**The following article was written by Kristoffer Mousten Hansen and Karras Lambert and published on September 28, 2022. Cryptocurrency as Money — Store of Value or Medium of Exchange? It was originally published by mises.org. The opinions expressed in this article are the authors’ own. Bitcoin.com does not endorse or take responsibility for the opinions, content or quality of any op-ed.**
The Austrian school is often admired by cryptocurrency users. Because Austrian economists always believed in private money being better than government-controlled, this is understandable. Unfortunately, an erroneous understanding of the development and functions of money has emerged and become increasingly dominant among at least some proponents of bitcoin — a narrative that is at odds with the basics of Austrian monetary theory.
In this view, which can perhaps be traced to Nick Szabo’s essay emphasizing collectibles, the primary and predominant function of money is as a “store of value,” or this function is on par with the medium-of-exchange function. According to this view, a commodity must first “transmit value” over time. This can be then used as a medium for exchange, before it becomes a unit in an account.
The account reverses the function and emergence of money. It is a means of exchanging money. Its status as a “store of value” (more on this phrase below) is incidental, while the function of unit of account is nonessential, as there have been many money commodities throughout history that were never used as units of account.
The Austrian tradition, from Carl Menger to Ludwig von Mises and Murray Rothbard, has always insisted that money is in essence a medium of exchange, with any other so-called functions being incidental and, in the case of “store of value,” metaphorical. This is how we will explain it.
The Value of Your Assets
We must first examine the theory of value in order to fully understand the nature and function of money. Austrians always stressed the subjective nature value. Value isn’t something inherent to goods, but it is always dependent on the individual acting and his choices. The act of choosing to value an object is the moment when he prefers it to others. An object can be valued either for its usefulness in directly achieving the acting individual’s end (as a consumer good), for aiding the production of consumer goods (as a producer good), or as a medium of exchange.
Value is subjective and can only be meaningful when it is used in the context of a particular situation. Subjective value cannot be transmitted across time, and therefore there is no such thing as a “store of value” in a literal sense. While a thing can be kept for later use it cannot be stored with the same integrity as its original physical form. However, the fundamental role of subjective value in the creation and maintenance of exchange rates (i.e. prices) is still played by market participants at all times.
The exchange is always made when both parties are more interested in what the other has than they are willing to give up. Most exchanges in a monetary economy are between non-money goods or services. However, the reverse preference ranking principle holds: The seller prefers the amount of money to buy the good, while the buyer prefers that the good outweighs the money he has to give up.
An integrated market price system is created in a society that has repeatedly exchanged goods and services. A thing’s market price is then the same as its market value. To call something a “store of value” is really a way to say that its market value is expected to remain the same or increase over time. There is a difference between money, and money can’t be expressed in one price. The market value for money must be expressed at a range of prices. This is how money’s purchasing power can be expressed. We refer to money as a store value. This means that we assume it will have an increasing or stable purchasing power relative to other goods.
A key argument of the “store of value” proponents is that money is the good that best served as a store of value and therefore gradually emerged as the most common medium of exchange. This idea has very little to do with Menger’s account of the origin of money. This isn’t the best way to store value, but it can be the most valuable good.
The movement from direct to indirect exchange develops as market actors discover that goods differ in how widely demanded they are and begin to exchange their goods for more widely demanded — more marketable — goods instead of engaging in direct barter. A small number of products gradually becomes the most dominant means for exchanging goods. This is due to their unique characteristics: high price per unit weight/volume; divisibility; durability; transportability. The most appropriate commodities for this purpose were the precious metals, which were then used to make money up until the twenty-first century.
Notice that there’s been no mention of money being a store of value in this discussion of Menger’s theory of money so far. He actually argued explicitly that it wasn’t right to attribute money qua money to the function of store value.
But the notion that attributes to money as such the function of also transferring ‘values’ from the present into the future must be designated as erroneous. While metallic money is certainly suitable because it has a long life span and is easy to preserve, other commodities may be better suited. Indeed, experience teaches that wherever less easily preserved goods rather than the precious metals have attained money-character, they ordinarily serve for purposes of circulation, but not for the preservation of ‘values.’
The fact that monetary metals can also be good store of value is an accident. It is not necessary to their monetary function. A commodity’s “store of value” qualities are also likely to make it an exchangeable medium. Thus, durability is important for any monetary commodity, and it is obviously essential for anything to be a “store of value” for any length of time.
In fact, as Mises explained, the function of store of value, insofar as it can be said to exist for a certain money commodity, is embedded in the commodity’s primary function as a medium of exchange: “Money is the thing which serves as the generally accepted and commonly used medium of exchange. That is the only function of money. All the other functions which people ascribe to money are merely particular aspects of its primary and sole function, that of a medium of exchange.”
We need not get into a deeper discussion of the demand for money — it is obvious, as Mises goes on to mention in the chapter just cited, that people keep a reserve of money, and that all money is always held by someone somewhere. This too, however, does not indicate that money necessarily serves as a “store of value.” As William H. Hutt explained in a classic article (later elaborated by Hans-Hermann Hoppe), money’s use in a person’s cash balance is as a reserve of purchasing power against unforeseen contingencies.
Cash is kept in reserve for emergency situations and to take advantage of unanticipated profitable opportunities. But even bad money — i.e., money declining in purchasing power and which therefore cannot meaningfully be said to be a “store of value” — serves this purpose. It is simply holding onto money until such a time in uncertain times that it can be exchanged for something of greater value.
Bitcoin enthusiasts who align with the Austrian school of Menger, Mises, and Rothbard err when they ascribe fundamental importance to the “store of value” function of money at the expense of the “medium of exchange” function, the latter of which is the only essential aspect of money. Likewise, downplaying the importance of active usage of cryptocurrency, which also entails increased business demand, in favor of a “HODL forever” mentality, goes against Mises’s recognition that “business usage alone can transform a commodity into a common medium of exchange.”
How do you feel about crypto as money, the debate between medium-of exchange and common store-of value? Please leave your comments below.
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