In macroeconomics, something is considered to be “money” if it serves three primary functions:
- Store of value. No one will hold onto a “money” that does not hold its value over time.
- Medium of exchange. In other words, it must be a _currency_ used to conduct day to day transactions.
- Unit of account. Money provides a standard for valuation and pricing of various goods and services.
For the average person, money is primarily the second function, meaning it is what they use on a day to day basis to purchase items they need. For an investor or trader, however, all three functions are important, about which I think most investors/traders would agree.
In particular for the crypto investor or trader, these three functions are likely becoming key drivers of demand and price for the largest cryptocurrencies as well as the entire crypto space. Further, I would argue that it is quite likely that one or more cryptocurrencies will become an actual “money”, whether individually or in combination, that fulfills the three functions above.
Furthermore, I believe that this shift to becoming “money” will have two quite significant results:
- It will be a once in a lifetime event that will yield equal or even greater returns than what has been seen thus far (but maybe not for the reasons one would think!).
- This shift will cause dramatic changes in the world economy as economic power is decentralized and moves away from the major financial centers onto the various blockchains and into the wallets of more people throughout the world, especially in the global south.
(Note: both of these results are beyond the scope of this somewhat limited analysis to discuss.)
In other words, the money-ization of cryptocurrencies will create dramatic economic and social changes, most of which will be good for the world as a whole.
Let’s take a look at the largest market cap cryptocurrencies to see if there are signs that the three functions of money have started to manifest in one or more of them.
Which cryptocurrencies should we include in our analysis? One thing that is immediately striking about the entire cryptocurrency market are the outsized market caps of Bitcoin (BTC) and Ethereum (ETH) at US$807 billion and US$385 billion respectively as of this writing. (Valuations from coinmarketcap.com) The total market cap of the next 7 cryptocurrencies combined barely equals that of ETH. Therefore, the only 2 worth noting at this time for this discussion are BTC and ETH as they are both approaching the market cap necessary to be within an order of magnitude of a fiat currency’s “money supply” figures.
Let’s look at function 1, Store of value. Many analysts in the cryptocurrency space acknowledge that BTC has become a store of value. For example, Ryan Selkis at Messari.io refers to BTC as “digital gold” (a common term used in the crypto world) in his annual report, even going so far as to mock the increasingly irrelevant Peter Schiff, an old-school gold bug who will likely be buried with his bars of gold. Given BTC’s price and the expense and slowness of transactions on the Bitcoin blockchain, its primary utility is increasingly as a store of value, inflation hedge, and, to some extent, a way to move large amounts of capital quickly and easily as compared to wire transfers and traditional banks.
While ETH does not (yet) function as a store of value, it can be argued that ETH is increasingly a medium of exchange (function 2) and unit of account (function 3), even if not in a conventional sense. While no cryptocurrency is being utilized as a “daily use” currency for buying groceries, gasoline, etc., over a broad geographic or political area, ETH is serving as a medium of exchange for transactions involving smart contracts deployed to the Ethereum blockchain or the various Layer 2 chains such as Polygon.
Transactions occurring as part of Ethereum smart contracts will be denominated in ETH (or an ERC20 token such as MATIC). Thus, ETH or a derivative token is both the medium of exchange as well as the unit of account for any smart contract transaction on Ethereum mainnet or any Layer 2. In addition, gas (fees) is be paid in ETH or an ERC20 token for these transactions. For anyone doing Defi involving Ethereum, which makes up the majority of Defi transactions across all blockchains, ETH serves the second and third essential functions of money.
If we look at another booming economic activity on blockchains, NFTs, we see the same occurring. While Solana has grown rapidly as a blockchain for minting NFTs, the majority of NFT transactions are conducted on Ethereum (and Layer 2's) and accounted for in ETH (ERC20 token). That said, no matter which crypto protocol is used, the entire NFT market (somewhat obviously) uses a cryptocurrency for the currency and unit of account.
Thus, we can see that the 2nd and 3rd functions of a money are being fulfilled in several areas of the cryptocurrency markets, primarily in those involving financial transactions.
In summary, while the cryptocurrency market has not reached a level at which a true money has emerged, we are clearly seeing evidence of all 3 functions of money being fulfilled by BTC and ETH. In addition, given the almost certain continued growth of the entire cryptocurrency space, it is only a matter of time before one or more cryptocurrencies fully become money.
When that happens, there will be a shift from talking about the USD price of a cryptocurrency to quoting the exchange rate of USD into, say, BTC as money. We just might see something like the following on a financial website in the next 5 years or less:
1 USD = 0.00000012 BTC (1 USD priced in BTC)
From there, it is only a matter of time before major world commodities (oil, iron, etc.) are priced in a cryptocurrency, an event that will have unknown but profound implications for the major financial centers of the world. For holders of the major cryptocurrencies, the price appreciation in terms of USD, EUR, and JPY will likely be another order of magnitude higher or more.