Evolution of currency: comparing different forms of money

Money, the lifeblood of economies and a cornerstone of civilization, isn't just a means to transact; itEvolution of currency: comparing different forms of money's a narrative evolving with society. From shell beads to digital currencies, its journey fascinates. But what makes one currency preferable over another? Is it allure, scarcity, confidence, or decentralized agreement?

Here, I try to assess different forms of money, such as the classic gold and silver, traditional fiat currency, tangible commodity money, cryptocurrencies, real estate, and unique collectibles. Each is evaluated on ten dimensions that define their functionality and worth: divisibility, uniformity, acceptability, liquidity, transferability, portability, durability, store of value, and decentralization.

Money is a construct that serves three main functions: store of value, unit of account, and medium of exchange. Through these functions, I decipher the very characteristics that money must possess to effectively lubricate the wheels of commerce and to anchor economic activity. To measure the efficacy with which different forms of money embody these functions, let's consider how our ten criteria affect money's functionalities.

Comparison criteria

• Divisibility: Money must be easily divisible to facilitate transactions of varying scales.
• Liquidity: This speaks to money's ability to be readily converted into other forms without significant loss of value, underscoring its effectiveness as a medium of exchange.
• Decentralization: The degree to which money is decentralized impacts its resilience and the control individuals have over their assets. This affects its role as a store of value.
• Transferability: The ease with which money can be transferred from one party to another determines its efficiency as a medium of exchange, influencing the velocity of economic activity. This is specially important as the speed of transaction has become instantaneous since the invention of modern communication channels, and a money that has similarly fast speed of settlement is needed.
• Portability: The ease with which a currency can be carried across various locales affects its utility as both a medium of exchange and a store of value.
• Uniformity: Money should have a standardized form so that units are indistinguishable and equal in value, which is crucial for it to be a unit of account.
• Store of Value: Money must maintain its worth over time, allowing individuals to preserve wealth.
• Acceptability: The widespread acceptance of money validates its role as a medium of exchange and encourages its use across communities and nations.
• Durability: Money's endurance assures that it can withstand repeated use, relating directly to its ability to remain a store of value and medium of exchange over time.
• Scarcity: Intrinsic or enforced rarity upholds the value of money, preventing the dilution of worth and allowing it to accurately function as a store of value and unit of account.

Each of these characteristics weaves into the fabric of what we understand as money, ensuring that regardless of its form, money fulfills its intended purpose effectively and reliably. In this analysis, these criteria act as the measuring sticks that allow us to juxtapose traditional and contemporary forms of value.

But before I delve into the numerical verdicts, I must caution that what you'll find here stems from a qualitative comparison. Consider this an invitation for dialogue, rather than an empirical conclusion.

Are gold and real estate truly the safe havens they are touted to be? Does fiat currency still hold the crown in terms of liquidity and acceptability? Can Bitcoin and its crypto peers redefine the essence of what we consider valuable? Let's explore the dynamics of durability versus decentralization, the tug of war between tradition and innovation, and the continuous reshaping of our financial landscapes.

I compare the following types of money:

• Gold: Historically, one of the most widely used forms of money due to its durability, divisibility, scarcity, and intrinsic value.
• Silver: Like gold, silver has been used as money throughout history due to similar properties such as durability, divisibility, and scarcity. It is less scarce and more divisible than gold and therefore, has been mostly used as money, while gold has had more of a store of value role. It has also been valued for its industrial uses.
• Fiat currency: Fiat currency is issued by governments and relies on the trust and confidence of the people using it. Its value is not backed by a physical commodity but rather by the government's authority and the stability of the economy. There are about 130 different fiat currencies.
• Bitcoin: A decentralized digital currency, often referred to as "digital gold," Bitcoin operates on a blockchain technology and is created through a process called mining. It offers properties such as scarcity, divisibility, and decentralization. The biggest advantage of Bitcoin to gold is that immediate transferability and portability.
• Other Cryptocurrencies: Besides Bitcoin, there are thousands of other cryptocurrencies with varying features and purposes. Some, like Ethereum, offer smart contract functionality, while others focus on privacy or scalability. On the other hand, Bitcoin, due to its small transaction rate, is more decentralized than others because its full ledger, currently more than 500 GB in size, is relatively small and thus, any single individual can be a Bitcoin node.
• Commodity Money: In addition to gold and silver, other commodities have been used as money throughout history, including shells, tobacco, and livestock. With the advancement of technology, those commodities lost their scarcity aspect, and thus, lost their applicability as money.
• Central Bank Digital Currencies (CBDCs): Some central banks are exploring the possibility of issuing digital versions of their fiat currencies, known as CBDCs. These would be centralized digital currencies issued and regulated by the central bank.
• Collectibles: These are non-traditional assets that can serve as a store of value due to their scarcity, historical significance, and cultural value. While not typically used as a medium of exchange like traditional money, they can appreciate in value over time and be bought, sold, or traded within specialized markets. However, they have lower liquidity than other contenders here.
• Real estate: Similarly to collectibles, can also function as a store of value. Its value is derived from factors such as location, desirability, and demand for property, making it an investment that can appreciate over time. While not as easily divisible or fungible as traditional currency, real estate can be bought, sold, and leveraged for financial purposes, contributing to its role as a form of wealth preservation and investment.

Figure below shows how each form of money scores on each criteria. For a justification of each score, see the last section.

This plot shows the average score per type of money.

What does this comparison tell us?

Exploring the ratings of different forms of money reveals insights into the interaction between traditional and modern value systems. Precious metals like gold and silver excel in scarcity, durability, and store of value, showcasing their enduring worth. Gold, especially, shines in scarcity and decentralization, making it resilient to economic fluctuations.

In stark contrast stands fiat currency. Fiat currency excels in divisibility and liquidity, making it convenient for daily transactions. However, its low scores in scarcity and centralization highlight its susceptibility to inflation and regulatory control, jeopardizing its long-term reliability.

Real estate and collectibles score high in scarcity and store of value but lack liquidity and transferability, making them less adaptable to fast-paced financial markets.

Central bank digital currencies (CBDCs) score highly across several dimensions, but their centralization — much like fiat currency — remains a double-edged sword.

Commodity money and other cryptocurrencies have strengths and weaknesses, but their limited acceptability and liquidity constrain their potential in today's versatile economy.

Bitcoin emerges with an impressive array of full marks in key areas such as transferability, durability, and decentralization. It's the seamless marriage between cutting-edge technology and the age-old principles of scarcity and portability that positions Bitcoin as a formidable contender in the monetary arena. Yet, challenges in acceptability hinder widespread adoption as a medium of exchange.

Do these scores resonate with your experiences, or would you adjust them based on personal or professional insights? What aspects matter most when defining 'money' for you?

Why those scores?

Divisibility

The ability to be divided into smaller units without losing value.

- Gold: Gold is physically divisible but with diminished practicality and increased costs at very small sizes.

- Silver: Similar to gold, silver is physically divisible but not as practical in very small amounts due to costs and handling.

- Fiat currency: Fiat currency is highly divisible, especially digitally. Physical cash might be limited in its smallest denomination constraints.

- Bitcoin: Bitcoin is extremely divisible, up to eight decimal places, known as Satoshis, without any loss of value proportionally.

- Other cryptocurrencies: Most cryptocurrencies are divisible to many decimal places, enabling microtransactions and precise amounts.

- Commodity money (e.g. shells beads, cattle, salt): Commodity money is typically not easily divisible without losing value or its utility as money.

- CBDCs (Central Bank Digital Currencies): Given that these are digital, they should theoretically be highly divisible to the same degree as fiat currencies, if not more.

- Real Estate: Dividing real estate reduces the utility and can be highly complex, costly, and subject to regulation.

- Collectibles: Physical collectibles are not divisible without losing value and context (e.g., cutting a rare baseball card in half).

Scarcity

The limited supply of the object. Scarcity is a critical attribute for a store of value since it helps maintain value over time against inflationary pressures.

- Gold: Gold is scarce due to its limited supply on Earth and the significant effort required to mine and refine it.

- Silver: Silver is more abundant than gold but still has a finite supply, making it relatively scarce.

- Fiat currency: Fiat currencies are not scarce as they can be printed at will by governments, leading to potential devaluation through inflation.

- Bitcoin: Bitcoin has a well-defined maximum supply capped at 21 million coins, making it digitally scarce.

- Other cryptocurrencies: The scarcity of other cryptocurrencies depends on their design; some have hard caps, while others have inflationary or flexible supplies. For this reason, I'll average this with a range to 7. Overall, among the top cryptocurrencies that has been accepted by the society, Bitcoin is the most scarce.

- Commodity money: The scarcity of commodity money depends on the commodity itself. Some, like rare spices or metals, can be scarce, while others, like common agricultural products, are less so. Nevertheless, once used as money, people will be drawn to produce larger amounts of them.

- CBDCs (Central Bank Digital Currencies): CBDCs would likely mimic fiat currency's properties and therefore not be scarce, as they would be controlled by central authorities.

- Real Estate: Real Estate is a finite resource and cannot be manufactured, although its scarcity varies dramatically based on location and other factors.

- Collectibles: Genuine collectibles are typically scarce by nature, but this can vary widely depending on the collectible category and provenance.

Durability

The ability to withstand wear, decay, or damage over time. Durability is important for a store of value as it ensures the asset's longevity and ability to retain value over time. However, for the digital forms of money, durability also implies robustness against technological obsolescence and cyber attacks.

- Gold: Gold is one of the most durable materials known, resistant to corrosion and oxidation, lasting thousands of years.

- Silver: Silver is durable but slightly less so than gold due to tarnishing; however, it still lasts indefinitely with care.

- Fiat currency: Physical fiat currency, in physical form, such as paper bills, is not very durable because it can be easily damaged or destroyed. In digital form, fiat currency is more durable assuming the digital infrastructure persists and functions properly.

- Bitcoin: Bitcoin, as a digital asset, is highly durable so long as the network exists and private keys are safeguarded.

- Other cryptocurrencies: Similar to Bitcoin, other cryptocurrencies are digitally durable, reliant on network and private key integrity.

- Commodity money: The durability of commodity money is highly dependent on the commodity, with some like precious metals being durable, while others like perishable goods are not.

- CBDCs (Central Bank Digital Currencies): Akin to digital fiat, CBDCs should be highly durable in digital format, assuming a stable digital infrastructure.

- Real Estate: Real estate is generally durable, considering buildings and land can last a very long time, but requires maintenance.

- Collectibles: Collectibles can be durable, but this varies greatly with the type of collectible and how well it is preserved.

Portability

The ease with which the object can be carried or transported. Portability is critical for the function of a medium of exchange and influences the practicality of an asset as a store of value, especially when it needs to be moved or used across distances. Digital assets typically score highest on this characteristic due to the nature of electronic transferability.

- Gold: Gold is physically challenging to transport in large amounts due to its high density and weight.

- Silver: Silver is less dense than gold but still relatively heavy and cumbersome to move in substantial quantities. Since it is less scarce, larger quantities of silver need to be moved for the same value.

- Fiat currency: Physical fiat notes and coins are relatively light and compact, making them reasonably portable in moderate quantities. Digital fiat currency, as represented in bank accounts and transactions, is highly portable and easily transferable across distances.

- Bitcoin: Bitcoin is very portable; any amount can be moved across the globe quickly and easily by transferring control of private keys. One can even remember 12 secret phrases and move with any amount of Bitcoin.

- Other cryptocurrencies: Other cryptocurrencies share Bitcoin's characteristics regarding portability, enabling global transfers without physical movement.

- Commodity money: The portability of commodity money (like livestock or grains) is low because transporting it is often impractical due to size, perishability, or care requirements.

- CBDCs (Central Bank Digital Currencies): Assuming a digital form, CBDCs should have high portability similar to other digital currencies.

- Real Estate: Real estate is wholly non-portable due to its fixed location and the nature of property as an immovable asset.

- Collectibles: Collectibles vary in portability depending on their size and fragility, with some being easily movable and others requiring special conditions.

Uniformity

Consistency in the appearance and quality of the object. Uniformity is important for an asset to function smoothly as money and for ease of valuation. Assets such as fiat currency and cryptocurrencies score highly due to their intrinsic nature of being identical within each unit. Physical assets like real estate and collectibles are less uniform due to their unique characteristics.

- Gold: Gold's uniformity is ensured by its elemental purity, and gold bullion and coins are standardized in weight and quality for trading. If it is not a gold coin, assessing its purity is not easy.

- Silver: Like gold, silver can be refined to a high level of purity and is typically traded in standardized forms.

- Fiat currency: Physical fiat currency is printed in a highly uniform manner with standard denominations, although counterfeiting can be an issue. Digital fiat currency transactions are uniform and standardized across the financial system without variation.

- Bitcoin: Each bitcoin is identical and divisible into satoshis, making it highly uniform as a digital currency. It is even more difficult to counterfeit Bitcoin than physical fiat currency.

- Other cryptocurrencies: Cryptocurrencies are defined by their respective protocols, which ensure uniformity in their units.

- Commodity money: The uniformity of commodity money varies depending on the commodity but generally lacks the standardization of precious metals or fiat currency.

- CBDCs (Central Bank Digital Currencies): CBDCs are likely to be highly uniform, with each unit consistent and defined by its digital nature and underlying system.

- Real Estate: Real estate lacks uniformity; each piece of property is unique in terms of location, size, and characteristics.

- Collectibles: Collectibles vary widely in uniformity; even within a category, individual items often have distinct features that affect their value and collectibility.

Acceptability

The widespread agreement within a society or globally that the object can be used as a medium of exchange. Fiat currency scores highest in its respective jurisdiction, while digital forms of money like Bitcoin are gaining ground but still have a long way to go for universal acceptability. Non-monetary items like real estate and collectibles score low due to their niche markets and transaction complexity.

- Gold: Gold has a long history of being accepted as a form of payment and store of value globally, but it's less accepted for day-to-day transactions.

- Silver: Silver is widely recognized as valuable but is less commonly accepted as a payment method compared to gold.

- Fiat currency: Fiat currency is the most widely accepted means of payment within its respective country of issue. But only a few fiat currencies, most notably US dollar, are accepted globally.

Other notable fiat currencies, such as Euro, are less accepted than USD.

- Bitcoin: Bitcoin's acceptance is growing, especially for online transactions and among certain merchants, but it's not universally accepted.

- Other cryptocurrencies: Other cryptocurrencies are less accepted than Bitcoin, and while some niches may accept them, they are far from widely accepted for everyday transactions.

- Commodity money: The acceptability of commodity money is limited and often tied to specific historical or cultural contexts.

- CBDCs (Central Bank Digital Currencies): (hypothetically) CBDCs would likely have high acceptability within their issuing countries once implemented, being seen as equivalent to their fiat counterparts.

- Real Estate: Real estate is not accepted as a form of payment due to its non-liquid nature and transaction complexities.

- Collectibles: Collectibles are not generally accepted as currency and are more often bought and sold in specific markets or auction houses.

Store of value

The capacity of the money to retain its worth over time, allowing its owner to preserve capital. Precious metals traditionally score high, while fiat currencies score lower due to inflation. Bitcoin and real estate have features that can make them good stores of value but come with their own risks and considerations.

- Gold: Gold has been a reliable store of value for centuries due to its scarcity, durability, and the fact it's not tied to any single country's economy.

- Silver: Like gold, silver has maintained value over long periods but is more susceptible to price fluctuations due to its industrial uses.

- Fiat currency: Traditional fiat currency typically loses value over time due to inflation; however, it can store value effectively in the short-to-mid term.

- Bitcoin: Bitcoin is considered by many as a store of value due to its scarcity and growing acceptability, but its relatively short history and volatility must be considered.

- Other cryptocurrencies: The ability of other cryptocurrencies to store value varies widely, with established ones being seen as better stores of value than newer, more volatile ones.

- Commodity money: Commodity money's ability to store value depends on the commodity, with those that are non-perishable and widely accepted (like certain metals) being more reliable.

- CBDCs (Central Bank Digital Currencies): CBDCs are expected to mirror the characteristics of fiat currency, so they may not be robust stores of value over the long term unless they are specifically designed to be deflationary.

- Real Estate: Real estate typically appreciates over the long term, serving as an effective store of value, although this can vary greatly by location and market conditions.

- Collectibles: High-quality collectibles can be excellent stores of value, often appreciating over time, but this greatly depends on the type of collectible and changing market demands.

Liquidity

Liquidity measures how quickly and easily an asset can be sold for cash without significantly affecting its price. Fiat currency is the most liquid as it is the standard for monetary transactions, while other assets vary greatly based on their market size and the complexity of transacting.

- Gold: Gold is highly liquid due to its global market presence and universally recognized value. However, its physical form can sometimes make immediate transactions more complicated.

- Silver: Silver is also widely traded, but its market is smaller than gold's and hence slightly less liquid.

- Fiat currency: Fiat currency, especially in digital form, is the most liquid asset as it's the standard medium of exchange for goods and services in its country of issue and often accepted internationally.

- Bitcoin: Bitcoin is relatively liquid, with numerous exchanges enabling quick buying and selling. However, its price volatility can affect liquidity, and it's not as universally liquid as fiat.

- Other cryptocurrencies: Liquidity varies significantly among cryptocurrencies, with popular ones being fairly liquid on exchanges but less so than Bitcoin and far less than fiat currency.

- Commodity money: The liquidity of commodity money is generally low because it's not widely used and may require specific buyers.

- CBDCs (Central Bank Digital Currencies): If implemented, CBDCs could be nearly as liquid as digital fiat currency, benefiting from the regulatory and technology infrastructure of central banks.

- Real Estate: Real estate has lower liquidity due to the time-consuming process of selling it and the high transaction costs involved.

- Collectibles: Liquidity for collectibles is generally low, and selling them quickly often means accepting a lower price. The liquidity largely depends on the current market demand for specific collectibles.

Transferability

Transferability refers to the ease with which ownership of an asset can change hands. Highly transferable assets facilitate economic activity by allowing for efficient trade and market transactions. Digital and liquid assets typically rate higher in this regard.

- Gold: While gold itself is a universally recognized asset, physically transferring it can be cumbersome and risky. It's easier to transfer ownership through gold certificates or via a custodian.

- Silver: Similar to gold, silver can be transferred but tends to be weighty and requires secure logistics for large amounts.

- Fiat currency: Fiat currency is fairly easy to hand over for transactions within the same country, but cross-border transfers may face regulation and fees.

- Bitcoin: Bitcoin can be transferred to anyone in the world with internet access, almost instantly and without needing a third party.

- Other cryptocurrencies: Like Bitcoin, other cryptocurrencies can typically be transferred directly between parties quickly across borders without an intermediary.

- Commodity money: The transferability of commodity money is low due to its physical nature, which may be bulky, perishable, or otherwise difficult to transport and hand over.

- CBDCs (Central Bank Digital Currencies): Assuming they are designed similarly to current digital monetary systems, CBDCs would likely have high levels of transferability, facilitated and recorded by central banks, but face the same regulations with, possibly, lower fees.

- Real Estate: Transferring real estate is a complex, regulatory-intensive process involving contracts, registration, and potentially hefty tax considerations.

- Collectibles: Transferring collectibles can be complicated by the need for authentication, insurance, and a specialized market. Additionally, some may be fragile or require secure transportation.

Decentralization

Decentralization in the context of money and assets pertains to how control and decision-making are spread across a network or market rather than being concentrated in a single entity. It can increase resilience and reduce the opportunity for single points of failure or manipulation.

- Gold: Gold is naturally decentralized with no central authority controlling its distribution or value, and it can be privately owned and traded.

- Silver: Silver is also decentralized, with a globally distributed supply and various markets for trading, though slightly less so than gold as it has more industrial uses.

- Fiat currency: Fiat currency is controlled by central banking systems and governments, making it highly centralized in both issuance and regulation.

- Bitcoin: Bitcoin operates on a decentralized peer-to-peer network without central oversight, and its issuance is controlled by a predetermined algorithm.

- Other cryptocurrencies: The level of decentralization varies among cryptocurrencies; some like Bitcoin are highly decentralized, while others may be more centrally controlled by their creators or small groups of stakeholders. However, the number of participants in Bitcoin in higher than other networks, as it has the highest value, and the barrier to become a node in the Bitcoin network is low because of its small ledger size.

- Commodity money: Most commodity money is decentralized, as it's not issued or regulated by any central authority. However, the market power of major producers can introduce some level of centralization.

- CBDCs (Central Bank Digital Currencies): CBDCs would be issued and controlled by central banks, making them one of the most centralized forms of money.

- Real Estate: Real estate ownership is decentralized, and although subject to government regulation, individual properties are owned and traded by private persons or entities.

- Collectibles: The collectibles market is decentralized, with ownership and validation of authenticity spread across individuals and various organizations.