What is Hard Money ?
Understanding hard money is important as the ” hardness” of cryptocurrencies you are looking to invest in should be one of the aspects of your due diligence. So what is hard money exactly and why does it matter to crypto investors?
To understand this concept, we must first take a step back in time and look at the evolution of money. The first forms were commodities such as cattle, grain, or shells. People valued these items intrinsically because they could use them for trade.
Salability
Salability (a good’s ability to hold value over time) is an important factor when choosing a form of money to use. In our example, cattle are not a very salable form of money as your cattle could die. Your grain could rot but your shells on the other hand would stand the test of time much better.
How well a given good keeps its physical integrity over time is an important aspect of salability, but it is not enough. Some goods could lose significant value in the future even if they remain intact because of supply problems. If, for example, your economy uses shells because they are durable and relatively scarce in your region, a foreign merchant that comes from another location where they are abundant and easily accessible could topple your local economy.
Therefore, we can understand the “hardness of money” by considering how difficult it is to create new monetary units.. Hard money’s supply is difficult to increase. Easy or soft money on the other hand is where supply is easy to increase.
Now that we understand what hard money is, considering the US Federal Reserve added more than 40% to the supply of USD during the COVID pandemic would you say the USD is hard or soft money?
Stock and Flow
Ultimately, Stock (which includes all the money that people have created or destroyed in the past) and Flow (which refers to people’s ongoing creation of additional supply) combine to form hard money. If you have an interest in cryptocurrencies, you may have heard of the stock-to-flow model (see below). The stock-to-flow model attempts to predict the future price of Bitcoin by factoring in the supply shock caused by Bitcoin Halvings (if you’re unfamiliar with Bitcoin Halvings, click here to read our article that explains them).
Cryptocurrency
So what is the correlation between Cryptocurrencies and Hard Money? Let’s look at Bitcoin. Bitcoin has, at its core, a rule that says that there will only ever be a total supply of 21.000.000 Bitcoin and the issuance of new Bitcoins is tightly controlled by the mining process. Blockchain technology and the decentralization of the Bitcoin network ensure those rules are immutable and this makes Bitcoin very hard money . A good counter-example of that would be cryptocurrencies like Shiba Inu whose volume is practically unlimited making it very soft.
Based on what you have learned from this blog post would you say Ethereum, with its mathematically capped volume, is hard or soft money? and what about Gold?
If you want to understand more about how Bitcoin works or cryptocurrencies in general we recommend our “Introduction to Cryptocurrency” course.
I hope this article helps you better understand what is hard money and its importance when considering investing in different cryptocurrencies.
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Tag:Bitcoin, Hard Money, S2F, Stock to Flow
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