What is Money? - Bittr Academy

Money sits behind almost every decision we make: from a morning coffee to financing a company. It works as a means of exchange, a price yardstick, and a savings tool. Not all “types of money” are equally good at these jobs. We use money every day, yet many people don’t know what makes good money, which traits matter, and how money has evolved. Politics and network effects also shape which money we end up using.

The three core functions money should fulfill

Medium of exchange: Trade without bartering: Money sits in the middle instead of swapping goods directly.
Unit of account: A common unit makes prices comparable.
Store of value: Savings should hold purchasing power over time.

Traits of sound money

Several objective properties determine how well something works as money:
Fungible: Each unit is interchangeable with any other.
Durable: It doesn’t spoil or fall apart.
Portable: Easy to move or transfer.
Verifiable: Authenticity is easy to check.
Divisible: Works for both tiny and large amounts.
Limited: Scarcity keeps the system fair because no party can mint new units at will. Euro and US dollar score well on portability, divisibility, and durability, but they fall short on scarcity: the supply can be expanded for policy reasons. That helps short-term economic management, but weakens them as long-term stores of value. Purchasing power erodes over time.

Gold shines on scarcity and durability, so it’s a solid store of value. But for day-to-day payments it’s impractical: heavy, awkward, hard to split into tiny pieces.

Three forms of money

Fiat money: Today’s national currencies (dollar, euro, yen) aren’t tied to a commodity. Their value comes from legal recognition and broad acceptance. They tend to inflate and are poor for long-term saving.
Commodity money (gold as money): Gold itself serves as the medium of exchange—coins or bars change hands directly. Pros: high durability and natural scarcity. Cons: bulky and costly to transport, slow to settle over distance, everyday authenticity checks are cumbersome, and tiny payments are impractical. In short: strong for preserving value, clumsy for daily payments.
Gold standard (gold-backed currency): Paper or account money that promises a fixed claim on a set amount of gold. You pay conveniently with notes or transfers while the issuer (state/central bank) guarantees redemption in gold behind the scenes. Pros: everyday usability and fast payments with nominal scarcity discipline. Risks: convertibility can be suspended or the peg adjusted, political interventions and bank runs are possible. Historically, gold pegs were loosened or abandoned in crises.
Bitcoin (digital scarcity): Since 2009, a purely digital, decentralized form of money with a hard cap of 21 million units. No institution controls issuance; the rules are embedded in the protocol. Bitcoin isn’t backed by a physical good—the scarcity is enforced in code. It’s a strong store of value and also works well as a payment system.

Why money is economically essential

Trade and specialization: A common medium of exchange simplifies commerce, enables division of labor, and boosts productivity.

Prices send signals: Prices reflect supply and demand. Firms plan investments and households plan spending. Resources get allocated more efficiently.

Credit and growth: Reliable money underpins healthy credit markets (loans, mortgages, working capital).

Stability and society: Predictable purchasing power encourages saving, investing, and long-term projects. Inflation does the opposite: it erodes trust and fosters short erm thinking.

Network effects matter even more for money

Money becomes more useful as more people accept it. A widely used currency cuts exchange costs and coordination headaches. That often creates a “winner-takes-most” dynamic: once a currency becomes the standard, it’s hard to displace. New challengers need clear advantages (e.g., better long-term value preservation) before they reach critical mass.

Unlike other technologies, you can’t spread the same purchasing power across multiple “networks” at once. You can use several social media platforms in parallel, but you can’t hold the exact same funds in Bitcoin and an alternative at the same time.

Network effects would favor a single global unit, but in practice, national borders get in the way. Governments manage their currencies (interest rates, money supply) to steer the economy and budgets, and they mandate use of the local unit.

Money is always changing

History shows dominant forms of money can be replaced. Fiat money is surprisingly young: for millennia, people used commodity and metal money (salt, silver, gold), and even modern currencies were tied to gold for a long time. The Bretton Woods system only ended in 1971. Since then, the dollar—and today the euro as well—rests purely on state credibility and monetary policy. Because most of us grew up in this post-1971 world, fiat feels like the “natural” standard.

Can fiat money be replaced?

In principle, yes. A new form of money must be stable and trustworthy and ideally censorship-resistant and apolitical. If it can combine store of value and medium of exchange, its appeal rises sharply. The catch is the network effect: without enough users, no system wins. Once a challenger reaches a tipping point, adoption can accelerate very quickly.

In a connected world, a decentralized digital money has no real geographic limits. As internet access spreads, such money could gain a global foothold and play a major role both as a savings vehicle and as a medium of exchange.

Final thoughts

Good money is scarce, divisible, verifiable, durable, fungible, and portable.
Network effects and politics define what we use day to day; standards are hard to dislodge.
Replacements happen when an alternative offers clear benefits and reaches enough users.