Disclaimer
We’re not advocating cryptocurrencies as an investment here.
This is merely an analysis based on the definition of money and none of this should be construed as investment advice.
While there is money to be made in cryptocurrencies due to its relatively small marketcap (and thus, higher volatility), it must be assumed that if you are willing to risk your money on it that you remember to use caution and only bet a tiny part of your overall portfolio.
Play safe.
We take money seriously. So any analysis we do is done through that lens.
Our approach is methodical, rational and rooted in honest research and experience. This means we do everything we can to ignore the noise and just focus on the signal.
Irrational asset maximalists, promoting their “One True Asset”, will probably hate this post. We value logic and reason and reject the religious-like fervor of maximalism.
Remember: Critique isn’t criticism.
Let’s get on with it… the questions we seek to answer here are: “Can cryptocurrencies be digital gold? Can they be money?”
What is money?
If you need a refresher about the nature of money check our inspired post entitled A Beginners Guide: Is it Money or is it Currency?
Money is…
- A Medium of Exchange (MoE)
- A Unit of Account (UoA)
- Portable – Can be easily carried
- Durable – Lasts a long time
- Divisible – Can make change
- Fungible – Changeable
- A Store of Value (SoV)
Without any one of these attributes, an asset, including a specific cryptocurrency, can’t be considered money. For reference Gold, Silver, Platinum, and Palladium have all, at one time, been considered money due to their monetary properties. Gold and Silver obviously being the most common choice for money historically.
Can cryptocurrency be considered money?
If a cryptocurrency has all properties of the definition of money, then yes, it can be considered money. If you think about it, an asset doesn’t have to be metal to be a money. It just has to have all the properties to be a money.
Let’s look at some popular cryptocurrencies to see if they measure up starting with the largest marketcap crypto, bitcoin. Ultimately, we want you to be able to make the assessment for yourself so we’ll give you the starting point to continue your own research.
Bitcoin (BTC)
With the largest marketcap, this cryptocurrency has the most familiar name brand.
Bitcoin possesses many of the same attributes as traditional forms of money, such as the ability to be used as a unit of account, portability, and the fact that its durable. But does it make the cut? Let’s go to our our checklist.
A Medium of Exchange (MoE)
As of now, we don’t agree that bitcoin is a good medium of exchange. Users can definitely make transactions, but they can’t make small transactions without paying fees that are higher than the cost of the payment.
This means you can’t pay for an item that costs the USD equivalent of $0.50 without incurring fees that can range from $1.50 to $50 depending on the sluggishness of the network. Bitcoin, unfortunately, is not a good medium of exchange for that reason alone.
Some say bitcoin is supposed to be a savings network, but that argument doesn’t hold up to scrutiny considering the original goal of bitcoin, as laid out in the original whitepaper (careful, it’s technical), was as a form of cash. Bitcoin has since made changes to it’s underlying code which crippled it from being a cash.
A Unit of Account (UoA)
Bitcoin can be used as a stable unit of account considering it’s fixed supply. At the moment, not all coins have been released so it’s slightly inflationary until all bitcoins have been mined (just another word for being electronically minted by software- not people).
Portable – Can be easily carried
Bitcoin can be easily carried in a digital or physical wallet making it easy to transport.
Durable – Lasts a long time
Bitcoin doesn’t degrade over time or change its state fundamental state. It’s also decentralized, meaning a bad actor couldn’t come along and compromise the bitcoin network.
Divisible – Can make change
Bitcoin is divisible down to the smallest unit called a Satoshi. There are 100 million Satoshi’s in a single bitcoin.
1 BTC = 100,000,000 Satoshi’s
Fungible – Changeable
Fungibility refers to the idea that you can trade one unit with another unit of equal value. For example, one Troy ounce of gold can be traded for one Troy ounce of gold and you don’t lose any value in the exchange.
Bitcoin uses a public ledger meaning anyone can see your holdings if they know your bitcoin address. This presents obvious personal security concerns regarding privacy and anonymity. Gold, silver, and even paper cash is private and anonymous making them highly fungible.
Additionally, most bitcoins are purchased through centralized exchanges which require you to submit personally identifiable information. Those exchanges have software which link your identity to your bitcoin wallet addresses allowing them to track the movement of your bitcoin for as long as the bitcoin network exists- which means those coins will be tracked for the rest of your life!
There are tools you can use to “mix” your bitcoin which can allow you to gain some anonymity, but those are possibly illegal to use and considering the software will track your coins up to the point of mixing them, authorities might even be able bust you for using that software under Anti-Money Laundering (AML) laws.
What this means in regards to fungibility is that bitcoin and their addresses can be “tainted” via the public ledger. Governments and institutions can blacklists wallet addresses associated with known users and institutions reserve the right to refuse service with users of those tainted addresses.
Freshly mined bitcoins have no history associated with their public ledger and thus have been sold for a higher price than bitcoins with a history.
This means 1 BTC does not equal 1 BTC. Combined with the fact that bitcoin can be tainted, bitcoin, fundamentally, is not fungible.
A Store of Value (SoV)
While the price of bitcoin has soared since its inception, no one seems sure whether it’s due to speculation or if it’s a stable store of value over time. In order for the world to agree on that, the world will need to use bitcoin. While we agree that it is possible for bitcoin to be a good store of value, no one knows for sure. We believe it’ll be around a while, but we don’t know yet if it’ll be over taken by another cryptocurrency in the future.
We believe that it might be a store of value but understand we need more time for this to play out. This is also something that is a consideration for all cryptocurrencies- not just bitcoin.
Final assessment.
Bitcoin is NOT money and thus, in its current form, not digital gold.
Not being a good medium of exchange and not being at all fungible means that it shares more similarities of a currency than a money.
Note: Many people have argued that the addition of a second layer on top of bitcoin can make it fungible and a better medium of exchange. Our assessment of that argument is the following: Any additional layer solutions are no different than the relationship of paper-backed gold certificates to gold. Paper representing gold’s value is not gold. A layer two representing the value of the underlying bitcoin, is not bitcoin.
Ethereum (ETH)
From here we’ll be going a bit faster in our assessments because we spent a good deal of time explain each property.
Ethereum is interesting because it’s more than just a currency- it’s programmable currency. We’re not going to into into these features as they don’t pertain to our discussion here, but understand that extra features doesn’t necessarily preclude an asset from being a money in the way that being golden or silver-colored doesn’t preclude gold or silver from being money.
So let’s take a look: Is Ethereum digital gold?
A Medium of Exchange (MoE)
Ethereum, like bitcoin, can be exchanged but also suffers from the same high transaction fees that bitcoin does. The network can become sluggish and fees go up.
A Unit of Account (UoA)
Ethereum can be used as a unit of account.
Portable – Can be easily carried
Like bitcoin, Ethereum is portable via hardware or digital wallets.
Durable – Lasts a long time
This is the same as bitcoin. The network is decentralized and its own protection and validation of the network- even though it doesn’t using mining (it has something called staking).
Divisible – Can make change
Ethereum, like gold and bitcoin can be a unit of account. Each Ethereum unit is made up of defined smaller units called Wei. It’s definitely divisible.
Fungible – Changeable
Ethereum suffers from the same public ledger issues that all cryptocurrencies with a public ledger face- surveillance. While there are also software tools and layer 2 solutions to aid with its fungibility problem, this still doesn’t make the underlying asset more fungible.
Ethereum is not fungible.
A Store of Value (SoV)
Like bitcoin this scenario is playing out. Ethereum is deflationary in that it’s supply is decreasing over time with each transaction making Ethereum more scarce.
Like all other cryptocurrencies, it’s still too early to tell for sure but, considering Ethereum’s popularity we like to think it has all the makings of an solid Store of Value.
Final Assessment
Ethereum, like bitcoin, is NOT money, and thus not digital gold. It lacks Medium of Exchange and Fungibility. Ethereum could be considered a currency at best- but definitely not money.
Monero (XMR)
Monero is a popular cryptocurrency which is often referred to as a “privacy coin” due to its completely anonymous network. People can transact with Monero and there’s no associated history and it doesn’t leak data which can be mined to correlate your identity.
It’s so private that the IRS has issued a bounty for anyone that can demonstrate the ability to track and trace transactions. To date, no institution or individual has successfully demonstrated an ability to do so.
To us, calling Monero a “privacy” coin is silly. No one calls Gold and Silver “privacy metals” because of their inherent anonymity and privacy.
So let’s look at Monero.
A Medium of Exchange (MoE)
Monero can be transacted and generally has low fees compared to bitcoin and Ethereum. Additionally, the software can compensate for increased network usage and adjust, allowing for transaction fees to remain relatively low. In fact, fees can be less than a penny.
This makes Monero more ideal for smaller and larger transactions. Unlike the other two, Monero is a good Medium of Exchange.
A Unit of Account (UoA)
Monero can be considered a unit of account for the same reason bitcoin and Ethereum can.
Portable – Can be easily carried
Monero is also portable using a physical hardware or digital wallet.
Durable – Lasts a long time
Monero is protected by decentralized mining all over the world making it very resilient and durable.
Divisible – Can make change
Monero can be subdivided into it’s smallest unit called a “piconero” or “pico” for short.
Fungible – Changeable
Monero is highly fungible since it has no associated history and isn’t traceable. This property allows users to know their identity is protected from surveillance. If Monero is purchased on an exchange, the wallet address can be correlated to you in the same way that an ounce of gold purchased online can be correlated to your physical address. But it stops there. No one can know how much Monero you have in that wallet or know if you transferred it to another wallet address.
This means 1 XMR is equal to 1 XMR in the monetary sense. A Monero wallet address can become tainted like bitcoin and Ethereum addresses, but not the amount of Monero in that address because it’s impossible to know the amount inside it. Once that Monero is moved to another wallet address, all links to that previous address are now gone. Just like cash, gold, or silver.
Monero is fungible.
A Store of Value (SoV)
This is the same answer as for all cryptocurrencies. Monero definitely has the features to become a store of value but it will require time to get there.
Final assessment.
Monero is the best contender to be a money. We’re not going to say outright that it is digital gold because we don’t know if it’ll eventually be a solid store of value- but that goes for all cryptos.
Are they digital gold?
This table summarizes our findings.
| MoE | UoA | Portable | Durable | Divisible | Fungible | SOV | |
|---|---|---|---|---|---|---|---|
| BTC | ❌ | ✅ | ✅ | ✅ | ✅ | ❌ | ✅ (?) |
| ETH | ❌ | ✅ | ✅ | ✅ | ✅ | ❌ | ✅ (?) |
| XMR | ✅ | ✅ | ✅ | ✅ | ✅ | ✅ | ✅ (?) |
So, is Monero is digital gold?
Ultimately, we’re not sure. We have to wait for the market to decide on whether it’s a Store of Value to know for sure. But we feel strongly, based on its properties, that it’s the best contender out of the 22,000+ cryptocurrencies out there. It has almost all the properties that made gold and silver money.
Wrapping Up
Most cryptocurrencies have non-fungible coins with public ledgers or lack other properties making them ineligible to be considered a digital gold or money.
It’s possible other cryptocurrencies could begin a push toward sound money without extra layers or complex software schemes to add those features but until they do, only Monero stands as the closest thing we have to being digital gold.
As fans of sound money, we prefer holding real time-tested value. We believe that cryptocurrencies aren’t going anywhere and no, we don’t believe the internet is at risk of being shut down anytime soon. As an new asset class, cryptocurrencies have a real potential to disrupt the legacy financial system in some way.
Do we think they’ll replace gold and silver as money? Not at all. Precious metals will always be a form of money and it’s up to the new kid on the block to prove they can be just as sound as gold and silver have for thousands of years.
