Is Bitcoin Considered Sound Money?

We view money as wealth that is sitting in a bank account or investment portfolio. It is also the cash in our wallet

The term "sound money" is often used to describe a monetary system that is stable, durable, and functions reliably in maintaining value. It's a concept that has been discussed by economists for centuries, and it's particularly relevant today as we see the rise of new cryptocurrencies and digital assets.

One way to analyze the soundness of money is by considering its properties. According to the Austrian School of Economics, ideal money should possess six properties:

1. Unit Value: Money should be easily divisible into smaller units to facilitate exchange for goods and services of varying value.

2. Durability: It should withstand wear and tear over time without deteriorating in value.

3. Portability: People should be able to carry it with them easily to make purchases.

4. Recognizability: It should be readily identifiable by users to ensure confidence in its authenticity.

5. Stability of Value: Money should maintain a relatively stable purchasing power over the long term.

6. Commodity Money: Ideally, money should have an intrinsic value tied to a valuable good, providing an ultimate backup in case of monetary collapse.

In discussing the cryptocurrency Bitcoin as sound money, it's helpful to consider its properties in relation to traditional currencies, such as cash (fiat currency), which is widely accepted and used in the economy.

Bitcoin (BTC) vs. Cash

Property | Bitcoin (BTC) | Cash (e.g., US Dollar) | Comments

------- | -------- | -------- | --------

Unit Value | BTC is divisible (e.g., satoshis) | Dollar bills and coins are divisible | Both can be easily divided for goods and services of different values.

Durability | BTC is digital and can last. But if no one uses it, it becomes worthless. | Cash can get damaged or dirty. | Both are durable in the sense that they can withstand physical wear and tear. However, BTC's value is ultimately tied to demand and usage.

Portability | BTC is easily portable. People can access it on their devices. | Cash is relatively portable, but large sums can be bulky. | BTC is highly portable and accessible to billions of people around the world.

Recognizability: | BTC is easily recognizable by its hash and address. | Cash has unique serial numbers for each bill. Counterfeit detection is also needed. | Both are readily identifiable by users.

Stability of Value: | BTC is known for its volatility, especially in the short term. It's also new, so its long-term stability is yet to be seen. Its total supply is 21 million BTC, which is a factor in its scarcity and potential for value. | Traditional currencies have experienced inflation and changes in purchasing power over time. Central banks intervene to manage the money supply and stability. | BTC's value is ultimately determined by market forces of supply and demand. It's a commodity like gold, which has also seen price fluctuations over centuries.

Commodity Money: | BTC is sometimes viewed as an asset commodity like gold, which has intrinsic value and served as money in the past. However, BTC has no commodity value like precious metals. It's a digital token with value based on its utility and demand. | Cash is legal tender backed by the government, which provides its value and function. | Both are types of money used for payments to satisfy daily needs.

In summary, Bitcoin and cash have different properties and advantages. Bitcoin is easily portable, recognized, and durable in the sense that it's a digital asset that can last. However, its value ultimately depends on people continuing to use it and exchange goods and services for BTC.