Digital Assets: Are They Money?

Let's talk about money.

A brief history of money from barter to bitcoin [1]

Money serves as a medium of exchange, a store of value, and a unit of account. The dollar excels as a medium of exchange (widely accepted globally) and unit of account. However, as a store of value, its performance is mixed: $1 in 2024 is equivalent to the purchasing power of $26 in 1914. This is why gold and other commodities are often used when inflation is a concern.

Historically, money started as barter, transitioned to valuable commodities, then to representative money, and finally to today’s fiat currency, which has value because a government says it does. Digital assets also have "no intrinsic value," similar to fiat currency like the dollar, which explains some of the skepticism from central banks.

Cash (physical money) is private and straightforward. Only the parties involved in a transaction know about it, the transaction can't be reversed without returning the cash, and the same cash can't be spent twice. Cash is essentially a permissionless, decentralized peer-to-peer technology. For instance, if someone gives you a $10 bill, the transaction is complete without intermediaries.

However, cash can't be used online. Enter digital money. Digital money requires a third party, like PayPal or a bank, to track account balances. Both you and your counterparty must have accounts with this third party to transfer money, which adjusts the account balances accordingly.

Digital assets, such as Bitcoin, have changed this by enabling the transfer of ownership without intermediaries. Transactions are confirmed through multiple updated ledgers, making online transfers more direct and secure.

[1] Bank of America