Understanding Crypto · Lesson 1 · Beginner
What is money? The three functions
You can classify any crypto asset by the three functions of money and avoid apples-to-oranges comparisons.
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Three jobs
Money solves the problem of barter: without money, the baker has to find someone who wants bread and offers exactly what the baker needs. Money splits that up, across quantity, time and place.
The three functions: medium of exchange, store of value, unit of account.
The three functions of money
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According to Menger and Mises, money emerges in the market: the most salable good wins out. No state has to mandate it. Add to that fungibility (every unit equal) and liquidity.
Test yourself
Which function of money does a stablecoin like USDC fulfill most strongly?
- Store of value over years
- Medium of exchange and unit of account
- All three equally strong
How does a good become money according to Menger?
- By government decree
- Because it is the most salable good in the market
Which function does a typical memecoin fulfill?
- None of the three reliably
- Store of value
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The key points at a glance
- Money has three functions: medium of exchange, store of value, unit of account.
- Money emerges in the market as the most salable good, not by decree.
- BTC aims for all three, a memecoin for none, a stablecoin mainly for exchange and unit of account.
Deep dive
Coincidence of wants: the problem money solves
Barter breaks down on a two-sided condition, the double coincidence of wants: the person across from you has to want exactly what you offer and offer exactly what you need. Money resolves this along three axes.
- Amount: you split value into arbitrarily fine units
- Time: you store purchasing power instead of letting it spoil
- Place: you carry it with you
Why only one money wins out in the end
Menger and Mises describe money as a spontaneously emergent product: no state decrees it, it wins out as the most salable good. The engine is the network effect, which is why only one or a few assets survive as money in the end.
Money status is a process, not a label. Salt, cattle and shells lost their role the moment metals offered the better profile. Whether BTC lasts is an open question, and a rising price alone does not prove it.
The three functions as a scoring grid
For every asset, ask separately which of the three functions it actually fulfills. In day-to-day trading your unit of account is effectively the dollar, because you quote almost everything in USDT or USDC, even when you trade BTC.
- Stablecoin: strong as a medium of exchange and unit of account, weak as a store of value
- Memecoin: reliably fulfills none of the three functions
- BTC: aims at all three, with an open outcome
Sources: Ammous, Burniske/Tatar, Menger
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