With the recent rally in Bitcoin I thought it would be prudent to review what currency really represents and what causes real money to surpass currency.  Both currency and money share seven properties, and though real money actually is a currency, real money surpasses currency because of one very important factor. Hopefully by the end of this piece we’ll understand where Bitcoin and all other digital currencies fall into the equation as well.

Before I talk about the properties of currency and money, let’s remember that real money has a recorded human history of nearly 6000 years, and because real money is a currency, currency will share much of that history. Fiat currency, or currency by government mandate, shares much of that history as well, but really only came into use about 2500-3000 years ago. And finally, the historical record shows that 100% of all fiat currencies have been devalued to becoming worthless, and there is no reason to believe that record will break down in the future.

So what are the seven properties of currency, and what is the one property that allows real money to be the superior choice? And where does BitCoin fit in?  I’m glad you asked.

In no particular order, the seven properties are a unit of account, medium of exchange, conveniently portable, durable, fungible, divisible, and broadly holds confidence.

A unit of account simply means that the value assigned to a coin or bill is printed or stamped onto it.  This way everyone knows the difference between a $1 bill and a quarter.

Medium of exchange means I can use it to buy something from you because who knows if you need the shoes I made or are even willing to accept them in exchange for 5 pounds of steaks?

Conveniently portable means I can easily carry it around with me.  Unlike other items that have been used in the past, our coins and bills are light weight and fit into my pocket.

Durable is pretty simple…it doesn’t wear out. And divisible means if I pay too much for a bag of carrots, the cashier can make change.

Fungible means that each and every unit of currency is exactly the same as the other units. So the $20 bill in my pocket can be exchanged for another $20 bill or even a ten, five, and five one’s.

Finally, broad confidence means that I know that when you pay me for something, I can turn around and use the very same currency you gave me and to go to the grocery, the grocer can take the same currency to the shoe maker, and so on.  We are all confident the next person will accept it, and s/he is too.

Like I said though, real money has one more property which surpasses currency, and that is a store of value.  Which means that the $20 bill in my pocket can buy about 40 lbs of G-Pod potatoes at the local discount wholesale warehouse store, and 25 years from now I can expect it to still buy the same 40 lbs of potatoes.

And I want to be clear about our central bank, the Federal Reserve.  Since the creation of the Federal Reserve in 1913, the value of the US Dollar has plummeted by over 96%, and it is for that reason that my grandparents used to tell me (you probably heard similar stories) they remembered paying a nickel for a gallon of gas. Or why my parents bought a house in the early 70’s for about $34,000, and if they sold it today they could get about $400,000. My Bar Mitzvah suit was about $70 and my son's will be about $200 in September. The value of those items hasn't changed, even though the price has. 

Real money carries all 8 properties, and that is why if you price anything in real money, aka ounces of pure gold, prices generally stay level over very long periods of time.  For example the average single family home in America has always cost about 180-200 ounces of gold.  A good men’s suit: 1 ounce. A barrel of oil: 1.555 grams (24 grains). And so on.

So where does digital currency, like BitCoin, fit in? Well, digital holds 6 out of 8 of those properties.  The first missing property is that there is no broad confidence of the general public.  Sure, there are some vendors who will accept digital and anyone on the dark web will accept it, as well as drug gangs, mafiosos, and the like, but most of the general populace won’t because they will be hard pressed to go to the grocery store to buy groceries, shoes at the shoe store, or gas for their car using digital currency.

Second, digital currency clearly doesn’t store value, let alone over long periods of time. There are no long periods of time as of yet, because digital has only come to the fore in the last 10 years.  Look at Bitcoin for example. If you bought at any time from about September 2017 through now, you’re probably down by 25% or more. In the last month Bitcoin is up, sure, but since the peak of the cryptos in January 2018, the total market cap is off by 75% for all coins combined.

If you are really desperate to get into crypto, you better make sure you know how to trade it.  But if I were you, I wouldn’t be in crypto as an investment.