Is Bitcoin money? Application of characteristics and functions of money to Bitcoin

Table of Contents

Abbreviations and Acronyms

List of Graphs

1.0 Introduction

2.0 Money
2.1 Definition of money
2.2 Characteristics of money
2.3 Functions of money
2.4 Key takeaways

3.0 Value of money
3.1 Subjective value of money
3.2 Objective value of money
3.3 Time tested value of money
3.4 Key takeaways

4.0 Private versus government money
4.1 Government money
4.2 Private money
4.3 Key takeaways

5.0 History of money and current developments
5.1 Golden age
5.2 Paper money (representative money)
5.3 Fiat money and current system
5.4 Key takeaways

6.0 Bitcoin
6.1 Basics of Bitcoin
6.2 Functions of cryptocurrencies
6.3 Value of cryptocurrencies

7.0 Conclusions

8.0 Bibliography

Appendix IV

Abbreviations and Acronyms

Abbildung in dieser Leseprobe nicht enthalten

List of Graphs

Graph 1: Aristotle's Good money

Graph 2: Segmentation of generations

Graph 3: Evolution of Money

Graph 4: Caroli's adoption real curves

Graph 5: All Data Gold Price in USD

Graph 6: Historical Home Prices

Graph 7: The money flower: a taxonomy of money

Graph 8: Cumulative count of Number of speeches CBDC

Graph 9: CBDC architectures

Graph 10: PBOC CBDC

Graph 11: Bitcoin holding in publicly traded companies

Graph 12: Crypto ATM Installations Growth

Graph 13: International reserve currencies since 1400

Graph 14: United States Balance of Trade 1950-2020

Graph 15: Bitcoin Pre-history Timeline

Graph 16: The Bitcoin Transaction Lifestyle

Graph 17: Distributed Ledger Technology

Graph 18: Size of the Blockchain from 2010 to 2020

Graph 19: Modeling Bitcoin Value with Scarcity

Graph 20: BTC Google Scholar Search Results (2016-2020)

Graph 21: CBDC Google Scholar Search Results (2016-2020)

Graph 22: Digital Currencies Google Scholar Search Results (2016-2020)

Graph 23: BTC Google Search Results (2016-2020)

Graph 24: CBDC Google Search Results (2016-2020)

Graph 25: Digital Currencies Search Results (2016-2020)

Graph 26: CBDC pyramid

Graph 27: Balance sheet asset composition

Graph 28: BTC search Results in BIS

Graph 29: BTC search results in JSTOR

1.0 Introduction

By publishing the whitepaper of Bitcoin in 2008, Satoshi Nakamoto started the story of Bitcoin which still needs to be determined (Nakamoto, 2008). It is not just a question whether Bitcoin works as promised to as “a peer-to-peer decentralized virtual currency” (Nakamoto, 2008, p.1). It is much more a question of it being accepted by people in general. The fact that various forms and definitions of money have existed throughout history, an approach to apply characteristics and functions of money to Bitcoin is needed, in order to clarify if it can be seen as an alternative form of money. However, due to the fact that sovereign states have already established rules and regulations in regards to currencies and money, the institutions will also assess how to essentially classify Bitcoin, as it is already too big to be ignored. The question is whether characteristics and functions of money can be applied to Bitcoin.

In order to show that there is a variety of different definitions of what Bitcoin is ought to be, two institutional stances on Bitcoin will be displayed. In 2013 for example the Financial Crimes Enforcement Network (FINCEN), which is a Department of the United States Treasury, classified virtual currencies (Bitcoin, etc.) like a currency, which does not have “all the attributes of a real currency”, as it is not legitimized by the government as a currency (FINCEN, 2013, p.1). Other institutions such as for example the Internal Revenue Services (IRS) in 2014 revealed guidance which treat virtual currencies for tax purposes (like e.g. Bitcoin) like property (IRS, 2014, p.2). It is therefore not really clear how institutions define Bitcoin, as one agency seems to classify it as a currency and the other like a property. This makes it even more difficult for the public to understand Bitcoin.

Additionally, politicians and bankers were not sure of what to make of Bitcoin and even wanted to outright ban it (Bambrough, 2019). Brad Sherman who is a U.S. Representative for California's 30th congressional district asked before the Subcommittee on monetary policy and trade of the Committee on Financial Services at the US House of Representatives to even ban Bitcoin as it is a threat to the US Dollar (Bambrough, 2019). Bitcoin being a potential threat to the US Dollar was even confirmed by Fink who is the CEO of Blackrock which is the largest global asset firm in the world (Fink, 2020). Moreover, banks as well its chairmen seemed to have feared Bitcoin as it might take some business away from them. Exemplary for this fear was Jamie Dimon, the chairman of America's largest bank JP Morgan, who called Bitcoin a fraud in September 2017, as he said that Bitcoin is related to criminal activities and will eventually even blow up (LaMonica, 2017). These concerns being stated by prominent bankers and politicians arguably discourages people to consider Bitcoin as an alternative form of money. However, since Bitcoin has emerged during the 08 financial crisis, it has developed for some people into an alternative form of money, as it ranked in the twelfth place amongst the national currencies in 2018 (Hazlett and Luther, 2019). Consequently, an examination whether Bitcoin can really be regarded as an alternative form of money is important.

This master thesis will assess “Why can Bitcoin be classified as an alternative form of money, and what indicators show that Bitcoin is to stay for the foreseeable future?”

The way of answering the question is to search for key characteristics and functions of money, before assessing these concepts against Bitcoin itself. This research into the question will mainly be done by analyzing qualitative research in the form of interviews, books, academic papers, central banks commentaries and surveys. Primary quantitative research will be partly conducted by analyzing google search results, google scholar search results, JSTOR search results and BIS database search results in regards to Bitcoin. This will be carried out in order to gather information, whether Bitcoin is a popular topic which is investigated by the public as well as academia. The reason why this approach is taken is to determine whether the trend of Bitcoin is rising or if Bitcoin has peaked in terms of the interest of the public. If the search results indicate a higher amount of publications, one can argue that Bitcoin is of interest to the public and academics. These trends therefore are indicative for Bitcoin being currently sought after by the public and academia.

The first chapter is called money. In order to analyze if Bitcoin is an alternative form of money, it is essential to consider what established monetary economists and institutions such as e.g. central banks as well as economists such as von Mises and Keynes wrote in regards to money. The assessment of the two main literary texts from von Mises and Keynes eventually led to the fact that characteristics and functions of money needed to be analyzed. In order to assess which characteristics money ought to have, this research will consider previous thoughts of history, current financial institutions and academic writers in regards to the characteristics and functions of money. It is important to understand what characteristics and functions of money were regarded as important in the past, as one can use the information in order to compare it to the current perception of what money is ought to be. Due to the fact that Aristotle is regarded as one of the most influential thinkers of Western society it is valuable to research what kind of characteristics money ought to have according to him (graph 1). Furthermore, current major financial institutions like the Federal Reserve Bank (FRB) or academic writers have also established characteristics and functions of money which are to be examined. Due to the change in times and the new technology Bitcoin possesses, it is important to consider current characteristics and functions of money and assess it against Bitcoin, in order to determine whether Bitcoin can be viewed as an alternative form of money.

In the chapter value of money one key determinant which von Mises as well as the Reserve Bank of Australia (RBA) pointed out is that the community essentially decides what money is. However, it is vital to highlight that money is only being used as such if it is deemed valuable. In this chapter therefore it will be determined how value is individually being defined, as von Mises argued that value is being attributed by individuals to objects (Mises, 1980). Consequently, it is first of all analyzed how subjective value can be construed and whether it can be applied to Bitcoin as an alternative form of money. This will be done via a segmentation of demographics in order to group individuals together (graph 2). Two key groups are the Millennials and Generation Z which make up 63% of the current population according to the UN (UN, 2019). The fact that 63% of the current population are comprised of Millennials and Generation Z shows that they will be the generations that have a major impact on what money is ought to be. Moreover, objective value will be closer analyzed in order to objectively analyse whether Bitcoin can be seen as an alternative form of money.

The following section is concerned about government and private money. Moreover, it will be shown what central banks have already planned in regards to central bank digital currencies (CBDCs) which might indicate, as Bitcoin is also a digital currency, that Bitcoin can also be an alternative form of money. Moreover, in this chapter it will be shown that private monies have existed in the past and therefore one should not outright reject the idea that Bitcoin can be classified as an alternative form of money.

Additionally, the following chapter specifically focuses on gold, fiat money as well as the history of money and its current system. Gold has so far historically been used as the predominant form of money and might therefore highlight attributes that are important for money to have. It is therefore one option to analyse whether Bitcoin even has the ability to provide a similar framework as gold could, as suggested by Ammous (Ammous, 2018). Furthermore, it is important to consider what the situation of the current financial system is, as problems in the financial system could be a precursor for the rise of a new form of money as alluded to above.

In the chapter of Bitcoin, Bitcoin's historical development will be portrayed in order to show that Bitcoin is not a completely new phenomenon which has sprung into existence out of nothing. The pre-history of Bitcoin will therefore show that various different concepts have been integrated into Bitcoin in order for it to be as it is now. In this regards one can see how various decisions regarding e-cash currencies have been made. Additionally, in the chapter of Bitcoin, Bitcoin will be compared to characteristics of money (durability, portability, divisibility and a store of value) (Aristotle, 1986 pp. 122-136) and functions of money (a) a unit of account b) medium of exchange c) store of value) (Hanawa, 1981, p.1). Furthermore, aspects about Bitcoin which can be useful in order to be determined as an alternative form of money will be pointed out. This chapter therefore is a way of analyzing which determinants in regards to the characteristics, functions and other aspects of money validates Bitcoin's classification as an alternative form of money.

Moreover, the chapter will display as much as possible information, which confirms the fact that the public, institutions and governments seem to accept Bitcoin as an alternative form of money. Key announcements will be gathered and taken into considerations whether Bitcoin can be an alternative form of money for the foreseeable future.

Finally, the conclusion will show whether Bitcoin is an alternative form of money, or not. Reasons for being optimistic that Bitcoin is an alternative form of money as well as potential shortcomings of Bitcoin will be highlighted. By and large, it will be shown whether Bitcoin can be classified as an alternative form of money and is most likely to remain an alternative form of money for the foreseeable future. However, the starting point of this thesis will be an assessment of what money actually is.

2.0 Money

“Throughout history and around the world, money has taken diverse forms - from cowrie shells, copper ingots, rum and gold in the past, through to colorful pieces of paper or polymer and digital bank records today.” (RBA, 2011, p.1)

It is first of all essential to give a very brief summary of the reasons for essentially having money. Macleod argued that there are two key facts that are important for the role of money. His first point is that a division of labor brings about more productive ways of producing a good, which in essence means, that if you specialise on a certain job that you are more likely to become an expert (Macleod, 2020). The second fact is that generally speaking individuals themselves prefer to be rather productive than not (Macleod, 2020). Mises describes this in a similar way, as he says that money essentially requires “an economic order in production is based on division of labor in which private property consists not only in goods of the first order (consumption goods), but also in goods of higher orders (production goods)” (Mises, 1980 p.41). One can clearly see that Mises puts the emphasis not only on the division of labor, but also on the fact that private property is important.

Another way of summarizing the development of money can be seen in the book by Schiff (Schiff and Schiff, 2010). The book also describes, how at the beginning, goods for goods were being traded, until it got to a point where some goods were plentiful and therefore not anymore needed immediately. The problem however was that some goods like fish for example would perish over a period of time. The problem of perishability therefore led to a natural search for an item, which was valued by most people in a community and which would not necessary perish quickly. Hence, money sprung into existence, which was a tool to exchange goods for goods. James describes money as being a central element in human relationships (James, 2018). Menger confirms this by stating that essentially humans have lived in communities in which they exchanged goods for goods basically forever (Menger, 2011). The problem however always arose, if one human being wanted to exchange one good for another directly, which the other human did not want or need. Consequently, the trade would not take place. It was therefore essential to have a good which was valued by most of the society in order to have an economy that would flourish. In different societies different items were valued, which resulted in different items being money.

Generally speaking, Sam has written a great article about the evolution of money in which he essentially explains the six stages of money (Sam, 2015). He argues that the evolution of money adapts to the economy (graph 3), as it has different needs and therefore money needs to adapt, too. The first initial phase he defined as barter, as explained by Macleod and Schiff. The second stage of money is classified by Sam, as commodity money, which is a form of money which is based on commodities. This is generally speaking needed by the population within a community. Due to the fact, that these objects are not needed at all times, it is inefficient to measure it as a store of value. Consequently, metallic money appeared, as it was valued by most people and could easily be measured specifically. The reason for it was that standardized coins could be formed which is therefore easily comparable and measured against another. However, it was difficult to carry these pieces of metals around throughout different regions, which as trade continued globally, led to the inefficiency of portability. This resulted into the creation of paper money which basically substituted the metals in a vault and was basically convertible into the metals. These paper instruments were essentially acting like the underlying metal. However, at times the convertibility was abandoned, which resulted in the lack of trust in paper money. The fifth stage was the so called credit money, which can basically be generated by banks via making loans to businesses or individuals. Deposits or money in checking accounts can easily be converted into money that is being used in day to day transactions. This so called credit money is mainly transferred nowadays into electronic money, as the speed is needed in today's society (Sam, 2015). Via the click of a bottom currency can be send via great distances at the speed of light. Having given a brief outline of money, it is now important to define money in more detail.

2.1 Definition of money

The RBA has clearly stated on their webpage that throughout history money has taken a variety of forms such as e.g. cowrie shells, copper ingots, rum, gold or even colorful pieces of paper to today with digital bank records (RBA, 2011). Another interesting form of money was the so called Rai stones, which were used on Yap Island, which is today a part of the Federated States of Micronesia (Ammous, 2018). These Rai stones were of a variety of sizes and large circular discs with a hole and weighed up to four tons (Ammous, 2018). These stones were admired by the Yapese, because of their beauty and rarity. A transfer would happen by one owner announcing, that his part of it was transferred to the person who exchanged something in return for this form of money (Ammous, 2018). The CPMI, which is a body of the BIS, defines money as an asset that can be transferred (BIS, 2015).

Furthermore, Maloney argues that “Throughout the ages many things have been currency. Livestock, grains, spices, shells, beads, and paper have all been forms of currency, but only two have been money. You guessed it: gold and silver.” (Maloney, 2008, p.3). At this point, the above mentioned quote, when researching the topic of money has been rather surprising, as generally speaking it is believed to be the case that the word currency can be interchangeably used with the word money. However, when researching this question further it was interesting to realize that the Federal Reserve Board via its website US Currency Education program defined currency as “Something that has value that can be exchanged for goods or services. Sometimes people use the word “money” instead.” (US Currency Education Program, 2020). The Solit Group however is adamant about the fact that there is one clear distinction between a currency and money. One substantial difference being, that money maintains its purchasing power over a long period of time (Solit Group, 2020). Kiyosaki argued that the word currency comes from current which already highlights that the currency is only a current form of money and needs to be exchanged and passed on (Maloney, 2008). The fact that a clear distinguishable definition of the words money and currency cannot be found on the Federal Reserve website arouses questions.

However, the Royal Bank of Australia also states that money does not essentially have to be valuable in itself, as paper banknotes could be used as money. However, they also warn about the fact, that if the money is not backed by some valuable good, than the money is really only backed by the trust of the community that is using it (RBA, 2011). But this trust can erode if the government prints too much of this money which would eventually lead to inflation, then high inflation and eventually into hyperinflation where the money becomes worthless, as e.g. in the late 2000's in Zimbabwe (RBA, 2011) It is interesting to note at this point, that the RBA states, that this has happened many times throughout history (RBA, 2011). This however can only happen, if the state is the sole issuer of currency and can create the currency without the actual physical backing of something valuable which according to Knapp is charlatism (Knapp, 2013).

The classical economic thinkers of Keynesianism and the Austrian School of Economics would describe money a little different. Keynes for example talks about money and uses two key terms (Keynes, 2011). For one there is the money of account, which at the end of the day expresses prices and general purchasing power. And then there is also a debt contract. He calls this the money of account the primary concept of a theory of money. He argues that money of account can only come into existence along with debts, which are according to him deferred payments or a debt contract (Keynes, 2011). He continues to state that the money of account is useful, as it is the purchasing power of the money in account and can discharge the debt contract (Keynes, 2011). He also believes that debts and prices must be stated in the money of account, and the money of account therefore is the medium of exchange which is conveniently used. One important fact is that money must be a link between the present and the future (Keynes, 2011).

Mises on the other hand describes money “neither as an abstract numeraire nor a standard of value” (Mises, 1998, p. 8422). He says it is necessarily an economic good which is appreciated by the community itself. The interesting point is that Mises constitutes money as an element of change as it fluctuates throughout time (Mises, 1998). Due to the fact that individuals know that changes occur constantly, they do believe in money, which according to their paradigm of the world, is the best form to keep, as they want to maintain their purchasing power (Mises, 1998).

The interesting point that this research found was that modern day economists such as James Turk has already defined money as a medium of communications in 2004 (Turk and Rubino, 2004). In the research conducted so far, this was the first time, that money was a medium of communications. However, Böhme et al also said that Bitcoin is an online communication protocol and therefore one can see that the concept might be not that seldom used (Boehme et al, 2015). One could have extrapolated the possibility of money being considered a form of communications, as it is a medium of exchange. However, Andreas Antonopoulos defined money as a language or a linguistic abstraction, which can be used to communicate value to each other (Antonopoulos, 2017, p.3). The concept of the way money is understood therefore has been challenged. One could argue that Andreas Antonopoulos's, without having an economic background, opinions might be disregarded. Nonetheless, one should consider his theory until it can be disproven.

However, on 6th April 2018, Saifedean Ammous an Assistant Professor of Economics at the Lebanese American University published the book “The Bitcoin Standard- the Decentralized Alternative to Central banking” (Ammous, 2018). This book was obviously frantically embraced by the Bitcoin community as finally an Assistant Professor of Economics stilled the cravings of cryptocurrencies being acknowledged by members of the academic society. The interesting part of the book is that Ammous tries to consider historical aspects about money and makes a case for Bitcoin as a valid form of money. He argues that money should not be easily produced as it otherwise loses its value. Furthermore, Ammous believes that money must solve the problem of sending economic value across time and space (Ammous, 2018, S.1). One can see how he relates a conceptual idea of Keynes, who as above mentioned that money is a link between the present and the future, and adds the layer of distance and space. He writes in his book that “In order to understand Bitcoin, one must first understand money, and to understand money, there is no alternative to the study of the function and history of money.” (Ammous, 2018, p.1).

2.2 Characteristics of money

As money and all its semblances such as e.g. fiat money has been used now for many civilizations, it is adequate to try to find out what the great philosopher Aristotle already believed money to be. In the Nicomachean Ethics book V, Aristotle basically defined money as having four key characteristics (Aristotle, 1986 pp. 122-136). The four characteristics of money are durability, portability, divisibility and a store of value. Durability means that money has to be able to be in a form which does not perish or decay. Portability means that money has to be easily carried from one place to another without any major effort. Additionally, money has to be easily divisible as one might not want to spend the whole amount but rather just a part of it. Moreover, the key point of money is that it has some store of value meaning it can preserve purchasing power over a long period of time. This basically means that one can buy the approximate same amount of goods now as well as in the future (graph 1). Aristotle discussed these issues already in the Nicomachean Ethics, as a just system, which is a key principle in order to have a foundation for trade. As money is a key aspect in every transaction in a society it has to be a just instrument, as otherwise one party would lose out. This already shows that money was not regarded as just one specific thing like for example shells, rice, fiat currency, gold, silver, salt or anything else. Money is in essence an item which everybody in a society appreciates and perceives to be valuable; which is the reason why many things can be classified as money as demonstrated above.

It is essential though to consider what characteristics other institutions regard essential for something to be classified as money. The FRB of St. Louis however believes that there are six characteristics money should have (FRB St. Louis, 2020).

The first key characteristic is durability which they describe, as the item needs to last a long time and should not be perishable. The FRB of St Louis describes the problem of having a cow classified as money. The limitations with the cow in essence are the life time of the cow, without even having considered that potential sicknesses which could occur.

Additionally, a cow could not run long distances in order to exchange it at the market place, which might not be local. This already indicates the second characteristic of portability. Long distances with a heavy object would be rather draining, whereas a 20 dollar bill easily fits in the back pocket and does not really require any strength.

Another key characteristic is divisibility which in essence means that a 20-dollar bill can easily be exchanged into smaller denominations such as e.g. 4x 5 Dollar bills or 2x 10-dollar bills (FRB St. Louis, 2020). It is obviously very hard to do this with an animal.

The next characteristic is uniformity which means that every bill is the same size, weight and value. Hence, living animals are not possible to be used as each cow for example has a different figure and different shape.

Another key characteristic is that money should have a limited supply (FRB St. Louis, 2020). One could also call this scarcity, as if something is very abundant, it cannot necessarily be valuable as everybody could have it. Many people would therefore spend their time on making the product that is being used as money, as they would want to enrich themselves. This oversupply of money would eventually lead to a loss of purchasing power and hence it would not be as valuable.

The last characteristic according to the FRB of St Louis is acceptability, which means that individuals have to have the same idea that the unit of money is worth holding (FRB St. Louis, 2020). Generally speaking one can agree that these basic characteristics have been accepted throughout history. This has also been confirmed by Hill as although the wording of the characteristics of money might differ, the meaning remains the same. Hill who works for the FRB of Philadelphia argues that the characteristics are divisibility, portability, acceptability, scarcity, durability and stability (Hill, 2013). Hazlett and Luther state that good money must have the characteristics of stability, durability, portability, divisibility, uniformity, etc. (Hazlett and Luther, 2019). Consequently, one can say that there are four key characteristics (durability, divisibility, portability and store of value) which all agree on.

2.3 Functions of money

“The functions of money as a transmitter of value through time and space may also be directly traced back to its function as medium of exchange” (Mises, 1980, p.47)

Research has shown that the most accepted functions of money are threefold. Hanawa writes in this regard that the functions of money are a) a unit of account b) medium of exchange c) store of value (Hanawa, 1981, p.1). This is also confirmed by Hazlett and Luther (Hazlett and Luther 2019, p. 14). However, it is vital to have a look at the functions central banks want money to have. Hill who works for the FRB of Philadelphia also comes up with the same three major functions (Hill, 2013). The first function is also the function of a medium of exchange, the second function is the store of value and the third function according to him is the unit of account (Hill, 2013). Having established what three key functions are widely accepted as money it is furthermore essential to analyze the three functions closer.

The first function is the so called function of a medium of exchange. In this regard it is important to go back to the point that there needs to be an economic order and division of labor which makes it essential to exchange goods in the first place, as already discussed in the chapter on money by Mises, Schiff and MacLeod (Mises, 1980, Schiff, 2010 and MacLeod, 2020). This might be a generally regarded as a logical premise.

The aspect of being a medium of exchange essentially means that money is a way of exchanging value for value. Rand has described this in her book in a very eloquent way, as she assigns Francisco d'Anconia to explain what function money essentially has (Rand, 1996). In the scene dAnconia asked what the root of money is and describes how it is merely a tool of exchange, which cannot even exist without men producing goods. Furthermore, he describes money to be a material shape of principle with which men want to trade with, in order to give value for value. Rand explicitly makes it clear by saying that money cannot be a tool by moochers or looters and therefore indicates that the form of money must be freely chosen by men (Rand, 1996). More specifically, Rand describes that money only comes into existence by men who are able to produce something and voluntarily exchange it for value (Rand, 1996). In order to accept the form of money, the money must have been made of an effort by men (Rand, 1996). The buyers and sellers of a product would only trade one for another, if both agents accept the value the product or money has in itself in accordance to their view on it (Hill, 2013)

The second key function which is to some extent already hinted at is the function of money being a store of value. Hill argues that people hold money in their pockets in order to exchange it for another good in the future (Hill, 2013). Dubey, Geanakoplos and Shubik argue for example that the higher the ratio of consumption in comparison to the service value is; the more appropriate is a commodity a store of value (Dubey, et al, 2003). The function of a store of value can also be described as a product which retains its purchasing power into the future. A prerequisite of money must be that its stability qualifies money to be a medium of exchange in order to be able to agree on deferred payment (MacLeod, 2020). The risks of the loss of purchasing power should be marginalized, as it is otherwise inappropriate for transactions that take place among the traders (MacLeod, 2020). MacLeod and Ammous also highlight the importance of time preference when engaging in an exchange (MacLeod, 2020 and Ammous, 2018). Time preference in essence means that different parties value the immediate possession of something different to the deferred possession (MacLeod, 2020). Money which stores value over time could therefore also be argued as a key incentive for people to trade with one another. In the absence of this key function of money, people would rather consume it immediately, rather than thinking about the future and would therefore have a high time preference (Ammous, 2018). The store of value function therefore seems to be a basic requirement in order for an economic transaction to take place in a community.

The third key function is the function of money being a unit of account. The function unit of account is essential, as it is important to measure and compare goods with one another (Hill, 2013). This is essential as it would otherwise not be possible to judge and account for the payment of goods and services (Hill, 2013). In 1966 Melitz already pointed out, that when discussing the unit of account that one has to make a clear distinction between money and the accounting prices (Melitz, 1966). He argues that if the money in itself would lose purchasing power; the unit of account would have to change in order to reflect the adequate value (Melitz, 1966). Consequently, he argues that money prices might remain the same, but accounting prices should move (Melitz, 1966). Doepke and Schneider conducted research in a similar field. In regards to the unit of account Doepke and Schneider came to three conclusions (Doepke and Schneider, 2017). First of all, when using money as a unit of account one has to analyze more specifically the context (Doepke and Schneider, 2017). In particular it is important in international finance to analyze the currencies and possible collateral, which needs to be put upfront in order to settle the trade (Doepke and Schneider, 2017). Secondly, it is vital to realize that it is difficult to change the unit of account in international trade, if a regime changes the unit of account of their currency. Thirdly, Doepke and Schneider argue that time series of historical changes of the currency's purchasing power could be used in order to help the agents, to ensure their trades are beneficial for both (Doepke and Schneider, 2017). The unit of account function of money is therefore very closely related to the function of store of value. It is not possible to reflect the unit of account, if the value of the currency does not remain the same according to Doepke and Schneider (Doepke and Schneider 2017). Consequently, in international trade one would to try to use the hardest currency available. Ammous defines unit of account as if the medium of exchange can be denominated into a certain price of the good (Ammous, 2019). He continues to argue that the more people use the medium of exchange the more acceptable and valid it becomes.

2.4 Key takeaways

There are several key important facts to take away. This chapter shows that money can have all sorts of forms, as several examples like e.g. Rai stones, shells, gold, silver etc. have already been used as money. It is therefore essential to remember that although Bitcoin might rather be an abstract concept, one should not dismiss it as money straight away. Additionally, von Mises as well as Aristotle both believed that the value of money is being construed by a community. Consequently, it is essential to analyze what a community and its people at the end of the day consider as money. Furthermore, Keynes as well as modern economists such as Ammous both agreed that money has to somehow be a link between the present and the future. It is therefore existential to consider what the current generation and future generations are defining money as. Additionally, it is essential to note that money must have the four characteristics durability, portability, divisibility and a store of value. It is important to know these in order to assess whether Bitcoin does have these characteristics. It is also vital to highlight the fifth characteristic called uniformity, as the concept of uniformity or fungibility might be an important aspect when considering Bitcoin as money. Last but not least, it is vital to remember the three functions of money (unit of account, medium of exchange and store of value) as these are established concepts against which Bitcoin needs to be assessed.

3.0 Value of money

In order to analyze the value of money it is first of all essential to define the term value in itself. This assessment might change the subject from an economic matter to a philosophical and psychological question. This might sound in the context of a master thesis in economics rather strange, but in ancient Greece the field of economics was rather just one part of philosophy, as philosophy was a field that analyzed every part of life (Thompson, 2006). In order to determine a definition of value it can be a good starting point to go back to ancient Greece and assess what the great thinkers thought about value. If one were to ask Socrates what he thought of value, he would most likely want to know whether we value the individual part as valuable or the totality and its functions. He famously convinced his students that he was beautiful, although he was not, by arguing that the functions of his parts of his body were very useful and therefore should be regarded as beautiful (Griffith, 1997). He therefore highlights the fact that value is dependent on how useful something is.

According to Perry value, in a rather generic sense, describes a certain consistency of what the individual likes or has a certain interest in (Perry, 1914). Perry continues to argue that an interest or bias towards something has a variety of different appearances; hence the interest and therefore the value of individuals differ. At a certain point in time we value a certain item which might differ at a later point (Perry, 1914). Other important elements in order to define value can be taken from Reid. Reid argues that value should be considered a relational adjective which creates some affective quality within an individual (Reid, 1931). The quality stimulates a psychological function within an individual; it also addresses the hedonistic urge within a human being that makes the object being admired. The author argues that it is an affective quality as in the first instance; it might just be an emotional response. However, in order to assess if something is valuable, it is also essential to add the function of thought. The combination of emotional feeling and logical analysis allows the individual to assess how valuable an object is as objectively as possible (Reid, 1931).

According to Macleod the term value is an often misunderstood term in society. MacLeod argues that it is mainly confused with the price itself (Macleod, 2020). He however regards value as a form of expression of an assessed preference between products and goods. It is therefore to some extent an analysis of the individual product and its advantages or disadvantages. Money however is the means whose main function is to guarantee the transfer of production into the needed desired consumption which ensures that individual scales of values are satisfied (MacLeod, 2020). He continues to explain that the price for the good being purchased is an expression of how much the product is valued by the buyer (MacLeod, 2020). It is therefore an expression of some objective value for a good, if the good is being freely bought and sold on the free market. However, in order to assess the value of money, it is essential to divide the value of money into two essential categories. These two categories are being called subjective and objective. The subjective opinion of money is the first to be discussed.

3.1 Subjective value of money

“But subjective valuation, which is the pivot of all economic activity, only arranges commodities in order of their significance; it does not measure this significance. And economic activity has no other basis than the value scales thus constructed by individuals.” (Mises, 1980, p. 52).

Mises therefore clearly shows how important the individual is in regards to the valuation process. Menger describes that the subjective value depends on many circumstances. First of all, he mentions three key aspects such as the time of sale, the given market and the specific economic conditions that are prevalent (Menger, 2007). He continues to argue that there are five other circumstances which are influential (Menger, 2007). The first circumstance is that it depends on the number of people who want a certain item as well as the extent of intensity they want the item at the time (Menger, 2007). The second circumstance is depending on the purchasing power the person has. The third circumstance depends on the available supply of the item compared to the amount wanted. The fourth circumstance depends on the possibility of dividing the item in question in order to fulfill the largest amount of people's desires. The fifth circumstance depends on the number and nature of the limitations imposed politically and socially on the market (Menger, 2007). All these circumstances essentially influence the subjective valuation of an item or money for this matter.

However, at this point it is essential to highlight that these circumstances would only be valid if rationality is the premise of this concept. Fergusson however argues that rationality should not always be presupposed when analyzing human behaviour (Fergusson, 2019). Fergusson argues that there are seven key aspects to consider when analyzing the human shortfalls in reality (Fergusson, 2019). The first shortfall of human beings is the so called availability bias, which essentially means that human beings only consider the knowledge they have in their memories rather than collecting data they really need. The second shortfall is called hindsight bias, which makes us put more thought onto higher probabilities after they have happened. The third problem is called induction which makes the individual create general rules based on insufficient information. The fourth shortfall is confirmation bias which actively makes humans search for evidence which supports the individual's opinion rather than trying to debunk currently held believes. The fifth shortfall is the contamination effect which essentially means that irrelevant information affects our decision making. The sixth shortfall is the heuristic affect which makes us believe our preconceived idea rather than conducting a cost benefit analysis. The final seventh shortfall is called bystander apathy which makes the individual not take individual responsibility if being in a crowd of people (Fergusson, 2019). It is in this instance important to mention that human being as well as economics is essentially a behaviour which can be classified as herd mentality (Spence, 2011).

Due to the fact that individuals generally speaking like being in herds this master thesis will use the approach Lee demonstrated in his speech in 2018 (Lee, 2018). Subjectivity will therefore try to be resembled within a group of people which most likely shares similar thoughts interests and behaviour. This thesis will focus on the current state of the population in 2020. It is essential to focus on the current demographic state as the outlook of this population determines what value is to them. This is an important concept to be understood as eventually the dominant group of people decide what the value of money is. The way the value is being expressed is by the people deciding what to invest in and what not. Value therefore is being expressed by the investment decisions of the current majority of people and its trend. It is irrelevant whether the value of the money is justified or not, as the investment decision into certain money is the key to determine the value of the money.

In order to establish some sort of subjectivity it is essential to try to categorize a group of people which has generally speaking a similar view on money and value. In marketing this process of categorizing groups of people is called segmentation (Brassington and Pettitt, 2003). There are various forms of segmentation as e.g. behaviour, demographic, geographic, and multivariable or lifestyle segmentation (Brassington and Pettitt, 2003). This thesis will focus on the demographic segmentation due to the fact that we live in a globalized Internet era where it is nowadays nearly irrelevant where you live in order to participate in the global markets. There are four main segments or categories of people which are called the silent generation (1928-1945), baby boomers (1945-1964), Generation X (1965- 1980) and the Millennials (1981- 1996) (graph 2).

The silent generation is the group of people born between 1928-1945, which is mainly influenced by WWII. Consequently, this generation concerns are uncertainty and unpredictability as they were influenced by the war (Adigiconsult, 2020). Their goal was likely to be rather safe than risk averse. The baby boomers are the group of people who were born between 1945-1964 (adigate GmbH, 2020). This generation was influenced by the World War and its consequences, however in contrast to the silent generation they have experienced positive economic growth. This might have led them to be taking more risks rather than the silent generation. Another characteristic of the baby boomers is that they are currently the majority of the pensioners who live amongst us (Bauer, 2009).

The next category is the Generation X which is born between 1965-1980. This is a generation which is not really influenced by wars as the previous two generations have been influenced by. This Generation X is more concerned about issues like climate change, environmental issues, living its individuality and work-life balance (Adigate, 2020). This generation is therefore more interested in ideological issues rather than potentially its appetite for wealth. However, this generation has seen financial crises, unemployment and an increase in divorces (Adigate, 2020).

The Millennials, or also called Generation Y, is the group of people who are born between 1981 and 1996. This generation is mainly concerned about having a job which they enjoy and rather than focus too much on the status and prestige. This generation has been influenced heavily by 9/11 and the financial crisis of 2008 (Adigate, 2020). The key difference in comparison to the other previous generations is that they are the so called digital natives. The term digital natives essentially classify a group of people who are growing up with a variety of different technologies (Helsper and Eynon, 2010). This group of people therefore has a major advantage over the older population as they might understand cryptocurrencies easier. However, it is important to also highlight that they are inclined to have youthful enthusiasm. This might result in their generation underestimating the risks they are baring when investing in cryptocurrencies (Richards, 2018).

The term digital natives however are not just exclusively used for the Millennials; it is even more adequate for the Generation Z which is the group of people who are born between 1997 - and now. This generation has never even known a life without technologies such as e.g. smartphones, kindles or I-pads etc... This generation therefore should be really called the digitals as they have breathed and lived digital technology. Facebook, Instagram and WhatsApp are products which cannot be considered living without. The average time spent on smartphones in the US has significantly increased from spending 10 minutes per day to three hours and fourty-nine minutes in 2020 according to a study by marketer (Wurmser, 2019). The time spent on smartphone usage has succeeded the time spent watching TV in 2019 for the first time (Wurmser, 2019). The Generation Z is also not focused too much on learning information by heart, as information is at all times readily available. This generation is also called smombies which is a mixture of smartphone and zombies. This group is constantly looking at their smartphones in order to not miss out on the latest news of their friends or family sharing something on Instagram, WhatsApp, Facebook or other media facilities. In order to assess what a group of people value it is essential to categorize the groups of people as carried out in this section.

However, by now having classified the group of people into the four categories silent generation, baby boomers, Millennials and Generation Z it is essential to analyse what each generation valued, values and possibly will value in the future. Lee argues in his presentation that each generation's prime income years peaks at the age 35 of the last individual being born in that generation. An example would be for the silent generation (1928-1945) that one would have to add 35 years to 1945 which would result in 1980. The year 1980 was therefore the peak of the silent generation's investment years and influence (Lee, 2018). It would be therefore a great idea to analyse whether a correlation between the peak of a certain asset class and the peak of income exist between the two.

The silent generation as already described was mainly influenced by the World Wars whether indirectly or directly. Consequently, this group of people generally speaking was rather not willing to risk anything and therefore they valued safety at a much higher level than possibly other generations. It is interesting to realize that in 1980 the gold price was at its peak of $850 in comparison to its $35 to $40 low nine years before (Grewe, 2019). Obviously, the gold price's peak might have had a variety of different factors, such as e.g. the Nixon shock 71, rampant inflation or for example the Vietnam War. It would therefore be rather inadequate to relate solely the peak income years of the silent generation to this fact. But it is certainly a logical attempt to try to make an assumption of what the silent generation valued. Gold obviously is one of the oldest forms of money in existence which has endured several crises throughout time (Bocker, 2010). Lee however argues that the peak of the gold price was not a coincidence as it perfectly matches the prime income years of the silent generation (Lee, 2018).

The next generation that could be interesting to analyze is the baby boomer generation which was born between 1945-1964. The baby boomer generation was still influenced by the wars but they were rather not vehemently influenced by it. They were rather influenced by an increase of economic activity. Consequently, this generation was most likely more risk averse and started therefore investing more in stocks rather than previous generations. However, in order to continue the idea of adding 35 years to the last born individual of the baby boomers one would have to come to the year 1999. The year 1999/2000 marked the year of the peak of the stock market. According to Poterba the 1990's were mainly driven by the idea of wealth creation throughout the US and Europe which resulted in a frenzy of rushing into stocks (Poterba, 2000). The baby boomers were mainly influenced by an economic boom as the war has destroyed most infrastructure and companies. There really was only a way up and therefore this generation was mainly concerned about the idea of wealth creation as Poterba suggested. The logical conclusion was an investment into stocks. The rise of the stock market in the US from 1995 to 2000 alone created approximately another two million households worth a million or more (Poterba, 2000). However, once again it is important to stress that there are certainly other factors that created the stock market boom rather than just coinciding with the peak income of the baby boomers.

The generation X were the group of people born between 1965-1980 who were mainly concerned about environmental issues, equality and their individuality. It seems like they were not as much concerned about the creation of value. If adding 35 years to the latest individual born of the generation X, it would result into the year 2015. In the year 2015 there does not seem to have been a major spike of any investment. The reason for that being possibly that the generation X was more concerned about individual self-actualization rather than focusing on the aspect of wealth creation.

The previous paragraphs have demonstrated what past generations have valued and what possible impact it had in their investments and perception of value. The following paragraphs will be focused deliberately on the Millennials and Generation Z as they will be the dominant force which decides what items they value and which not. An interesting aspect to consider could be the fact that the Millennials and the Generation Z are digital natives whereas the Generation Z could even be called Smombies as already highlighted above. Mourdoukoutas argues that Generation Z and the Millennials possess a unique set of skills, as they grew up with the Internet (Mourdoukoutas, 2018). To them sending money online across time and space is just natural and they most likely cannot perceive it any other way. To them therefore valuing technology is a rather natural evolution and not even considered to be risky (Mourdoukoutas, 2018). The reason why this is interesting is that there seems to be a clear shift underway towards a digital world. Lee argues in his presentation in 2018 that 77% of the stock's value in the stock market comprises of the FAANNG stocks, which are all stocks related to the digital space (Lee, 2018). These stocks are Facebook, Amazon, Apple, Netflix, NVidia and Alphabet. The reason why he regards this as crucial is that it shows a shift into a digital economy. Caroli showed an excellent graph regarding the technology adoption curve which shows that it can be rather fast and therefore it could be exemplary for the adoption of Bitcoin as money (graph 4). The reason why this is important is that the Millennials as well as the Generation Z are very affine to digital technology as they have basically grown up with it.

However, it is not only the case that the Generation Z and the Millennials are digital natives and therefore like digital technologies. On top of the fact that they like digital technologies 47% of Millennials in 2020 argue that they distrust banks over Bitcoin in comparison to 19% in 2017 (Tokenist, 2020). One can therefore clearly see that there is a change in perception of what money is meant to be. Obviously, there are still 53% that prefer banks over Bitcoin but the rise from 19% in 2017 is rather remarkable. Prof. Mourdoukoutas describes the reasons best why Millennials love cryptocurrencies by stating “Millennials love cryptocurrencies—for a couple of reasons. One of them is the technology behind them that promises to modernize capitalism, and free it from the tight control of big governments and big banks. The other reason is the potential cryptocurrencies have to make investors rich quickly, provided that they continue to rise at an astronomical pace.”(Mourdoukoutas, 2018, p. 1).

3.2 Objective value of money

"Value is a judgment economizing men make about the importance of the goods at their disposal for the maintenance of their lives and well-being. Hence value does not exist outside the consciousness of men." (Menger, 2007, p.122).

According to the different ways of looking at objective value one could use money immediately in order to possibly satisfy immediately physical needs. However, money can also have the function of saving towards a goal which can be obtained at a future date in time. Consequently, it is essential to keep in mind that money ideally needs to satisfy two objective valuations. One it has to be able to be exchanged immediately for something valuable. The second key point is that money needs to be valuable in the long term in order to meet the requirement of using the money to achieve long term goals. Objectively, money needs to be able to have value and be spent immediately as well as in the future.

In order to go into more detail of what the objective value of money is, it is important to determine the word objectivity. Davenport defines the word objective the following way “objective means based on measuring something which is real and can be tested free from any bias or preference” (Davenport, 1996, p. 295). However, it is nearly impossible to be objective due to the fact that even a documentation of any sorts is based on the history of the subject (Gross, 2009). Consequently, it is very difficult to determine what the objective value of money is. Psychologists are of the opinion that the most efficient form of analyzing something objectively is by empirical research based on behaviorism (Gross, 2009). It would therefore be a good starting point to analyse what value money has over time.

Due to the fact that the US Dollar is the world reserve currency it will be used as an exemplary guide. The US Dollar has been losing purchasing power over the last few decades. In order to exemplify the loss of purchasing power another two key statistics will underline this statement. The first example for the loss of the U.S. Dollars purchasing power is gold. In 1970 an ounce of gold cost $35 whereas now it costs $1900 (graph 5). Secondly, when analyzing the housing market in 1970 one can see that the median house price in the US cost $23,000 whereas in 2020 it would cost $278,621.25 (graph 6). It is therefore clear that the U.S. Dollar has been losing purchasing power over a long period of time. Obviously, one could also ask why the U.S. Dollar is that important for the entire monetary system. In order to fully understand the U.S. Dollar in the monetary system it is vital to see how it plays a dominant role. Once again history will be a good guide to understand the U.S. Dollar and its impact on the world.

However, there is also another way of analyzing objective value, as one could use parts of Ayn Rand's concept of objectivism (Dent, 2011). The concept of objectivism is essentially a full guide on how one should live on this planet and how one could come to the conclusion that something is objectively valued (Dent, 2011). According to Rand there are four key premises in order to reach objectivism (Dent, 2011). The first key premise is that reality essentially exists as an objective value as she describes that facts are facts and therefore they cannot be altered regardless of men's feelings. The second key premise is the fact that reason is a key concept as it is the only means of how human beings can understand reality. The third key premise is that human beings are an end to itself and do not exist in order for them being used for other individuals. The fourth key concept is that the ideal political-economic system is the laissez faire capitalism where the state has only a minor role to play in it (Dent, 2011). For this thesis only the first two key premises are at this point relevant. In order to assess if money has an objective value one could use the second premise of reason. The ability of man to think and perceive reality; man could decide whether something has value or not. One could therefore use the criteria utility as a form to determine that something has value or not. Reason and rationality could therefore help individuals to determine what item has which utility.

Another way of measuring rationally and objectively the value of money could be to use Bayes Theorem P(A | B) = —— where A and B are events andB(B) 0. Essentially, Bayes Theorem is mainly used when you do not really have enough information but one still has come to a conclusion (Covel, 2016). In short one creates a hypothesis at the beginning and then one tries to test it against subsequent events which is called indications and warnings (Covel, 2016). Basically this is called inverse probability which essentially means that one works backwards to test the hypothesis. One could therefore create all sorts of scenarios to test whether money has objectively value or not.

Another way of measuring whether money is objectively valuable could be to assess it by Menger's criteria of spatial and time limits (Menger, 2011). Menger's spatial limits of saleableness are mainly influenced by five circumstances. It is influenced by how much an item is wanted. Also it is influenced by how easy it is to transport the item or what costs are incurring when transporting the item. Additionally, it is important to determine to what extent the infrastructure in terms of transport is given. Furthermore, it is important to assess how the local market and its arbitrage opportunity are working. Finally, one has to assess how commercial inter­communication, interlocal and international trade is conducted. One can use these criteria in order to analyse how valuable money essentially is within this area of trade. However, Menger is not just concerned about the spatial attributes (Menger, 2011). He continues to analyse the time limits too. He therefore defines the saleableness as the following seven points 1) By permanence in the need of them (their independence of fluctuation in the same) 2) their durability, i.e. their suitableness for preservation 3) the cost of preserving and storing them 4) the rate of interest 5) the periodicity of a market for the same 6) the development of speculation and in particular time­bargains in connection with the same 7) the restrictions imposed politically and socially on their being transferred from one period of time to another.” (Menger, 2011, pp.16-17). These seven criteria are a tool which could be used in order to assess how valuable money objectively is. Due to Bitcoin's limited supply and its potential demand indicates that Bitcoin has a bright future. The rational human being could therefore assess the money one has and then figure out how it would perform when considering these seven criteria.

Another way of measuring objectively the value of money could be the consideration of the time value formula FV = PV x [ 1 + (i / n) ] (n x t) (Chen, 2020). The time value of money is a concept which argues that money now should be higher regarded as the identical amount of money in the future due to the fact that there should be an earning capacity (Chen, 2020). One could therefore assess whether the money you have is valuable in terms of its earning capacity. This is a concept which generally speaking throughout history might not have been significant, as it nearly always was the case that money would at least have an earning capacity in terms of interest. However, due to the current negative interest rates this form of earning capacity has been nearly eradicated. It is nonetheless still the case that one could receive earning capacities by having money, as it could be invested into something which gains value. The time value formula can to some extent also be called time preference as it also describes whether one would hold the money immediately or rather in the future (MacLeod, 2020). Time preference is mainly also associated by the earning capacity, however it could also be associated simply because one prefers holding the money because of its sheer desire (Ammous, 2018).

However, one interesting point, which was mentioned by Ammous, is a vital key characteristic money should have. He believes that two words stock and flow are essential. It is essential to analyse the amount of stock in existence, after deducting destroyed or used amount of the form of money (Ammous, 2018). Secondly, it is essential to analyze what the current flow is, which is being produced in a year. These two metrics can be together classed as the stock/flow ratio which essentially shows how much time it takes to produce the already existing supply. Ammous calls it hard money when it takes a long period of time to reproduce the above ground existing stock of the money currently in existence. On the other hand he calls it easy money which describes a process of producing the already existing above supply of the form of money within a short period of time. A typical example of the stock flow model has been published by Plan B (graph 19). It can be said that the stock/ flow model to some extent is being described as scarcity by others, but one could argue that scarcity is only one fact of a characteristic. Scarcity could easily be eradicated if a lot of stock can be generated in a short period of time and therefore scarcity would only have persisted over a short period of time. Consequently, the stock flow ratio is more precise than just calling an item scarce. The stock/flow ratio is a concept which favors Bitcoin due to its 21 million limited supply which cannot be extended (Ammous, 2018).

One final aspect to consider regarding the topic of subjective as well as objective value of money is Mises so called regression theorem (Mises, 1980). This so called regression theorem combines eventually subjective value and objective value to some extent into one theory. In essence Mises believes that through the subjective theory of value, objective value of money itself comes into existence (Mises, 1980). Hence, Mises argues that an individual who has a subjective view on what the marginal utility is, when selling a good for money, that one could conclude that it is the objective value of the money or the good (Mises, 1980). It is interesting that Mises combined subjective and objective value into one theory, as only the subjective valuation of an individual can in essence start a valuation process. Rand confirms this also as she said that men can only perceive through the consciousness of the own mind. The regression theorem seems to be valid as Mises basis the idea on Carl Menger's marginal utility which in essence dates back to the first exchanges of goods for value (Pickering, 2020). Some Austrian economists believe that something can only be valuable, if it has a use case. The interpretation of the regression theorem whether something can become money is only valid if it was a valuable commodity, then one would have to argue that Bitcoin cannot be money (Block, 2013). These economists would clearly argue that Bitcoin could not really be money as it has no use case in itself. However, Block points out if one were to interpret the regression theorem in terms of something of value than Bitcoin could be classified as money (Block, 2013). The reason why it can be argued in that case that Bitcoin is money, is the fact that some people clearly value Bitcoin as it rose in value over the years. Additionally, one could argue that Bitcoin's function is to be money. Consequently, Bitcoin has a use case and therefore does not contradict the regression theorem. The following part will analyse what form of money the oldest and most valuable is in the history of mankind.

3.3 Time tested value of money

“Gold and silver are the only substances, which have been, and continue to be, the universal currency of civilized nations. It is not necessary to remunerate the well-known properties which rendered them best fitted for a general medium of exchange. They were used ... from the earliest times... And when we see that nations, differing in language, religion, habits, and on almost every subject susceptible to doubt, have, during a period of near four thousand years, agreed in one respect; and that gold and silver have, uninterruptedly to this day, continued to be the universal currency of the commercial and civilized world, it may safely be inferred, that they have also found superior to any other substance in that permanency of value.” Albert Gallatin Longest- serving Treasury secretary (1801-1814) 1831 (Rickards, 2014, p.215)

The above quote in essence shows how important gold and silver have been throughout mankind's endeavors on the planet. The significant part, of the above quote, is the fact that humankind independently apart from each other has decided that gold and silver is regarded as one form of money. The reason why this is significant, as it could always be argued that a hegemonial power could have enforced their ideological believes onto its followers and therefore the valuation process would have rather been forced upon. However, due to the fact that the valuation process of gold and silver has independently happened shows that most tribes and nations have come to their own conclusions. One should not just consider the statement as being outright true as some 18 hegemonial influence could have happened in order for gold and silver being seen as the ultimate form of money. The following paragraphs will demonstrate how valid or invalid the above statement is.

In this regard it is interesting that gold and silver have already been used since 5000 BC in the form of jewelry by the Egyptians and continued to be used by Mesopotamia, Troy, Mycenea and Peru until 600 BC (Ancient History Encyclopedia, 2020). Turk and Rubino argued that the first gold coins were used in Lydia, which is currently in Turkey around 600 BC and were from then onwards also used by the Greeks, Persians and Romans (Turk and Rubino, 2011). Keynes also confirmed that the king of Lydia was the first one to struck coins which had a specific fineness of weight (Keynes, 2011). Additionally, he physically stamped the coins in order for the citizens to recognize it as being the official form of money (Keynes, 2011). From then onwards gold and silver coins were continued to be used as a form of money also by Julius Cesar in 46 BC, Constantine I in 312 CE, by the Byzantine emperor Anastasios from 491 AC,by Byzantine Emperor Nikephoros II of Phokas in 963 AC, by Mansa Musa I in 1324 AC, by Henry VIII in 1520 AC, by the Americans in the 18th century, by the world under the gold standard in 1880, by the entire world Bretton woods 1944, etc. (Ancient History Encyclopedia, 2020). The interesting point here to make is that most central banks around the world hold gold until now.

Mises wrote in his book the theory of money and credit that for thousands of years the choice of humans has always been going back and forth between gold and silver (Mises, 1980), which the above timeline clearly demonstrates. According to Keynes, Freud said that there are peculiar reasons which are deep in our sub-consciousness why gold satisfies our instincts and is a symbol for human beings (Keynes, 2011). Fergusson wrote the following regarding the Incas and their appreciation for gold and silver “Five hundred years ago, the most sophisticated society in South America, the Inca Empire, was also moneyless. The Incas appreciated the aesthetic qualities of rare metals. Gold was the sweat of the sun and silver the tears of the moon.” (Fergusson, 2019 p.20). The above mentioned quote shows how important gold and silver have been during the Inca Empire which seems to be just an example of how much gold and silver have been appreciated by human beings. One can clearly see that gold and silver have been appreciated by mankind throughout the ages and therefore it must have had to some extent some value.

Rickards believes that gold is to some extent unique as it is not a commodity which can be consumed in comparison to most other goods which makes it distinct (Rickards, 2014). Gold can mainly just be melted into a new form but it remains itself and cannot really be destroyed which makes it valuable as it lasts forever. Rickards describes that even economists such as e.g. Adam Smith and Karl Marx have classified most commodities as a tool which satisfied a variety of different needs for consumption such as e.g. oil, wheat, etc. (Rickards, 2014). They however still agree that gold is not really used for industrial usage but is rather appreciated by mankind as its store of value (Rickards, 2014). From a rational point of view, it is not surprising that gold and silver have value in one form or another as the characteristics of being abundant but also rare, not perishable, portable, divisible, fungible, store of value are important (Bocker, 2010). Most other commodities apart from the other precious metals do not have these characteristics and therefore cannot be classified as money or essentially have the ability to hold its value throughout time.

3.4 Key takeaways

The key aspects to take away from this chapter are the following. It is important to understand that essential any valuation starts with the value the subject or individual assigns to an object as Mises, Socrates, Menger and MacLeod argue. The valuation cannot exist by itself, but is rather attributed by the individual. It is in this context also important to state that the value can be rationally assessed like Menger did with his criteria of spatial and time concept. But it is also important to highlight that valuation can be assigned by emotions, which have the problem of human shortfalls as Fergusson described. Furthermore, one should remember that Menger's criteria of spatial and time limits can be a tool of how to assess Bitcoin objectively. However, it has been established that the two key generations (Generation Z and the Millennials) might have the biggest influence on determining what money might be in the future, as they are the predominant forces which shape the global society. It is therefore essential to seriously consider if these generations, due to the fact that they are the so called “digital natives”, consider digital money as the evolution of money. Moreover, future generations will be even more digitally focused as technology seems to only develop from here. This inclination can therefore be a major driver into the adoption of Bitcoin as an alternative form of money.

4.0 Private versus government money

“Governments, in contrast to all other organizations, do not obtain their revenue as payment for their services. Consequently, governments face an economic problem different from that of everyone else. Private individuals who want to acquire more goods and services from others must produce and sell more of what others want. Governments need only find some method of expropriating more goods without the owner's consent.” (Rothbard, 2010, p.49).

The above quote by Rothbard points out that the difference between government and private money mainly is the way how the accumulation process of money differs. Rothbard in essence describes that in order for private individuals to accumulate more money, the individuals have to produce something that others want. This idea in essence means that the individual has to think and produce something in order to accumulate money. According to Rand this motivation appeals to human beings highest quality, being mankind's ability to rationally think (Dent, 2011). However, the statement by Rothbard that government essentially just tries to find a method of how to expropriate more goods or money without the owner's consent should also be carefully examined. The government should also have the overall objective to ensure that it serves the people of the nation and therefore it wants to be regarded as fair and honorable. Consequently, it is essential to analyse what government money is and what the benefits are in comparison to private money which is solely regulated by the free market.

4.1 Government money

In order to discuss government money this thesis will display some examples of the past and government money at this moment in time. Going through the various types of government money that have ever existed throughout history would be rather irrelevant for this thesis, as the technological breakthroughs in regards to the Internet and Bitcoin have only incurred recently. Hence, many previous forms of government money would not be beneficial for an objective assessment whether bitcoin is money or not. A brief outlook of what central banks globally do in regards to digital currencies will also be highlighted.

As the concept of fiat money will be discussed in the following chapter in more detail, it is sufficient for now to describe fiat money as money which cannot be converted into something or be backed by a commodity (Meyer, 2001). It is essentially being declared by the government by decree as money (Meyer, 2001). In essence today most governments have central banks which coordinate the fiat money supply (Meyer, 2011), as history has shown that it could be difficult for politicians to resist the temptation of issuing more fiat money than actually adequate for a society.

Central banking is defined by Sechrest in the following way “Central banking is a nonmarket, centralized approach to monetary matters. A central bank is granted certain legal powers and privileges that are the means by which it attempts to manipulate selected macroeconomic measures. These measures most often are the rate of inflation, the rate of unemployment, various market interest rates, and Gross National Product (GNP)” (Sechrest, 1974, p.465). Sechrest continues to argue that the tool they have is the buying and selling of government securities, as well as its monopoly of deciding what the interest rate and reserve requirements should be (Secherest, 1974). Additionally, the central banks are granted a legal monopoly on the issuance of banknotes. Sechrest argues that central banking and legal tender laws go hand-in hand (Sechrest, 1974).

According to the Bank of International Settlement however, which is also called the central bank of central banks; central banks shall be granted autonomy in order to not be influenced by political interference (Moser-Boehm, 2006). However, it is essential to point out that although having been granted autonomy from governments the relationships between government and central banks are still to some extent intertwined (Moser-Boehme, 2006). According to Moser-Boehme there are a variety of cooperation central banks and governments have. For one the government and central banks appreciate each other's clarity of framework and each other's objectives. This is essential in order to achieve the overall goal of serving the people. The central banks and the government also try to coordinate monetary and fiscal policies in order to try to provide the best possible common outcome. Furthermore, the central banks as well as the governments coordinate in other areas too like e.g. in the legal arena in order to make laws effective. Additionally, the central bank is being regarded as an entity which provides a stable monetary environment in order for businesses to thrive. Moreover, the central banks and governments also work together to address macroeconomic challenges which might persist in low income countries for example. In particular a focus is being placed on the management of oil and resource revenues. These are just a variety of issues the central banks and governments work together (Moser-Boehme, 2006).

However, Central Banks obviously have their own objectives. The single most primary objective is to preserve price stability (Moser-Boehm, 2006). Consequently, central banks as for example the Federal Reserve, has been established in the United States. Central banks therefore should have an independent agenda in comparison to the governments. The central banks have had two predominant objectives to at least focus on price stability and employment when deciding on their policies (Meyer, 2011).

Due to the fact that the US Dollar is the world reserve currency it is adequate to assess what objectives the FRB of the USA has. The Federal Reserve Board according to its own website follows five key objectives (Federal Reserve Board, 2020). The first objective is that it conducts the national monetary policy in order to ensure maximum employment, stable prices and moderate long term interest rates. The second objective is to ensure stability throughout the financial system on a micro (USA) as well as on the macro level (world). The third objective is to ensure the safety and soundness of financial institutions and observe the financial system as a whole. The fourth objective is that they ensure that payments and settlements in the US Dollar are safely conducted through the services of the banking industries. Finally, the last official objective is to focus on the community. In order for the FED to follow this objective they analyze consumer trends, economic developments and change of law and regulations (Federal Reserve Board, 2020).

At this point it is interesting to define essentially what legal status the issuance of the central banks currency has. The European National Central banks state 'Euro notes and coins are for example the only official legal tender in the European Union according to § 3 chapter 1 sentence 1 of the coin issue law as well as § 14 I sentence of the Bank (Bundesministerium der Justiz und Verbraucherschutz, 2010). However, there are at this point already discussions in court about the validity of this statement as the TV and radio licenses might have to be paid via digital payment rather than in Euro notes and Euro coins.

According to the RBA legal tender is described as a form of payment which is legitimated by the legal system and can be used to pay and charge legally of debt (RBA, 2020). Banknotes are legal tender under the Reserve Bank Act 1959 and coins are legal tender under the Currency Act 1965. The system of money, where the currency of a country is not backed by a physical commodity (e.g. gold) but by a directive from a government that makes it legal, is called a ‘Fiat' system. (RBA, 2020).

In the USA however it seems to be even vaguer what the status of the legal tender really is. In the USA according to the coinage Act of 1965 specifically section 31 U.S.C. 5103 which is called legal tender it states the following: "United States coins and currency (including Federal reserve notes and circulating notes of FRBs and national banks) are legal tender for all debts, public charges, taxes, and dues." (US Department of the Treasury, 2011, p.1). This on the surface seems to be quite clear, as it clearly states that the United States money as identified above is identified as legal and valid offer of payment for debts to creditors (US Department of the Treasury, 2011, p.1). However, the section goes on to describe that there is no Federal statute that any business, organization or person must accept the currency or coins as for payment for goods and services (US Department of the Treasury, 2011, p.1). This therefore seems to be vague. Another issue at this point to note is under the coinage Act of 1965 it says “United states coins and currency (including Federal reserve notes and circulating notes of the FRBs and national banks)” (US Department of the Treasury, 2011, p.1). At this point it would be interesting to point out that there seems to be a difference between United States currency and the Federal Reserve Note currency. There are various entities in particular J.E. Griffin who wrote the book ”The Creatures of Jekkyl Island” in which he tries to demonstrate that the FRB is not really federal and is in control by a variety of private banks (Griffin, 2016). As the thesis is not concerned who is behind the FRB the research into this topic will be left as a mere indication of the issues the FRB might have.

Due to the fact that the US Dollar still holds the world reserve currency status it would be interesting to analyze the money supply of the US Dollar. According to the FRB the total money supply consists of cash, coins and bank accounts in circulation (FRB, 2015). This money supply is defined as an asset which is deemed to be a safe asset for households and businesses, in order to conduct payments or hold it to preserve the value for a short term. Greenspan argues that the preservation of value however is mainly dependent on the quantity of money being issued in relation to the demand for it (Greenspan, 2002). However, the key standards of measures of the money supply are three monetary aggregates being called M1, M2, and M3. M1 is classified as the currency held by the (nonbank) public and checkable deposits which are “checkable” standard and other checkable deposits. Salernno classifies these accounts also as “Now” accounts (Salerno, 2018). These accounts generally speaking pay interests on the amount you have deposited. The reason why they are called “Now” accounts is that the currency is available immediately rather than one having to wait for a specified amount of time to be transferred into a currency. It is therefore very liquid. The compilation of the M1 account is to determine how much currency is in circulation which is most likely being used for instant transactions (Salerno, 2018). This is also called by Salerno standard money (Salerno, 1987).

The second monetary aggregate (M2) includes M1 and adds “non-transaction accounts” which can generally speaking be classified the amount of money which customers save (Salerno, 2018). These so called “saving accounts” are basically liquid savings which can include small time deposits, certificates of deposits (CD's) of $100,000 or less (Salerno, 2018). These savings accounts can be easily withdrawn as no penalty is incurred when withdrawing this amount of money, as it generally does not have a maturity date (Salerno, 2018). The FRB uses M2 preferably because this monetary aggregate displays the most stable relationship with interest rates and the total amount of money spend within an economy. Consequently, in order to decide on monetary policies by the policymakers or leading economist this monetary aggregate is considered to be the most valuable (Salerno, 2018).

The third monetary aggregate called M3 is generally speaking the broadest base of money as it includes all assets which can be used as money (Herger, 2016). Issing describes M3 essentially as all money which can be used to pay off debt (Issing, 2011). Salernno describes M3 as large denomination time deposits such as e.g. CD's which are issued in excess of $100,000, which are bona fide time liabilities, as these cannot essentially be turned into cash as the issuing institution does not pay it out and until its maturity (Salerno, 1987) . One can already see that M3 is the money supply which is not as liquid as M2 and therefore the key measure of how to determine what the difference between the monetary aggregates is the liquidity. In most cases the items which are aggregated as in M3 as e.g. government bonds are traded by large institutions amongst themselves. These government bonds mainly have large denominations and therefore are unsuitable in day to day business transactions.

These government bonds can be a practical way of storing value rather than being the best medium of exchange. A classic example is the repo market (repurchase agreement). The repo market in essence is a process where government securities are being exchanged for cash in most cases overnight (Amadeo, 2020, a). The repo market therefore facilitates banks with short term cash injections in return for providing an asset which possesses a store of value. Government bonds therefore are a practical way of gaining cash in the short term. However, it should be noted at this point that the reliability of the overnight repo market can also be a cause for concern. Amadeo writes in his article that Lehman Brothers as well as Bear Sterns have heavily relied on the repo market to fill the short term liquidity gaps (Amadeo, 2020, a). The reason why most companies would rather want to hold other forms than cash currently is that cash does not generate revenue and therefore big institutions especially hedge funds rather rely on M3 products as they yield a higher interest than cash. However, the difficulty comes at the point where institutions stop trusting others as they believe the counterpart might be insolvent. At that moment the repo market stops as the institutions are not willing to accept M3 products in exchange for cash, as they do not know if the counterpart might have to declare bankruptcy. Consequently, companies like Bear Sterns and Lehman Brothers collapsed. It is therefore troubling to realize that the repo market already had massive problems in 2019 which resulted in the FRB interfering and injecting $500 billion in the repo market (Harper, 2020). However, as this thesis is not about the repo market this will not be further discussed, it was merely a way of demonstrating of how M3 products can be used in exchange for cash. In essence it shows that government bonds are a temporarily store of value which can be used to generate cash if the banks are willing to accept it from your institution.

However, as already indicated above Central Banks main function is to ensure financial stability which serves the citizens of the world themselves. Hence, Blinder argues that monetary policy is a field where only trained specialists can essentially make qualified decisions in the long run as politicians are too short sighted (Berman and McNamara, 1999). However, although having seen that the central banks are autonomous to politics the question nonetheless remains if this is really the case. Poast argues that if wars need to be financed, governments essentially receive the money for financing it from the central banks in form of government bonds and consequently the debt is gradually being inflated away (Poast, 2015). Hence, one should ask the question how independent the central banks really are. Another question one should ask whether the banks really serve Wall Street or Main Street?

O'Driscoll Jr writes in his article that the question also remains whether central banks are necessary, as the Canadian banking system weathered the Great Depression without having a central bank (O'Driscoll, 2010). He continues to argue that a modern financial system can also be developed without having a central bank (O'Driscoll, 2010). He argues that many critics see the Central Banks currently as an unelected fiscal authority, which randomly distributes money to the big banks. One example is the 08.12.2011 decision of the European Central Bank to issue the two longer-term refinancing operations, which resulted in a €489.2 billion loans to 523 credit institutions (ECB, 2012, a). The interesting part is that banks were being lent this amount of money for a zero interest rate, which some of them used to buy government bonds at an interest rate between 2-8%. Due to the fact that Mario Draghi said he will defend the Euro whatever it takes, it was a nearly zero risk trade. Most banks therefore bought government bonds at the high interest rate and eventually pocketed the spread between 0% being lent to them and the maximum of 8% which were guaranteed by the Greek government bonds. There was basically a zero percent risk involved for the banks as Draghi proclaimed he will defend the Euro.

Another fundamental problem with this kind of issue that banks receive the money first is the so called “Cantillon effect”. In essence the “Cantillon effect” describes the process that if monetary expansion is being conducted that the people “close to the money” reap its rewards (Thomas, 2012). As price inflation does not immediately occur, the banks or individuals who receive the money first can buy or invest in an asset class without it being inflated and therefore profit from it mostly. Hence, banks and the people closest to the newly issued money are the beneficiaries. Whereas, the “normal” citizens are eventually experiencing the price inflation, which was caused by the issuance of newly, printed or nowadays electronically issued money. The central banks additionally have the mandate to decide what the current interest rates should be and therefore decided that savings were basically receiving at zero percent interest, which made savings a rather unattractive investment.

One essential aspect of government money is however the faith and confidence in a government which eventually determines the success of government money. Although knowing that the central banks are autonomous from the government, due to the fact that they are supposed to coordinate their policies with the government, there is the potential of distrust. However, some citizens might not be aware of the autonomous status; and therefore the citizens perceive them to be one body. The trust therefore in the governmental entity is the crucial aspect of whether government money is successful or is being repudiated. The saying “as rich as coesus” goes back to the ancient king of Lydia who was very wealthy by ensuring the money and the trade was under control (Reardon, 2018). To him it was essential that he himself as well as his money maintained credibility (Reardon, 2018). If however a government continuously promises everybody all sorts of benefits and the citizens realize that the government debt continuously grows without ever being paid back and price inflation becomes rampant; the citizens eventually lose confidence in the money. However, this obviously would also be the case if private institutions issue money, but the difference is that the government has many branches and therefore can be tracked and evaluated on many different levels.

In order to highlight the current and recent developments in central banks policies, it is vital to point out that central banks have been discussing virtual currencies and developing digital currencies themselves. In 2012 the European Central Bank for example has been analyzing and discussing virtual currencies. The European Central Bank for example describes virtual currencies as an evolution from a conceptual point of view which has existential differences (ECB, 2012).

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