The war of money is the longest war known to man. All currencies are constantly competing with one another for monetary supremacy. As with all wars, the war for money has had many casualties. Ultimately, all currencies have been devalued or died. The key characteristics of money are that it is salable across time and space, acts as a medium of exchange, and possesses an ability to retain value over time. The money that is best aligned with these characteristics becomes the victor — until the creative destruction process produces a superior monetary medium.
Over the course of history, various mediums have emerged as money. The earliest forms were non-metal, such as salt bars in Ethiopia or cowrie shells in Nigeria. Non-metal money gave way to metal money — scarce, fungible, and highly durable. Metal gave way to paper, which is more salable across time and space. Digital money is disrupting paper money. Digital goods are the most durable in human history. Bitcoin, the new digital money challenging the throne, is also finitely scarce. Finite scarcity positions it to be the scarcest money ever invented.
With each emergent money, the properties of one medium improve upon and obsolete the monetary properties of the pre-existing form. Innovation in money is historically zero sum — every time a new money has emerged, it is at the expense of another. Economic systems converge on a single monetary medium. Bitcoin wants to be the next to disrupt. While that may sound alarming, it’s not a novel idea. Money is technology. Money is not immune to the creative destruction process.
What is the function of money?
Civilization as we know it would not exist without money. Money helps facilitate economic activity by acting as an intermediary between present and future exchanges. The most important feature of money is the ability to retain value — both through time and through space.
The US dollar is incredibly good at retaining value in space. I can transfer you $100 via any financial institution at relatively low cost. However, the US dollar does not fare as well in its ability to retain value over time. Its monetary properties are inflationary — the dollar loses roughly half of its value every ten years. Over 100 years, the value of your money in dollars is cut in half ten times. That’s not a great property of a money.
A helpful framework for thinking about any asset — the dollar, Bitcoin, real estate — is to think through how that asset holds value via time and space.