What is Money? Money simply explained
In order to understand bitcoin as a medium of exchange as well as a store of value, one must first understand money fundamentally. Although we use it every day, this question is surprisingly difficult to answer as to what exactly money is.
Direct Exchange of Goods
The simplest way for people to exchange value is through the mutual direct exchange of goods. This process of direct exchange is also known as barter. However, this is only practical in a small ecosystem, but it can also become a major disadvantage because the needs of both parties cannot always be satisfied.
In a complex global economy, one needs a neutral good that serves as a medium of exchange.
Two Types of Money
Money is basically distinguished between commodity money and fiat money.
Commodity money, such as tobacco, shells, or gold usually has intrinsic value in addition to its exchange value, in the form of the commodity itself.
> Learn more about Commodity Money.
In contrast, fiat money is national currency issued by the government, such as the U.S. dollar, euro, or Swiss franc. The value is derived from the existence of the government and the national bank that issued it.
> Learn more about Fiat Money.
We use money to communicate value, to express to each other how much we value a product, a service, a gesture.
Money through Time
Historically, different cultures and regions have used different neutral means of exchange. For example, shells, tobacco, gold, silver, paper or Bitcoin came into use as money or means of payment.
Modern economies are fundamentally based on fiat money. It has no intrinsic value in itself, yet it serves as a means of payment for goods and services in today's society. It is accepted because people trust that the responsible central bank will manage well and thus keep the value of money stable in the long term.
If central banks were to fail in this task, fiat money would lose its general acceptance as a medium of exchange and would also no longer be attractive as a store of value.
Functions of a Money
Money fulfills three functions. As a medium of exchange in trade with other parties. In its function as a unit of account, it forms a reference and facilitates the comparison of goods and services in terms of value. As a store of value, money enables people to save and thus maintain their purchasing power.
Medium of Exchange
As a general neutral medium of exchange and payment, money is used to exchange goods and services. It facilitates the exchange of goods between parties.
Unit of Account
A unit of account allows the value of all goods and services to be expressed in one unit and thus made comparable. Money acts as a measure of value.
Store of Value
The store of value function enables saving. Specifically, saving means that money received does not have to be exchanged for goods or services in a timely manner. Instead, one saves one's capital and obtains goods as well as services at a later point in time. Purchasing power should be maintained in the process.
Basic monetary Properties
In order to fulfill the above functions, money should also be durable, transferable, divisible, fungible, verifiable as well as have a certain stability of value. At the same time, one of the most important factors, the quantity must be subject to scarcity.
The article What is a Medium of Exchange? goes into more detail about the monetary properties of a means of payment.
Money is a medium of exchange that is widely accepted in transactions for goods and services. It serves as a unit of account and store of value and has evolved over time from tangible items such as beads, shells, and coins to paper money and electronic money.
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