What money is and does is not always so cut and dry

Money has come a long way with humanity and history and has seen the sociological and anthropological impacts as societies have grown and changed over a period of time. Humans were always smart enough to create a solution to solve the problem of “double coincidence of want”. Economists have argued that there was no large scale barter system that existed, instead the problems with ‘so called money’ lead to barter economy within smaller societies. For e.g. – hyperinflation or civil war when money loose its value, people could rely on barter to exchange goods and services for their day to day needs. But since barter cannot work on a big scale and had so many problem, other forms of money came into existence and they meant different things in terms of what it did. But at the end, the main goal of money was always to enable a smooth and large scale exchange of goods and services which people had trust on and act as a medium of exchange.

There is no denying that views on money are as difficult to describe as are shifting clouds. (Schumpeter 1994 (1954): 289)1

Money is a Social Relation: Geoffrey Ingham

Money is a puzzle. The standard answer to the question of what is money derives from the late nineteenth-century functionalist account: money is what money does. Conventionally, it is a measure of value (or unit of account); a medium of exchange; a standard of deferred payment; and a store of value.

Marx admitted his difficulties, but apparently was mistaken in the attribution to Gladstone of the view that “even love has not turned more men into fools than has meditation on the nature of money” (Ganssman 1988).

Time Value of Money

The value of money now is greater than value of same money tomorrow. This is due to some key factors that affects individual and the economy.
Opportunity Cost
– Save the money and earn interest : If people have money now, they can put in the bank or buy bonds and earn interest of it. So there is an opportunity of making more money associated with the money in hand.
– Use the money to buy something that one need – it gives a feeling of satisfaction and pleasure to spend the money and use for personal.

Risk – unknown risk of the future, uncertainties.

Inflation – this could cause the value of money to decrease hence the money tomorrow will be of lesser value.

Liquidity – loose liquidity by not having he money now.

This loss of opportunity (or the opportunity cost) is fulfilled by demanding a compensation. The compensation provides the individual with the amount of money that is lost by not having the money now.

The opportunity cost is nothing by the interest that is earned on the money. This is defined by the expression:

Future Money = Present money + some compensation over a period of time
F = P + r
Over a period of time, this can be expressed as:
F = P(1+r)t
Where,
r = rate of interest and t = number of years the money is held or maturity.

hence, the rate of interest earned is nothing but the amount with which money loses its value over a period of time. Or the extra amount that is earned to compensate for not having the money now.

Is Bitcoin money or can it be :

Bitcoin was developed to enable a peer to peer money transaction that will eliminate the need for third party to verify and approve transactions. The technological solution such as Cryptography and Proof of work etc. were developed to achieve this goal so individuals could securely transact their money without it being managed by a central authority. In the paper issued by Satoshi Nakamoto, there is no mention that Bitcoin is proposed to replace money.

Bitcoin in its current form fulfills some functions of money if not all but it certainly has the potential to fulfill all the functions of money when those gaps are closed. Bitcoin fulfills the following functions of money

• Medium of exchange – with the current use of bitcoin and acceptance by several institutions and organization, bitcoin is definitely used as a medium of exchange if not fully.
• Store of Value – With the value that bitcoin holds (though volatile), it definitely has store of value. Also with economic incentive of mining for new block creation makes it more like commodity money.
• Unit of account – Not completely. However other currencies have started to be valued with respect to BTC.
• Consistent value – With bitcoin being so volatile, it does not fit in for this function.
• Durability and Portability – Bitcoin is both durable since the transaction history is stored in thousands of computers and stored in wallets. And ofcourse it can be sent from anywhere to anywhere without any restriction of borders so it makes it perfect for portability.
• Instant clearing – As of now, it takes 10 minute by the design for bitcoin to clear and approve transaction. The size of block is also a concern since bitcoin has a block size of 1MB.

Some of the issues or gaps with Bitcoin that must be closed for it to fulfill the functions of money

• Supply of bitcoin to be increased. Money cannot be deflationary in a growing economy as demand of money increases.
• Settlement Time: As people want real time settlement, the number of transactions per second should atleast be raised to 10,000 transactions per second ( according to Hayes)
• The block size to be increased from 1MB to 5MB for it to contain more information on every block of transactions.
• Central Bank and government to recognize Bitcoin as money and support through legislature.

References
Ingham [University of Cambridge] : Money is a social relation

[Saif Akhtar is a technologist in love with Blockchain innovation & disruption ]