The Evolution of Money

from collectables to stores of value to mediums of exchange to units of account

Reasonable minds disagree on whether and how these three functions of money are related. For example, some argue that money can only become valuable as it becomes useful as a medium of exchange. That said, the argument that I find most compelling is that which says money must become useful as a store of value first and foremost before it can become useful as a medium of exchange and potentially a unit of account. A well-known 19th century economist named William Stanley Jevons once said, “Historically speaking… gold seems to have served, firstly, as a commodity valuable for ornamental purposes; secondly, as a stored wealth; thirdly, as a medium of exchange; and, lastly, as a measure of value.” A Bitcoin enthusiast who wrote one of the best pieces I have read on Bitcoin modernized and extrapolated upon Jevons’ quote to suggest that money always evolves in four stages: from a collectible to a store of value to a medium of exchange to a unit of account. The most interesting evolution is that from a store of value to a medium of exchange which Boyapti describes as follows. “The purchasing power of a store of value will eventually plateau when it is widely held and the influx of new people desiring it as a store of value dwindles.” This theory makes logical sense.

More generally, it seems intuitive that the common cause of evolution throughout the four stages of money that Jevons and Boyapti describe is the same thing that fundamentally powers the phenomenon of money itself, that is, people’s belief in it. Using arbitrary percentages, it seems reasonable to me to suggest that once 1% of the world (in terms of either people or wealth) believes in the value of Bitcoin, it will reasonably have moved from a collectible to a bona fide store of value. Based on the estimated number of people who own Bitcoin and the percentage of those who legitimately believe in it, I would roughly estimate that we are are somewhere between 0.1% and 0.5% today.

Bitcoin would reasonably remain in the second stage of evolution (store of value) until the point at which, as Boyapti describes, there are no longer large numbers of people looking to put large amounts more of their money into Bitcoin. I believe the value of Bitcoin at which this would occur is difficult to predict even approximately so I will not attempt to do so at this time.

Finally, at a point in which nearly as many or more people believe in the value of Bitcoin than other competing currencies like the locally common fiat, Bitcoin would theoretically become most useful as the global unit of account and potentially the global reserve currency. At that point, you would no longer see the price of bananas in the US listed in dollars or the price of bananas in Europe listed in Euros. You would see prices globally expressed in Bitcoin first and foremost, perhaps beginning in countries with more volatile and less dependable currencies where Bitcoin’s early adoption makes more sense than in the US (i.e. Africa, Venezuela, etc.).

For the foreseeable future, it seems sensible to view Bitcoin only as a store of value with the acknowledgement that it could eventually develop into a useful medium of exchange and even potentially a unit of account. Still, it is important to emphasize that Bitcoin by no means needs to reach those later stages of money’s evolution in order to reach a level of value that is at least one or two orders of magnitude greater than in the present. This would imply values of around $100,000 or $1,000,000 per Bitcoin with a market capitalization (total value) of around $2T or $20T, respectively.