The three functions of money: store of value, medium of exchange, unit of account
Money is usually defined by what it does rather than what it is. Economics textbooks list three primary functions, and anything that performs all three, whether shells, gold, banknotes or entries on a ledger, is money in the full sense. A cryptocurrency can be judged the same way, and the jobs it does well and badly say more about it than its price.
What are the three functions of money?
Store of value: money keeps purchasing power from the day it is earned to the day it is spent. Medium of exchange: people accept it in payment for goods and services, so trade does not need a double coincidence of wants. Unit of account: prices, debts and accounts are stated in it. Each needs different qualities of the money itself.
Three functions, one asset
The list is old. W. Stanley Jevons set out the functions of money in Money and the Mechanism of Exchange in 1875, splitting measurement into a common measure of value and a standard for deferred payments; later textbooks folded those two into one and settled on three. The three are not equal in difficulty. Holding value asks only that an asset keep its worth. Paying asks that it also move. Measuring asks that people trust it enough to write their prices in it, which is the hardest of the three to win and the easiest to lose.
Each function draws on different properties of the money itself. Those properties are the qualities of sound money: scarcity, durability, fungibility, portability, divisibility and verifiability. The CoinSpectrum Grade numbers the functions 1, 2 and 3 and tags every quality with the function it serves, so a reader can see which function a coin's strengths and weaknesses touch.
| Function | What it asks | Qualities that serve it |
|---|---|---|
| 1 Store of value | Purchasing power kept over years | Scarcity, durability, verifiability |
| 2 Medium of exchange | Payments that are cheap, fast and accepted | Portability |
| 3 Unit of account | Prices and debts stated in it | Fungibility, divisibility |
1. Store of value
A store of value carries purchasing power forward in time. Grain spoils, cattle die and paper currencies are printed; what lasts is what cannot be made in quantity at will and does not wear out. Gold held the role for millennia for those two reasons, and because anyone could test it.
A cryptocurrency answers the same three questions in its own terms. Scarcity: is there a fixed cap, and can anyone mint past it? Durability: has the chain run for years without being halted, frozen or rewound? Verifiability: can a holder check the ledger with open software, without trusting a server? A coin with an uncapped supply that a foundation can inflate, or a chain that its validators have stopped twice, is a weaker store of value whatever its market cap.
Price volatility is the usual objection, and it is a fair one over months. Over years the question is different: whether the supply schedule is known and holds. A store of value is judged by what can be done to it, not by how its price moved last quarter.
2. Medium of exchange
A medium of exchange is what sellers accept so that a baker can buy shoes without finding a shoemaker who wants bread. The quality it needs most is portability: value that moves across a room or an ocean at little cost. The Bitcoin whitepaper opens on exactly this point, naming the cost of mediation as what rules out "small casual transactions".
For a chain, portability is two numbers. The fee: a payment that costs more than a cent to send is not one anyone makes for a coffee. The capacity: a network that can carry only a few transactions a second cannot serve as money for many people at once, however cheap each payment is. The grade measures capacity against what the busiest networks actually carry, so the line moves with real demand rather than with a figure picked once.
3. Unit of account
A unit of account is the yardstick: the unit prices are written in, contracts are settled in and books are kept in. It asks two things of the money. Fungibility: every unit must be worth every other, or a price in the unit means nothing. Divisibility: the unit must split finely enough that a cheap item has a price, which is why Bitcoin counts in satoshis, a hundred-millionth of a coin, and why a coin whose smallest unit is worth more than a cent cannot price small things.
It is the function cryptocurrencies have least. Merchants who accept a coin usually still price in dollars or euros and convert at the moment of payment, because a price that moves during the day is a poor yardstick. A coin becomes a unit of account when people stop converting.
The order a money earns them
New money tends to earn the functions in sequence. People first hold it because it keeps value; once enough people hold it, sellers accept it; once enough trade runs through it, prices are set in it. Gold followed that path, and so far Bitcoin has followed the first steps of it. The order is a reading of history rather than a law, and the site states it as its position: a coin that skips the first step, paying well but holding value badly, tends to be spent and sold rather than kept.
The order is also why the grade puts scarcity first among the sound money properties and does not make a coin's market share as a currency a criterion: the qualities can be checked today, while the functions are earned over decades.
How the CoinSpectrum Grade uses the functions
The CoinSpectrum Grade opens its Cryptocurrency Standards with the six sound money properties, one criterion of six checks scored out of 10. On every asset page each check names its quality, a short description and the function it serves: scarcity, durability and verifiability marked 1, portability 2, fungibility and divisibility 3. A coin that passes the 1s and fails the 2 is a store of value that is expensive to spend, and the page says so line by line.
Questions
Is Bitcoin money?
By the three functions, partly. It is held as a store of value, it is accepted in payment in some places, and it is rarely a unit of account: few prices are written in bitcoin. Each function is a matter of degree, and the qualities that serve them can be checked one by one.
Can a coin be a store of value without being a medium of exchange?
Yes, and most money begins that way. Gold was held for centuries in places where it was not spent. The risk for a cryptocurrency is the reverse case: a coin that is cheap to send but easy to inflate, which people spend and do not keep.
Why does divisibility belong to the unit of account?
A unit of account has to price small things. If the smallest unit of a coin is worth more than a cent, a cheap item has no exact price in it, and merchants fall back on another currency. Divisibility is what lets prices be stated in the coin itself.
Are stablecoins a unit of account?
They borrow one. A dollar stablecoin is priced in dollars and measures value in dollars, so its unit of account is the dollar, issued by a company that can freeze or mint it. That is why the grade scores stablecoins as tokens, below every native coin.