over 3 years ago

    The Hierarchy of Money cover image

    The Hierarchy of Money

    - Robert Kiyosaki..."Money is not the most important thing in life, but it does affect everything that is important"

    At the earliest stages of life, it becomes obvious that money is very important. Without it, acquiring resources is increasingly difficult. It's the difference between living the life you want, and living the life you "have to". When it works we know it, when it doesn’t we know it even more. A common experience most children encounter is “we can’t afford it” and for adults, it is “how much does it pay?”

    - Aristotle...“Money is a measure of everything of which has value”

    Three roles

    What it means...

    Store-of-Value

    a way to protect your money through time

    Medium-of-exchange

    a way to trade your money

    Unit-of-account

    a way of measuring value with money

    Six Properties

    What it means...

    Divisible

    money that can easily divide & recombine

    Portable

    money that is easy to carry

    Verifiable

    money that resists counterfeiting

    Durable

    money that resists decay over time

    Hardness

    money that resists debasement

    Censorship Resistant

    money that resists censorship

    A Short History of Money

    Money is the language from which we 1) express value, 2) measure value, and 3) record value. It's a developing technology that enables value transfer across space and time. As money evolved from shells to coins, it allowed for faster, cheaper, and more efficient commerce (the trading of resources). Better commerce-enabled individuals and societies to access better tools, gadgets, and ideas. Ultimately, the harsh conditions of everyday life began to improve. Better living conditions plus technical innovation meant populations would grow at faster rates. The money would manifest in various forms: cattle, salt, aggry beads, Ria stones, shells, silver, and gold. Much like any rational person would base their beliefs on "sound principles," the world market was looking for " sound money." By the 18th century, gold emerged as the best form of money because of its superior properties.

    Historical Money

    Livestock

    Livestock was used as money because it had nutritional value. Livestock failed as sound money because it could not be divided, recombined, or resist rot. Nutritional values such as fruit, livestock, and grain were exchangeable but lacked resistance to decay.

    Ria Stones

    Ria stones were a type of limestone used as money on the Yapi island. The process of converting limestone to Ria-stone took lots of time and labor, contributing to the properties of hardness and scarcity. Ria stones succeeded as a medium of exchange, store of value, and unit-of-account until it didn't. The lack of scarcity was exposed by an Irish American in 1871. David O'Keefe shipwrecked on the island of "Ria-stone-money" and quickly realized he could mass-produce Ria-stone's using European technology. David O'Keefe left and returned to the island with massive amounts of Ria-stone, exchanging the stone for the island resources. The ease of producing massive quantities of Ria-stone in a short period of time resulted in a transfer of wealth to the Europeans and a debasement of Ria-stone money to worthless. This is called "Inflation."

    Aggry Beads

    Aggry Beads were used as money for centuries in western Africa. Europeans were attracted to the rich resources of Western Africa and noticed aggry beads were used as money. Europeans began to mass-produce aggry beads then ship them to Africa and use them as money to buy up all of Western Africa's resources. Western African's believed they were becoming rich because they didn't understand their money's lack-of-hardness. They traded away most of their rich resources for aggry beads. Aggry beads failed because they were easily mass-produced, debasing the value. By modern terms, the inflated supply of aggry beads is called "Inflation."

    Wampum Shells

    Wampum Shells were used as money because they were both scarce, hard to find, and satisfied the functional-roles of money. As technology advanced in North America, the properties of Wampum Shells were exposed and could not satisfy "Hardness." The rise of Fossil-fuel-powered boats dramatically increased the supply of Wampum Shells. Again, history repeats itself, and the individuals who sold their resources for Shells slowly realized the shells were worthless.

    Salt

    Salt was a great medium of exchange and unit of account because it was so divisible, verifiable, and portable. The problem was that salt could be easily destroyed by water and eventually become inflated due to technologies that could mass-produce salt, collapsing it's buying power.

    Silver Coin

    Silver emerged as a better form of money than previous monies because it carried a lot of value in such a small size and was much harder to produce than cattle, salt, beads, stone, and shells. Of all the previous money before it, silver was superiorly divisible, portable, durable, and much harder to produce. It served as a better medium of exchange and unit of account. But, it also failed to satisfy the properties of hardness and verifiability. Governments began diluting the purity of silver coins with copper and bronze, a technique called "coin clipping." Recipients of silver had the illusion that they were receiving pure silver and when they learned of this devaluation tactic demand collapsed, ultimately destroying the trust of silver coins as money.

    Gold Coin

    Resistant to decay and virtually indestructible, Gold emerged as the best form of money. Although gold is not the best "medium of exchange," it's definitely the best "store of value." Gold is the most difficult form of money to find and produce, making it the hardest, scarcest, most predictable system of money. The creation of gold coins increased the ability to be exchanged (divisibility & portability). Coin-clipping persisted and Empires who diluted their gold coins always collapsed. Ultimately, gold lost it's medium of exchange status to Fiat-currencies but retained its status as the only true store-of-value. In the gold standard era, between 1790 and 1970, the world experienced the largest innovational period in history. When Gold was removed as money, the World saw the bloodiest centuries ever. 

    Fiat Paper

    Shipping large amounts of gold across vast distances was too costly, risky, and time-consuming. So Government-issued paper money, known as Fiat-currency. Backed by gold, Fiat was an extension of what gold failed to be, a scalable medium-of-exchange (divisibility, portability). Its value depended on the ability to redeem $35.00/USD for 1oz of gold. This was true between 1945 and 1971. Governments succumbed to the desire to over-print, creating an excess amount of fiat than gold available. Essentially abandoning the Gold-standard (defaulting on their promise to redeem) and declaring the Dollar-fiat-currency as the world reserve currency. Who could challenge the United States Military forces, technological advances, and political control? Credit cards, debit cards, and other electronic forms of payments such as "apple pay" are extensions of the fiat currency system.

    Bitcoin

    In the wake of the 2008 financial crisis, a new asset class was born. Created by Satoshi Nakamoto, Bitcoin was the beginning of a new decentralized system of money. Controlled by no "one" owned by "everyone" participating. Bitcoin is divisible by 100,000,000 unit's making it the most divisible money ever. Bitcoin can be instantly transferred in large amounts across the world making it superiorly portable. Bitcoin's network allows anyone to verify its supply while insuring privacy through a technique called cryptography. There will only ever be 21million bitcoins making it the scariest hardest asset ever created. Bitcoins can't be destroyed or erode over time ensuring superior durability. Bitcoin's largest weakness is that it lacks the proper on and off-ramps for entry much like the first car's lacked the infrastructure to drive on. Then it was built. The ingenuity of bitcoin creates a network effect that generates a new property, Censorship resistance.

    Comparing Roles

    (-)12345(+)

    Store of value

    Medium of Exchange

    Unit of account

    Soundness

    Fruit/Grain

    1

    2

    1

    +3

    Livestock

    3

    1

    2

    +4

    Ria Stones

    2

    1

    2

    +5

    Aggry Beads

    2

    2

    2

    +5

    Wampum Shells

    2

    2

    2

    +5

    Silver

    3

    3

    2

    +8

    Gold

    4

    3

    3

    +10

    Fiat Currency

    2

    4

    4

    +10

    Bitcoin

    5

    5

    5

    +15

    Comparing Properties

    (-)12345(+)

    Fiat

    Gold

    Bitcoin

    Divisibility

    4

    2

    5

    Portability

    4

    2

    5

    Hardness

    1

    4

    5

    Durable

    3

    5

    5

    Verifiable

    2

    4

    5

    Censorship-Resistance

    1

    4

    5

    +14

    +21

    +30

    Fiat vs Gold vs Bitcoin

    Unit of Account

    The Unit-of-account role of money simplifies trade, speeds up transaction volumes, and secures adoption.

    Verifiable

    Gold is audited every 3-5 years, Fiat can't be audited and Bitcoin self-audits every 10 minutes.

    Censorship Resistance

    Every Fiat transaction is censored. Gold and Fiat can be confiscated by governments. Bitcoin can only be accessed by the user's private keys. The U.S government confiscated its citizens' gold following the 1933 gold-ban. In the world of Fiat-currencies, centralized authorities decide what you can and cannot purchase. Authorities can also change both the tax and interest rates at will. In a Fiat system, everyone's transactional data is collect and stored by the central authority. Try moving a million dollars in cash or gold across any border, it will be confiscated. In a totalitarian surveillance state such as China or North Korea, public dissent can result in a financial freeze. Bitcoin is tamper-proof meaning information cannot be altered.

    Medium of Exchange

    The medium-of-exchange role of money enables individuals to specialize in a chosen "craft" and enables economies to steadily grow.

    Divisibility

    Gold's lack of divisibility made it inconvenient for small purchases, giving rise to paper money💵 as a superior tool for dividing and recombining value. Imagine shaving a block of gold every time you purchase a cup of coffee, very inconvenient. A $1.00/bill can divide into 100 pennies, making its use much more convenient for small purchases and tailoring purchases to match consumption desire. Bitcoins can divide into 100,000,000 million units called Satoshi's, crushing the divisible capabilities of Fiat and Gold.

    Portability

    Although Gold carries a lot of value per unit of weight, it's density prevents the "ease" of transferring across borders. Imagine carrying $50,000 in gold on an airplane or up a mountain or on a boat. What are the chances that your heavy clunky Gold or bag full of cash isn't seized by the gate-keepers? Bitcoin is superior in portability because it isn't restricted by borders and is easily transfers across vast distances no matter the amount. Fiat currencies take days, weeks, and sometimes months to transfer across long distances (wire transfers). There are limits to how much paper you can carry across borders or on planes before it is confiscated. With Bitcoin, you can bring any amount across any border through any transportation vehicle with ease. The main advantage of Fiat is that it dominates the global payment rails, bitcoin's are not nearly as accepted...YET.

    Store of Value

    The Store-of-Value role of money is arguably the most important function of money because it protects the sum of all value into the future

    Hardness

    If money is not scarce and hard to produce, its trust-value slowly collapses over time. Hardness ensures the trust of the value is not copied, diluted, or corrupted by producers. Fiat is easy to produce, you just push a button to either print the paper version or push the button to generate numbers on a computer in the form of debt. The dollar has declined in value by 97% over the past century due to governments expanding the Fiat money supply. In order to produce Gold, you need time, labor, and machinery, making Gold much harder to produce than fiat. Bitcoin is more difficult to produce than Gold from a cost basis. To mine Bitcoin, you pay for mining computers and electricity. Scarcer money incentivizes savings and decreases the demand for inflationary money. The scarcity of fiat can't be protected because Central banks can print 20years of time-value in a moment. You can't create 20 years of labor in gold or bitcoin by pushing a button you actually have to do the work for 20years. There is a limit to how much Gold can be produced in a period of time. The Gold supply steadily increases by 2% a year and Fiat can increase by 15% in a week. Bitcoin is the perfect store-of-value because it can never be diluted with more bitcoins. The Hardness property of Bitcoin is unrivaled because it's the only form of money thats supply is completely fixed at 21million coins. Bitcoin is the only asset that is completely scarce with rising demand.

    Durability

    You wouldn't save your value in apples because they will decay in a matter of weeks and your wealth will basically evaporate. Paper decays where Bitcoin is electricity energy transferring from computer to computer. To destroy bitcoin you'd have to destroy the internet, good luck. Gold is virtually indestructible making its durability absolute.