Understanding Money: How Its Essential Properties Define Value and Exchange

What makes something function as money? Most people think of coins and bills, but the deeper question reveals that money is actually defined by a specific set of characteristics. These money properties are what transform any object—whether gold, paper, or digital code—into a universally accepted medium of exchange. Understanding these properties is fundamental to grasping why money works and how it has evolved throughout history.

In our daily lives, we handle money without questioning its nature. We trade our labor for it, save it, and spend it without truly understanding what gives it value. Yet money is far more than just paper or metal. It is, at its core, a solution to one of humanity’s oldest economic problems: how to facilitate trade when direct exchange becomes impractical. The story of money is really the story of how societies discovered and refined a set of essential properties that allow any medium to function as money.

The Foundation: What Money Actually Is

Money serves three interconnected functions in any economy. First, it acts as a medium of exchange, allowing us to trade goods and services without requiring a perfect match of wants between two parties. Second, it functions as a unit of account, providing a common measure of value so we can compare different goods objectively. Third, it operates as a store of value, preserving wealth across time so we can accumulate resources and plan for the future.

But for something to successfully perform these three functions, it must possess certain fundamental characteristics. This is where money properties become essential. Societies throughout history didn’t consciously design these properties—rather, through free market experimentation, they naturally gravitated toward goods that possessed them. Gold ultimately became the world’s dominant monetary standard not because kings declared it, but because it naturally embodied the most useful combination of these properties.

The Six Essential Money Properties That Enable Exchange

For any item to serve as effective money, it must demonstrate six core characteristics that economists have recognized for centuries.

Durability means money must withstand repeated use without deteriorating. A good money can be passed from person to person, generation to generation, without losing its physical integrity or value. Gold satisfies this perfectly—it resists corrosion and decay. By contrast, milk or fresh produce cannot function as money because they perish quickly, rendering them useless for long-term wealth storage.

Portability ensures money can move easily between locations and people. While gold works reasonably well in small quantities, transporting large amounts across distances or borders becomes impractical, which is one reason paper currency and digital money emerged as improvements. Modern digital assets demonstrate exceptional portability—value can cross the globe in seconds.

Divisibility allows money to be broken into smaller units without losing value. A ten-dollar bill can become two five-dollar bills, maintaining total value. A cow cannot be divided meaningfully. This property enables transactions of any size, from tiny purchases to massive commercial deals.

Fungibility means each unit is perfectly interchangeable with every other unit. One dollar is always equivalent to another dollar; one ounce of gold equals another ounce. Without fungibility, disputes over which specific units are “better” would undermine money’s function as a common medium.

Scarcity—or what computer scientist Nick Szabo termed “unforgeable costliness”—means the supply is strictly limited. If money could be created infinitely at no cost, its value would collapse instantly. The harder something is to produce, the more reliable it becomes as a store of value. This is why historically scarce commodities like gold held monetary value for millennia.

Verifiability enables people to quickly confirm that money is genuine and acceptable. If counterfeiting were easy or widespread, money would lose credibility and get rejected. Sound money must be easy to recognize and extremely difficult to fake.

These six money properties work together. Scarcity combined with durability enables value storage. Portability and divisibility facilitate exchange. Fungibility and verifiability ensure trust. Without all six, something may function temporarily as money, but eventually it fails because it cannot satisfy all three functions simultaneously.

Why These Properties Matter More Than Ever

The importance of money properties becomes clear when examining history’s monetary failures. The government-monopolized currencies of the 20th century, particularly after 1971 when the gold standard was abandoned, gradually lost their scarcity property. Central banks could print at will, causing inflation and currency devaluation. Without the scarcity anchor, the store-of-value function deteriorated, damaging people’s ability to build multi-generational wealth.

Different economic schools of thought understood money differently, but the Austrian school of economics—founded by Carl Menger—made a crucial observation: the most salable good naturally becomes money. This “salability” flows directly from possessing strong money properties. Karl Marx examined money through his labor theory of value, but even his analysis pointed to the same conclusion: money’s acceptance depends on it embodying useful characteristics that society recognizes.

When money lacks essential properties, it fails at its functions. A currency that cannot be easily divided creates friction in commerce. Money that cannot be easily verified gets counterfeited and rejected. Money that lacks scarcity loses its store-of-value function and eventually gets abandoned.

How Money’s Functions Connect to Its Properties

The three functions of money are not separate from its properties—they emerge from them. Because gold is durable and scarce, it became an excellent store of value, enabling the store-of-value function. Because gold is divisible, portable, and fungible, it could function as a medium of exchange. Because gold retained consistent value over time, merchants could price goods in it, enabling the unit-of-account function.

Andreas Antonopoulos, a prominent Bitcoin educator, identified a troubling modern phenomenon: money has been weaponized as a system of control. When governments monopolize money issuance and manipulate its properties, they can restrict who trades with whom, censor transactions, and enforce political compliance through financial means. This corruption of money’s properties—particularly scarcity and censorship resistance—ultimately undermines all three core functions.

Sound money, by contrast, is money whose properties cannot be manipulated by any single entity. Its scarcity is mathematically enforced rather than dependent on government restraint. Its verifiability is built into its system. Its portability cannot be blocked. These money properties are what distinguish sound money from unsound money.

Modern Evolution: New Properties for the Digital Age

Digital technology introduced three additional money properties that extend the original six: established history (based on the Lindy effect—the longer something survives, the more likely it will continue surviving), censorship resistance (ensuring no centralized authority can block or confiscate), and programmability (allowing automated conditions and behaviors through code).

Bitcoin represents the first currency designed around all nine properties—the original six that made gold valuable, enhanced with the three digital-age properties that address modern concerns. Bitcoin’s code enforces scarcity (limited to 21 million coins), making it verifiable and mathematically sound. Its distributed network provides censorship resistance. Its digital nature enables unprecedented portability. Its programmability allows complex economic activity without intermediaries.

This is why Bitcoin is often described as “peer-to-peer electronic cash.” Satoshi Nakamoto solved a technical problem—how to create digital money without requiring trust in a central authority—by building a system where the money properties themselves are enforced by mathematics and network consensus rather than government mandate or corporate policy.

The Historical Trajectory of Money Properties

Throughout history, societies have chosen monetary media based on how well they embodied money properties. Different civilizations used glass beads, shells (wampum), metals, and paper, always gravitating toward whatever best satisfied the six core properties in their context. The gold standard emerged as the global norm precisely because gold optimized these properties better than alternatives.

The fiat era, beginning in 1971, represented a departure from this logic. Instead of selecting money based on its properties, governments simply declared paper money valuable through legal authority. This worked temporarily because the paper could be exchanged for gold, inheriting gold’s property advantages. But once that connection severed, fiat money was forced to rely solely on scarcity promises that governments repeatedly broke.

The progression is clear: commodity money (gold) → redeemable paper money → fiat money → digital money with encoded scarcity. Each transition attempted to preserve or improve certain money properties while sacrificing others. Gold was scarce and durable but not highly portable. Paper money was portable but sacrificed scarcity assurance. Digital fiat is portable but remains vulnerable to inflation. Bitcoin attempts to preserve all properties while optimizing for the digital age.

Why Money Properties Will Continue Shaping Financial Future

The choice of monetary system ultimately reflects which properties a society prioritizes. The 20th century prioritized government control at the expense of scarcity and soundness. Wealth was transferred from savers to borrowers through inflation. The long-term consequences included reduced individual economic sovereignty and generational wealth decline.

As individuals recognize that their money lacks critical properties—particularly scarcity, verifiable supply limits, and censorship resistance—demand for alternatives increases. Bitcoin and similar systems that explicitly embed these money properties into their design offer a different path. Whether through technological innovation or renewed interest in commodity backing, the future of money will likely involve a renewed focus on these properties.

The emergence of alternative monetary systems should be understood not as replacement of all existing money, but as a broader recognition of an ancient principle: money that best embodies the fundamental properties will be the money people prefer to use. Market participants, given the choice, naturally select the monetary medium that most reliably performs the three core functions. And that selection is ultimately determined by which candidate possesses the strongest money properties.

This principle has remained true for thousands of years and will likely continue determining monetary competition in the future. Understanding these properties is therefore not merely academic—it’s essential for anyone seeking to comprehend why financial systems succeed or fail and how to preserve value across time.