What Does it Mean for Money to be Hard?
and why it is important for your bank account
Upon the request of one of my readers, I recently went on a quest to find a cryptocurrency that was “harder” than bitcoin. I aimed to be unbiased in my search, and evaluate cryptocurrencies along dimensions that would add to their monetary hardness.
I did not find one that beats the hardness of bitcoin.
So what exactly does it mean for a money to be hard? Why does this even matter for your bank account? Well, it could end up impacting your investment decisions which in turn affects your ability to retain your earned wealth.
Thank you to the individual that reached out and inspired this topic and letter.
Monetary Hardness
As Ben Kaufman points out in his article Bending Bitcoin — The Principle of Hard Money, the exact definition of hard money is difficult to pin down. The definition differs depending on which school of economics you subscribe to, and when (historically) you’re asking the question.
For the sake of this letter, I will use the following definition which I believe to be an appropriate approximation and amalgamation of definitions shared by economists.
Monetary Hardness — Referring to the ability of a specific money to resist alterations in its total supply and monetary policy.
All other definitions can essentially be derived from the definition I’ve laid out above. You’ll see other definitions point to money’s property of being a store of value. But a careful analysis will tell you that a potent store of value comes down to 3 things.
The money having a limited supply
The money being accepted by a critical mass of people/users
The money resisting changes to its monetary policy
A money having a limited supply doesn’t matter at all if the monetary policy can change at a moment’s notice. Thats why I’ve opted to declare monetary hardness as the ability to resist changes in both the policy, and the supply.
Is Dogecoin Hard Money?
Take Dogecoin for example. Upon my search for a money harder than bitcoin, Dogecoin actually appeared higher in my list. This is because Dogecoin issues a constant number of new coins per block.
Every minute, 10,000 new DOGE enter circulation. So while new coins are always being issued, the inflation rate is constantly decreasing. Put another way the ratio between new coins being issued and the total supply of dogecoin is constantly decreasing and approaches (but never reaches) zero.
When thought about it this way, dogecoin actually becomes harder and harder over time. That is, as long as its monetary policy doesn’t change.
Dogecoin’s monetary policy is secured through proof of work mining, which I believe to be the most effective at achieving consensus. Although, I don’t think that the Dogecoin network is currently at a place wherein it is unable to withstand a 51% attack.
So while I wouldn’t say Dogecoin is hard money now, I would say that it becomes progressively harder money over time contingent upon two things.
The strength of the network enforcing a static monetary policy increases
The number of people using Dogecoin as a SoV, MoE, and UoA increases
The likelihood of both of these things happening in my mind is rather low.
What does this mean for your bank account?
Free market actors will select the best vehicle for transporting their wealth across space and time. Put simply, people will generally buy the thing that best stores the value they’ve earned through their labour, or investment. While this is ultimately dependent on the financial literacy of the individual, the masses follow the minority.
25% of a population is needed to affect social change — Damon Centola
With 2.5% of the population using or holding bitcoin, we are about 10% of the way to the 25% mark needed to prompt the majority to change their primary method for storing value. What are people currently using to store value?
Current Stores of Value
Historically money was the primary means for storing value. Now our government-issued fiat has failed as a store of value and is primarily used as a medium of exchange and unit of account.
People are turning to real estate, land, and equities (ignoring PE ratios) instead of storing value in money. If a money fails to be an effective store of value, it becomes softer and softer over time. I surmise that the trend of money softening is having a two pronged effect.
It is artificially inflating the price of assets (including bitcoin)
It is increasing demand for an effective and permanent store of value
Those who are using it as a store of value are diminishing their savings on a year over year basis. While I understand that you may not be ready to allocate a significant chunk of your portfolio to something like bitcoin, I urge you to stop saving in fiat money.
My Hypothesis for the Future
My hypothesis is that within our lifetime, our currencies will collapse underneath the weight of the institutions running them. Asset prices will need to be repriced.
I’m making a bet that a statistically significant chunk of the population (as close to 25% as possible) will choose to reprice assets in bitcoin. Shortly after this economic event, there will be a mad scramble to accumulate the hardest form of money. Not hard assets. Hard money.
Front Run the Big Players
For the first time in history the “little players” have an opportunity to front run Wall Street and nations. Make no mistake, these players have an advantage on all little players. You can bet that they have…
More capital
More ability to move their capital quickly
More ability to create and make money to buy the hardest asset
But what they don’t have is the understanding that their demise is inevitable. This lack of understanding is leading to delayed action. Unless we’re living in a time wherein our nation’s monetary rules do not abide by the same rules that all currencies in the past have, a collapse will happen.
The question is,
How will you navigate this impending crash, repricing, and flight into hard money?
During my analysis of other coins and tokens, I made a matrix of over a dozen select number of coins and rated them along the 6 properties of money as well as security and decentralization. You can view and comment on that sheet here.
Regards,
Keegan