weigh much, nor does the debit card, so it's quite easy to transport small or large amounts.
• Divisibility: thanks to the various denominations of banknotes and electronic payments, it's easy to divide it to buy even low-value goods.
• Durability: banknotes are very durable even if they can get damaged or torn, while "untouchable" money, like that in the bank account, potentially never gets ruined.
• Fungibility: each unit is identical in characteristics to others of the same denomination, and the same applies to all electronic payments where each unit (the cent) is equal.
• Verifiability: on banknotes it's not perfect, on electronic payments it is.
• Portability (over time): the same amount today buys half of what it did 5 years ago, effectively showing poor ability to maintain value over time. Who knows in 20 years.
• Scarcity: the amount of money in circulation (especially digital) increases relentlessly since the creation of the euro, and the same happened with the lira.

Well, what can I say: on some points we're good, but on others it's a complete disaster. What comes out of analyzing the quality of the euro currency is that it is certainly a convenient currency to use in the short term, but it doesn't work very well for saving over medium or long time horizons.

Other Forms of Money in History

But the euro is definitely not the only form of money that exists. Surely not the first. Let's try the longest-lasting form of money, used for millennia throughout human history. Let's replicate the same analysis for gold.

Evaluating Gold as Money

• Acceptability: it's hard to pay for groceries with a bar. Portability (in space): gold is very heavy, although even a little carries a lot of value. Divisibility: to divide it, you need to melt it, and it's certainly not convenient.
• Durability: it is the most inert metal par excellence; it never degrades; it is eternal.
• Fungibility: it doesn't have a form per se; it becomes fungible only if minted into coins or bars.
• Verifiability: it's not at all easy to determine the amount of gold in a coin or the purity of a bar.
• Portability (over time): excellent; gold never loses value.
• Scarcity: on Earth it is scarce even if we don't know the exact available quantity. In space, it is potentially infinite.

The result is completely different. Gold is certainly not convenient to use, especially in a digitalized way where payments we make are often at a distance. It's not even convenient to use to pay for dinner at the restaurant. But over long time horizons, it is undoubtedly an excellent store of value.

Beyond Euro and Gold: Other Options

However, there are other forms of money around the world; maybe one of them takes the best of both. Maybe somewhere there exists a form of money that is easy to transport, doesn't lose value over time, easily verifiable and durable - a form of money that perfectly embodies all those characteristics we discussed earlier.

We are evaluating the best form of money. Looking around, we see many other "state" currencies, but they are similar in every way to the euro. In fact, some are much worse because they are little accepted in other countries or inflate even faster than the euro. So let's leave that world behind.

Let's go back to the realm of gold. Beyond gold, there are many other precious metals, but let's be honest: who would use them conveniently for everyday purchases? Yes, maybe they are a good way to invest money in the long term, but that's not what we're talking about. The same goes for real estate.

Maybe the stock market? That's where you need a degree... So what to do? Not much is left.

Towards Native Digital Money

Unless... we try to move into the full digital world. Since 2008, there has existed a new form of money, natively digital, uncensorable, and non-inflationary. It's called Bitcoin.

Attention: I refer solely to Bitcoin. I'm not talking about cryptocurrencies. They are two very different things. Like a designer garment and its imitations. Bitcoin has nothing to do with the rest of the cryptocurrencies. This distinction is fundamental.

Analysis of Bitcoin as a Form of Money

That said, let's apply the same analysis to Bitcoin as well.

• Acceptability: check for yourself all the businesses that accept bitcoin right now => https://btcmap.org/map
• Portability (in space): being a completely digital product, it has no weight, except for the phone you have in your pocket anyway.
• Divisibility: it is infinitely divisible. Its smallest unit, the Satoshi, is just a convention, and there is actually no limit to its divisibility.
• Durability: the Bitcoin network is distributed across all countries in the world by independent people who freely choose to run the software on their own computers, so as long as at least one person in the world continues to run it, Bitcoin doesn't stop.
• Fungibility: fungibility is absolute since each unit is perfectly identical and indistinguishable from the others.
• Verifiability: just have a computer, even a very old and dated one, to mathematically verify the authenticity of Bitcoins, without having to trust anyone.
• Portability (over time): Bitcoin has proven to maintain its value well over time, although it has only existed for a few years.
• Scarcity: 21 million. There can never be more than 21 million Bitcoins in the world, in history, forever.

Conscious Choice of the Form of Money

Sure, maybe I'm biased, but if I am, it's because I evaluated the forms of money available to me and made my choice. Know that the choice is not based only on the fundamental characteristics of money.
There's much more. There's so much more that it's impossible to concentrate it all in one article.

Bitcoin, Banking System, and Ethical Dimension

Bitcoin is a free and ethical currency; there are no barriers to accessing a wallet. The same cannot be said of the traditional banking system, which reaches only a small percentage of people in the world. Bitcoin does not require trust in any individual or organization. The traditional banking system, on the other hand, is based on trust, which is repeatedly misplaced, in institutions that effectively have full control of the circulating currency.

Bitcoin touches on so many topics, from politics to ethics, from mathematics to game theory, from psychology to finance. Deepening Bitcoin is a journey reserved only for those who want to learn. Or rather, for those who want to unlearn all the cultural convictions and preconceptions about money, focusing only on objective data. It's not easy. Bitcoin is also a humility test.