Perspectives | Bitcoin from a Money Carrier Perspective

Foreword: What kind of goods are suitable for currency? How did currency finally come into being? The essence of currency is the medium of exchange, and the commodity with the most trading opportunities will spontaneously become currency. And the unit of valuation and the storage of value are not the inherent attributes of money, it is a by-product of money as a medium of exchange. To become currency, the core is not the unit of valuation or the store of value, but its saleability, that is, how to get the most trading opportunities. From this perspective, Bitcoin has a long way to go to become the carrier of money. However, due to its severability, portability, durability, money supply, and the gradual popularization of bitcoin knowledge, all other commodities have unparalleled advantages, which makes it possible to become the most likely currency for human society One of the goods. The writer is Ben Kaufman, translated by "SIEN" from the "Blue Fox Notes" community.

I have discussed what currency is before, and discussed the origin and nature of currency. It is a widely observable phenomenon. We see that currency is not a collective agreement of market participants, but an observable result of economical personal behavior: they exchange their goods for more marketable goods, so that they get more and better Trading opportunities. Money is a spontaneous, broad medium of exchange. (Blue Fox Note: This is why people in hyperinflation areas are willing to exchange their local fiat currency for other fiat currencies or gold with lower inflation, or even btc)

Understanding the nature of money allows us to determine the following two characteristics that determine the currency carrier: marketability, the degree of economic sacrifice required to exchange specific commodities (Blue Fox Note: In fact, it is the transaction cost). Understanding becomes the specific material carrier of money, and therefore requires us to further study the concept of "saleability". Correctly assessing the various factors that affect the saleability of a product is a very complex task that is difficult to generalize.

However, we can identify some significant influencing factors, which in most cases are the most influential. Exploring the power of these influences will provide us with common examples, and more importantly, provide us with general methods for dealing with specific cases and analysis.

By studying some basic considerations related to the saleability of goods, this article aims to provide a general method to assess the possibility of different goods appearing in the form of money.

Saleability considerations

As mentioned above, the marketability of goods is too complex to be formally generalized, at least without losing some key considerations. Instead, our approach here is to study the important factors and analyze them in an appropriate way.

We will start by studying three common considerations, starting with what kind of product intrinsic characteristics have an impact on their marketability.

Cross-scale saleability

The first type we call saleability of all sizes. It involves the costs involved in using commodities in transactions of different sizes (in terms of value). The lower the economic cost required to adjust the quantity of a commodity to accurately reflect the value of a particular transaction, the more trading opportunities the commodity may be suitable for, and the higher its marketability. (Blue Fox Note: Mainly discusses separability)

The most significant feature affecting this type is the severability of the commodity. The degree to which a product can be divided depends on how well we can divide the entire unit of the product into sub-units, while maintaining the value of the entire quantity. If we take an example, the chair is not easy to divide, because the value of the two subunits of a half chair is much lower than the value of the entire chair. On the other hand, silver has relatively high severability, and the two halves of a silver coin are usually the same value as the entire silver coin.

When assessing severability, there are two basic factors that we should consider: the extent to which a single unit can actually be divided into sub-units and maintain the same total value; and the economic costs incurred in the process of dividing the commodity.

The more a product can be segmented, the lower the cost of the segmentation process. Then, we can say that the more separable the product is. According to the first criterion mentioned above, silver performs well; but according to the second criterion, the process of dividing silver is very inconvenient and requires special labor, and the cost of the division process is relatively high.

Marketability across regions

The second type involves the saleability of goods across different regions, that is, the portability of goods. This consideration has two main components: the cost of shipping the goods and the transaction costs of moving the goods. The lower the economic costs involved in transporting and trading commodities in different regions, the more trading opportunities available to them, and the better their marketability. (Blue Fox Note: Mainly discusses portability)

However, this consideration is not limited to physical distance itself, especially in modern economies. When we use a bank, or other financial institution, we usually incur small fixed transaction costs, regardless of the distance to the payee, even if the payee is the bank itself.

Even if they have no transaction costs, such costs can make some small, intangible payments uneconomic. I still classify it as a "location" type, and for convenience's sake, most of the time, because physical location does play a role that cannot be ignored.

Marketability across time

The last category discussed here is marketability across time. The longer a commodity retains its value in the future, the lower the economic costs it incurs to its owners. (Blue Fox Note: Mainly discusses durability)

In this regard, the most significant consideration is the durability of the product. That is, the integrity it can maintain over time, and the cost of keeping it. For example, we can see that perishable goods have very low durability, while other goods (such as gold) have high durability and can be stored at little or no cost.

The more durable a product is, the more it can maintain its value and be used in the economy. As a result, better durability increases the demand for this product, which increases marketability.

Marketability over time, and other types discussed above, are often also affected by other factors, which are not necessarily inherent properties of the product itself. Now we will discuss these very important issues, which are not inherent properties of the commodity, but have a huge impact on the marketability, production and supply of the commodity.

Money supply

The supply of a commodity and the characteristics of its production may be the biggest "external" influence on its marketability. The treatment of the money production process is beyond the scope of this article, but it can be said with certainty that it can have a significant impact on the production of goods and their marketability. (Blue Fox Note: Currency commodities need a certain degree of scarcity, otherwise the supply is too large and currency cannot become an equivalent exchange)

Below we will discuss more specific issues, namely the impact of the growth of the money supply on its marketability, and the possible consequences of this growth.

All commodities are subject to the law of diminishing marginal effects, and currency is no exception. This economic law indicates that the marginal effect of a commodity on an economic individual decreases as its disposable supply increases.

The reason is that, through economics, individuals will prioritize specific commodities to meet their more urgent needs. Then, as the number of commodity units increases, he will use them to meet sub-emergency needs, which will cause him to assign a lower use value to each new commodity unit.

The effect of this rule on currency can be observed first from the cash balances held by individuals, but more importantly for us, it also applies to the purchasing power of the currency itself. When the money supply increases, compared to other commodities, the marginal value of the first person receiving a new currency unit will decrease.

Therefore, he is willing to spend more money on other commodities, because these commodities have higher marginal value to him. The owner of the new money will then plan to exchange more funds in the business, which will cause the new payee to have more money. As a result, they are also more willing to spend more in nominal terms because the new currency they now have reduces the value of each unit to them.

This process continues to spread throughout the economy, which leads to the value of each unit currency becoming lower and lower for more and more people. Those who have lost the value of a currency unit are reluctant to trade their commodities for the previous amount of money because the nominal amount of money now represents a lower value than before. Therefore, they will raise the price of the commodity so that the value of the commodity is the same as the value represented by the previous quantity currency.

The continuous rise in prices will affect the entire economy, because of transactions between people who receive new currencies and those who do not. When all individuals adjust their prices and cause prices across the economy to rise, the process will end, meaning that each currency unit loses some of its purchasing power.

The more money production increases, the lower the value of money. At the same time, due to the decline in its purchasing power, the economic cost of subsequently trading goods will increase. As a result, we have seen how this effect translates into costs, economic sacrifices, and burdens for those who accept currency exchange. This economic sacrifice attached to the exchange of commodities reduces its marketability and therefore discourages its use as currency. (Blue Fox Note: This is especially evident in hyperinflation areas. Once the supply increases excessively, which leads to a decline in purchasing power, this will greatly reduce the marketability of the currency, because not many people are willing to accept this medium of exchange.)

It is important to note that even if there is no actual production of money, simply being aware of the large increase in supply may reduce its marketability. The reason is that this risk may increase the cost of selling its currency in the future, and cause individuals to assume this risk and price it accordingly in current transactions. As a result, pre-emptive actions to deal with the risks of future money supply may lead to higher costs and reduce the current marketability of the currency.

external factors

The money supply can be seen in part as external factors, but not all external factors. The last aspect we will discuss next is influencing factors that have nothing to do with the substance of the currency itself. The most significant of these external factors are often legislative, social organization, and cognitive factors (that is, knowledge in society).

We have also discussed before, which explains the impact of legislation on the marketability of money and how the transition from nomadism to permanent settlements has caused a shift from a "cow" -based currency to a "metal" carrier currency. Therefore, we now address the third factor, the cognitive factor.

As people seek knowledge, they discover a causal relationship between the use of specific objects and the satisfaction of their needs. Discovery that expands people's knowledge can lead to dramatic changes in demand for goods. For example, oil was once considered to be of little value to humans and its demand was minimal. However, after discovering its use as an energy source and suitable as a fuel for internal combustion engines, the demand for it became very high.

In other words, as our knowledge grows, the marketability of oil changes from little to high value. Later, the further development of its market raised its marketability to a higher level.

Although to a lesser degree, we can apply this logic to many other commodities, including historical monetary material carriers. For example, after humans have discovered the smelting process, the demand for gold may increase significantly, which leads to the availability of gold for many new uses.

Changes in knowledge can also undermine the marketability of a commodity. For example, if a common material is found to be harmful to its health (as happened with mercury), its demand may plummet and its marketability will almost completely disappear. Therefore, external factors have a significant impact on the saleability of goods, so we can usually correlate their effects with the historical changes of many monetary substances.

Use of currency

Depending on its purpose, money typically has three roles: the medium of exchange, the store of value, and the unit of valuation. In previous articles, we focused on the use of money as a medium of exchange and considered it to be the nature of money and its origins, while ignoring other roles.

The reason for ignoring other roles is intentional, as other specific uses of the currency are less important to their nature and origin as a medium of exchange. However, for this article, we must examine these uses, as they may strongly affect the demand for a particular currency and, in turn, its marketability.

Contrary to conventional wisdom, I want to point out that the other uses of currency (the non-exchange medium part) are not unique and inseparable uses, but they are a natural consequence of being used as a medium of exchange. We will see that these other uses are by no means inherent to money, nor are they unique to money, but by-products of the use of money as a medium of exchange.

Value store

The first role we will discuss here is value storage. When commodities are exchanged for currency, people may not immediately use the exchanged currency. In fact, most of the time people save money and use it for different purposes at different times or delay exchanges for various purposes. When people hold money and save it together, we can say that they use it to "store value" because they save money for future exchanges.

However, value storage is not an intrinsic property at all, nor is it the exclusive use of money. The reason why currency is often used as the standard medium for value storage is, at least in part, because it is the most marketable commodity and it can be expected to be easily exchanged at low economic costs in the future, which will hold its holders Placed in the best position to be able to exchange it in the future. (Blue Fox Note: Bitcoin currently does not reach this level. People hold Bitcoin more for investment and appreciation, not because it is the most marketable commodity. This is also the current analogy of Bitcoin to Important reason for gold rather than currency)

Similarly, because the saleability of a commodity is strongly affected by its ability to exchange at low cost over time, the currency prevailing in the market is likely to be suitable for future value storage, not just immediate exchange.

Therefore, from an economic perspective, it is reasonable to store at least some value on the currency. Although in some economic circumstances there may be other goods more suitable for value storage. For example, in today's economy, we notice that real estate, stocks, bonds, and gold are all important value storage commodities.

Therefore, although it may be a store of value, and even a good store of value will increase the applicability of goods as currency, it is not exactly the case. (Blue Fox Notes: For example, stocks and bonds are not currencies, although there may be good value storage)

In fact, we can observe that in many hyperinflation situations, people are unwilling to store value in money, they exchange them as quickly as possible, rush into the store and spend their remaining cash balance.

The common disagreement over this statement is that when a new currency emerges, especially when an old currency has been established, it will be used first as a store of value, and only later will it begin to circulate in large quantities. This process gives the impression that the initiation of currency first started with the way of value storage, and then became the medium of exchange. (Blue Fox Note: Many people currently hold such views on Bitcoin)

However, we will see that this currency use, which was originally used as a store of value, was actually the result of low initial marketability as a medium of exchange before it entered greater circulation, but it is still a medium of exchange.

At the beginning of the currency, its marketability will remain relatively low, as it has just started to increase its demand for use as a medium of exchange. This means that at the beginning, the new currency will still not have many exchanges. It also means that compared to existing currencies, it takes a lot of time to exchange, meaning that people need to hold them for adoption.

The new currency will provide its holders with compensation for economic sacrifice because it has a relatively low marketability, otherwise it will be uneconomic to start using it as a medium of exchange, so it will not enter the circulation field as currency.

Therefore, the most likely economic compensation provided for its low marketability is the increase in its future value, and it must be attractive enough to compensate, compared with other goods that are usually stored as value, it can also obtain benefits. As a result, without the attractiveness of sufficient value storage, it is unlikely that goods will gain sufficient marketability to replace existing currencies.

Then, we can see that even though the original new currency was indeed used as a medium of exchange, it was a very low velocity of existence. It will then have to gradually increase its marketability, in a free market, which can be achieved by providing a super value store for its holders.

The use of money as a store of value should not be confused with its inherent attributes as a medium of exchange, but we should consider it as a factor that enhances its marketability and ultimately increases its use of exchange media.

sales unit

The second use of currency is the unit of account. That is, the basic unit commonly used to measure price and value. The reason currency is used as a unit of valuation in economic transactions and circulation is because we have extensive knowledge of the exchange rate of currency.

Due to its marketability, the unique property of currency is that it is widely circulated as the most commonly used medium in exchange. Because people actively use currency in transactions, we understand that the knowledge about the economic exchange value of commodities in the market is all based on currency.

Through its widespread use as a medium of exchange, currency is naturally easier to handle in terms of economic calculations and price formation, because we can obtain the most accurate data on the "equivalence" of its exchange on almost all other commodities in the market.

However, we should mention that although money naturally tends to be a universal unit of measurement, it is not fundamentally a property of money. It is entirely conceivable (though unlikely) that money usually does not exist as a unit of measurement, and the use of non-monetary goods as a unit of measurement.

Mises unveiled a logical flaw in the notion that money functions as a unit of account. He said that it was like "the function of describing measurements of latitude and longitude as stars." In both cases, the function in question is a useful tool for humans, but it is not the essence or the origin of the object under study, but merely a tool for people to use it further.

We conclude here that the only use inherent in the definition of money is the medium of exchange in circulation. Although from an economic point of view, the use of money as a store of value and a unit of valuation is possible or even effective, and these are naturally occurring by-products of the saleability of money, it is certainly not a key part of the definition of money.

in conclusion

Marketability is the decisive factor of the monetary material carrier, and it is affected by various possible factors. We have seen through multiple cases that specific attributes of a product, such as severability, portability, and durability, can affect its marketability. We also see that the supply and production of money, that is, its hardness, also affects its marketability as an external factor.

With the advent of money, people will naturally tend to use it as a store of value and pricing because of some important considerations that affect its marketability. Therefore, the possibility of the commodity as a currency matches the quality required for these uses. However, these roles are "secondary" to money and are a byproduct of their use as a medium of exchange.

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