The 12 Properties of Money | Hidden Secrets of Value Ep 3 | Alan Hibbard

Key Concepts

• Store of Value: An asset that maintains its purchasing power over time.
• Currency: A medium of exchange, distinct from money as a store of value.
• Intrinsic Value: Perceived benefit derived from an item's physical or chemical properties.
• Extrinsic Value: Perceived benefit derived from how people behave towards an item, often influenced by laws and societal expectations.
• Arduous: Requiring an increasing amount of energy to produce each new unit.
• Decentralized: Lacking a central authority controlling its creation, rules, or participation.
• Fungible: All units of the same size have the same value.
• Fiat Currency: Currency whose value is not backed by a physical commodity but by government decree.

Personal Anecdotes and Lessons on Value Storage

The speaker shares personal experiences illustrating the failure of certain assets to act as stores of value.

• Pier 1 Gift Card: A $100 gift card to Pier 1 was saved but became worthless when the company went bankrupt. This highlights the risk of relying on a centralized entity with a product that can become obsolete or disappear.
• Restaurant Gift Card: A $50 restaurant gift card expired before it could be used, demonstrating that currencies can have deadlines or limitations on their redeemability, thus losing their value.
• Chuck-E-Cheese Tickets: Saved tickets for prizes at Chuck-E-Cheese became undesirable as the speaker outgrew the prizes, showing that even accumulated value can become worthless if the underlying utility or desirability diminishes.

These anecdotes serve as cautionary tales against treating currencies or centralized assets as long-term stores of value, emphasizing the need for assets that are not subject to the whims of a single entity or arbitrary deadlines.

Twelve Properties of a Good Store of Value

The video outlines twelve essential properties for an asset to function effectively as a store of value. These properties are crucial for understanding why certain assets are chosen by the free market over others.

1. Portable: Easily carried and transported.
2. Durable: Resistant to decay, rust, or corrosion over time.
3. Divisible: Can be broken down into smaller units for various transaction sizes and making change.
4. Fungible: All units of the same size are interchangeable and have equal value.
5. Quantifiable: The size or quantity of each unit can be measured.
6. Recognizable: Easily identified by buyers and sellers, preventing confusion with items of different values.
7. Desirable: Reasonably confident that others will want to trade for it.
8. Liquid: Has a well-established and accessible market for trading.
9. Secure: Difficult to counterfeit.
10. Verifiable: Easy for holders to confirm authenticity and detect counterfeits.
11. Arduous: Requires an increasing amount of energy to produce each new unit. This is a critical property, as ease of production would devalue existing units. For example, fiat currencies like the US dollar are not arduous because new units can be created with minimal energy cost, leading to a lack of value storage.
12. Decentralized: No single entity controls the creation, rules, or participation in the network. Centralized control can lead to rule changes that undermine store of value properties (e.g., making units non-fungible or non-arduous).

Distinguishing Money from Currency and Related Concepts

The speaker clarifies why certain commonly associated properties of money are deliberately excluded from the list of twelve.

• Medium of Exchange: This is defined as a characteristic of currency, not necessarily money as a store of value. While money can be used as a medium of exchange, currencies are primarily designed for this purpose. Using money like gold for everyday transactions is often difficult, expensive, and slow.
• Unit of Account: This property is considered a proxy for ensuring ongoing demand for a type of money. When contracts and salaries are denominated in a specific unit, it guarantees future demand. However, this is seen as a subset of the "desirable" property, as ongoing demand is a form of desirability. Gold, for instance, is desirable but not typically used as a unit of account for salaries.
• Scarce: The speaker argues that "arduous" is a more critical property than strict scarcity. Gold, while perceived as scarce on Earth due to extraction limitations, is essentially infinite in the universe. Its value as a store of value comes from the increasing energy required to acquire more, not its absolute scarcity. Some cryptocurrencies are artificially scarce (supply capped) but can be created with no energy cost, thus failing to be arduous and consequently not good stores of value.

Intrinsic vs. Extrinsic Value

A key distinction is made between intrinsic and extrinsic value, which is crucial for understanding monetary value.

• Intrinsic Value: The perceived benefit derived from an item's inherent physical or chemical properties. These are governed by natural laws and are constant. For example, the intrinsic value of a dollar bill (ink on cotton) is close to zero.
• Extrinsic Value: The perceived benefit derived from how people behave towards an item, often influenced by societal norms, laws, and expectations. This can change based on human actions and regulations. The extrinsic value of a US dollar is high due to its legal tender status, its role in earning, spending, and paying taxes.

Monetary value is primarily extrinsic value. Money is acquired not for its inherent properties but for the expectation that others will accept it in future trades. This expectation is driven by how people behave towards it.

• Example: Food has intrinsic value (can be eaten). Money has extrinsic value (can be traded for food).
• Relevance to Store of Value: If something is not arduous for everyone to acquire, it suggests a reliance on extrinsic value, which is relevant for its store of value potential.

Historical Context and the Evolution of Money

The speaker discusses how historical forms of money have contributed to confusion about monetary value.

• Traditional Money (Seashells, Beads, Gold, Silver): These historically had intrinsic value because they were physical objects.
• Paper Money/Currency: The advent of paper money made it clear that monetary value is purely extrinsic.
• Cryptocurrencies (e.g., Bitcoin): Further solidify the understanding that monetary value is extrinsic.

The Role of Intrinsic Value as a Floor

While monetary value is extrinsic, intrinsic value can act as a "floor" for an asset's value.

• Gold/Silver: If gold or silver were to lose their monetary function (become demonetized), their extrinsic value would diminish. However, they would retain their intrinsic value (e.g., use in industry, jewelry), preventing their price from falling to zero.
• Bitcoin: If Bitcoin were to become demonetized, it has no intrinsic value to fall back on. Therefore, its price would fall from its extrinsic value to zero.

Conclusion: Identifying True Stores of Value

The video concludes by suggesting that when evaluating assets against the twelve properties, gold, sometimes silver, and likely Bitcoin are the strongest contenders. The speaker emphasizes that while Bitcoin may lack intrinsic value, its extrinsic value, derived from its decentralized and arduous nature, positions it as a potential store of value. The series will further explore these properties through the lens of physics, energy, friction, and entropy, ultimately arguing that all twelve characteristics can be viewed as facets of a single underlying principle. The speaker encourages viewers to prioritize their financial education, with goldsilver.com offered as a resource.