This is a part of the Bitcoin Infinity Academy course on Knut Svanholm’s book Bitcoin: Independence Reimagined. For more information, check out our Geyser page!

Mainstream Mediocrity

What is a Medium of Exchange? A monetary good is often described as a Store of Value, a Medium of Exchange, and a Unit of Account. But what do these descriptions actually mean, and in what order are they important for a monetary good to succeed, in the short and the long term? It all depends on the depth of one’s analysis. Let’s rewind to the dawn of civilized society. Money hasn’t really been invented yet, and good old bartering is the only means of trading there is. “I will give you my three goats if you give me your cow.” If the receiver of this proposal values three goats more than one cow, an exchange occurs. This is at the very core of all human interaction that isn’t violent. Both parties believe that they stand to gain something from the interaction. If this wasn’t the case, no interaction would have taken place. But how can I know that one or more of my three goats won’t be used as barter in another exchange in which I’m not a participant? I can’t, and neither can anyone else except the new owner of these bearded omnivores. They are, by definition, a Medium of Exchange. So is everything else. Every physical thing that anyone has ever claimed ownership of can be used as a Medium of Exchange. That good’s usefulness as such, however, is another matter.

A goat can hardly be considered a very effective form of value-bearing asset by anyone. In order for a good to be a useful Medium of Exchange, it not only needs to be portable, divisible, fungible, and not easily confiscatable, but it also needs to be able to store value, at least in the short term. Storing value is the trickiest part since what anyone finds valuable is entirely subjective. This is easily forgotten. The order in which the other monetary properties are important depends on how, where, why, and when the supposed exchange takes place. A car, for instance, can be considered relatively portable if it works and the potential buyer is within an acceptable driving range, but it’s not very divisible and quite easy to confiscate. In-game gold or Monopoly money, on the other hand, is very divisible and portable but not very fungible since it’s almost exclusively attractive to those playing a very specific game at a very specific point in time. Not only this, but in-game gold can be infinitely mined, and Monopoly money can easily be printed. The rules of Monopoly even say to just write numbers on a piece of paper when the bank runs out of bills! These examples might seem arbitrary and insignificant to any real-world economy, but the truth is that the only thing separating money from other goods as a Medium of Exchange is money’s usefulness as such.

In order for anyone to accept something as payment for another thing, they need to be confident that this something will not lose its value anytime soon. This is the one key property that any method of payment must hold. The greatest threat to this property is said medium’s potential to be produced in large quantities over a short span of time. An apple can be bought for a certain amount of money, but no one would accept apples as payment for a new car since the apples would rot and lose their value well before they could exchange them for something else. What everyone seems to have forgotten is that the same is true for fiat money. Your dollars or euros won’t rot overnight, but they will rot over a couple of decades. No one stacks cash in their mattresses anymore for this reason. Inflation deprives us of the ability to store the value of our labor long-term. Because of this, every decision made by every politician, every merchant, and every entrepreneur today is influenced by an unconscious incentive to focus on increasingly shorter-term benefits. Human progress is equipped with a damper, and we’re not as progressive, effective, or innovative as we could have been. All because of our overlords’ inability to resist the urge to dilute our money supply. The temptation to counterfeit has existed for as long as money has existed, and no civilization has ever been able to stop it. On the contrary, we’ve been very inventive in coming up with plausible excuses for printing money. The latest term for this criminal behavior is quantitative easing.

Enter Bitcoin — a monetary entity that no human can alter or even influence at this point in time. A very divisible token directly linked to the most fundamental thing of value the universe has to offer — energy. A means of converting energy into a part of the world’s only digital pie, of which no more than 21 million slices can ever be cut. A portable, divisible, fungible, and not easily confiscatable form of money that exists and proves its superiority to the existing system every day. So why isn’t Bitcoin particularly popular as a Medium of Exchange? Will it ever be, and more importantly, does it really matter? To answer this, we must dive a little deeper into the subject. Bitcoin is a very good Store of Value from a personal perspective. You acquire an amount, and that amount stays the same over time. More importantly, that amount will represent the same part of the total sum of Bitcoin that can ever exist, no matter how long you choose to keep it. If you want a specific amount of Bitcoin to “buy you a Lambo,” all you have to do is wait for someone to be willing to sell you a Lambo for that amount. This might take a while (or it might not), but if Bitcoin just manages to keep on doing what it does, it will happen. It is only a matter of time because, unlike Lambos, Bitcoins are scarce. Very scarce. Even absolutely scarce, which is a property of an asset that mankind has never encountered before. More and more people realize this every day, which is why they’re reluctant to sell their Bitcoin. The newly minted Bitcoin that is mined every day needs to be sold in order for the miners’ business models to work, but the Bitcoin that is already in circulation tends to stay where it is because people value the coins they possess a lot higher than what the current price in dollars or euros happens to be.

A good Medium of Exchange needs to be able to store value. The better it stores value, however, the less likely people are to exchange it for something that isn’t likely to store value as efficiently. Bitcoin’s value has such a large potential upside that people refuse to exchange it for frivolous things such as coffee or mass-produced cars. Contrary to what one might think, this doesn’t make it a bad Medium of Exchange. Quite the opposite. How often a Medium of Exchange is used is not the correct metric to look at when trying to measure its usefulness as such. This misses the point. What should be measured is said medium’s ability to buy you as much, or more, than what you bought it for. Bitcoin, because it is the only tool that cannot be diluted with new supply, is the closest thing possible to a guarantee of its long-term store of value.

Fiat money, inflation, and the ideas of John Maynard Keynes have distorted our perception of what money ought to be, so much so that most of us believe that coffee-buying convenience is the most important aspect of a monetary good. Looking only at merchant adoption and spread of acceptance metrics, Bitcoin still seems to be struggling quite a lot. In reality, these metrics are nonsequiturs and have very little to do with the actual success or functionality of the network. The price of a Bitcoin, as shown by ticker widgets and market cap websites, represents the lowest current price that anyone is willing to accept on an exchange market. Only a few Bitcoin owners are willing to accept this price, and most of them are waiting for a better opportunity. Bitcoin is indeed a currency, but it behaves very differently than all other currencies that preceded it. The fact that people are reluctant to use Bitcoin for everything but a few very important transactions is a clue to Bitcoin’s monetary superiority rather than a sign of anything else. So forget about coffee, forget about whether your local franchise burger joint accepts Bitcoin or not, and start focusing on what you can use this tool for.

About the Bitcoin Infinity Academy

The Bitcoin Infinity Academy is an educational project built around Knut Svanholm’s books about Bitcoin and Austrian Economics. Each week, a whole chapter from one of the books is released for free on Nostr, accompanied by a video in which Knut and Luke de Wolf discuss that chapter’s ideas. You can join the discussions by signing up for one of the courses on our Geyser page. Signed books, monthly calls, and lots of other benefits are also available.