One might think that currency is money – but actually, currency is a medium of exchange and money is a store of value. To be a good currency, something needs to be portable, difficult to counterfeit, trustworthy, and widely accepted. On the other hand, good money or sound money needs to be rare or scarce, portable, durable, easily divisible, fungible and non-consumable. In other words, sound money maintains its purchasing power over time, thus becoming a store of value.
For example, fiat paper currency backed by the government isn’t really sound money. The U.S. dollar started out being both when it was backed by gold. Once Nixon pulled it off the gold standard in 1971, it became currency and has lost much of its purchasing power over time. There was a time when saving money in a savings account produced a nice return, but that is no longer true. In fact, the longer you save your dollars, the less valuable it becomes. Investing money used to be considered risky, but now an investment plan is considered to be critical.
Short-term goals call for currency, long-term goals require sound money or investments. Knowing the difference may affect your personal strategy and approach.
Properties of Currency
Scarcity is a property of currency that both gold and bitcoin share. Gold is hard to find and extract, plus there is a limited amount on earth, and it is very had to counterfeit. Bitcoin is rare, as only 21 million will ever exist, and it is becoming increasingly more difficult to mine (create). Fiat currency is not scarce in the least, as it is produced by governments or central banks, and it can be counterfeited by them infinitely.
Fungibility means the currency symbols are interchangeable, meaning it is easy to exchange or trade for something of the same type and value. Gold is fungible because one ounce of gold carries the same value as another ounce of gold. Bitcoin is interchangeable, all 21 million will be exactly the same and have the same value. Fiat currency such as the U.S. dollar is also fungible, all notes and coins of one specific currency are the same.
Divisibility means the currency is easily divided into small increments to use in exchange for goods or services of varying values. Gold is divisible because it is soft metal, but scales must be used and it isn’t exactly easy to divide. Fiat currency is easily divisible like the U.S. dollar can be divided into 100 cents. Bitcoin is infinitely divisible and each can be divided into 100,000 satoshis. However, the Bitcoin protocol can be extended to enable even smaller portions.
Durability means the currency must be able to survive time and weather, that it will not dissolve, break, or wear out. Gold is very durable, as it is metal and has survived for thousands of years. Fiat currency is durable as long as the government supporting it survives. Bitcoin is durable and will also survive as long as the network survives. However, its network is decentralized with no single point of failure, therefore very hard to destroy.
Transferability means the currency should be easy to send from one person to another regardless of location. Gold is not so easy to store or transfer, hence most of it is stored in vaults with owners holding legal documentation instead of gold in hand. Fiat currencies are easy to transfer, as most are digital today, but must be transferred using third-party digital networks. Bitcoin is very easy to transfer and each owner can send it anywhere in the world through the Internet with no third-party involvement.
Ultimate Currency Survivor
Gold has always been valuable and probably always will be. Should the economy collapse or the banking system fail, gold could be what facilitates trade and stores wealth. It acts much like insurance and Bitcoin may not dent its market share. If Bitcoin were to displace gold as an investment asset, gold prices would drop drastically given 40% of demand relates to investment.
Many believe that Bitcoin’s value, usefulness, and importance has more potential for growth as the world becomes more digitized. That the more infrastructure is built around Bitcoin, the more demand for it will rise relative to its finite supply. Gold has a 1000+ year history of being a good store of value that is important to many people. Will gold’s history continue to be of importance as the world becomes more digitized and technically advanced?