28 July 2020

Money has three fundamental functions: it is a measure of value, a medium of exchange, and a store of value. The first function is clear. We use the money to measure the value of goods, services, and other transactions. But most people get confused with the last two functions. To avoid this mistake, we are going to explain what they are.

What is a Medium of Exchange (MoE)?

In the Middle Ages, people exchanged their merchandise for gold or silver. Sometimes they even exchanged it for rare treasures. Currently, we use money in return for products and services. That is what we called a medium of exchange.

A medium of exchange is an intermediary payment system that we use to sell, buy, or trade goods. Commodities, cryptocurrencies, and fiat money are the most commonly known mediums of exchange.

MoE and Devaluation

Money helps with comparing the value of objects in a determinate market. If a currency is no longer useful as a medium of exchange, users cannot price or plan accurately. Economists call it devaluation. It is caused by the lack of demand for local currency and the increased demand for foreign currency.

This could happen with cryptocurrencies too. Cryptocurrencies are decentralized, and they depend on community trust. If supply and demand are reduced, the project may not be able to continue and end up failing. There are more than 1,000 failed cryptocurrency projects in the network. But once a cryptocurrency is established on the market, it can be a suitable medium of exchange.

Medium of Exchange and Bartering

We already mentioned that the medium of exchange avoids the limitation of barter. Barter or bartering is trading goods and services without using money. The trade happens if one of the parties has a product or commodity that the other part wants and vice versa.

Let’s use a bit of a strange example. Imagine that you have a cow. You want to trade your cow for coffee beans. But the other party wants a guinea pig. Now, you need to find a new trader. One that accepts your cow in exchange for coffee. This is why the mediums of exchange are important – they are widely accepted in the market.

What is a Store of Value (SoV)?

A store of value is an asset that maintains its value without depreciating. These assets can be saved, exchanged, and retrieved at a later time. Also, a store of value can generate interest/passive income. Precious metals, real estate, and fine art are good stores of value. They are typically stable in their value and can last for prolonged periods of time. However, the most common store of value is money.

Money is considered one of the best stores of value. It is incredibly liquid and durable. Also, money has significant purchasing power.

Store of value and Wealth Preservation

We know that the preservation of wealth is an important key to a healthy economy. The store of value helps to build it. But high inflation can affect it. Workers would rather spend their income than save it if the economy experiences high inflation.

Considering the definition of a store of value, a cryptocurrency may not be the best one for now. They tend to suffer volatile price fluctuations over time and rely heavily on supply and demand. Despite the efforts of cryptocurrencies to become a store of value, they still have a long way to go.

MoE vs SoV: A Short Summary

Medium of Exchange

Store of Value

It is an intermediary payment system that allows us to get goods and services.

It is an asset that maintains its value through time, without depreciating.

A suitable medium of exchange can be fiat currency and commodities.

A good store of value can be precious metals such as gold or silver, real estate, and fine art.

A medium of exchange avoids the limitation of barter.

A store of value allows us to preserve our wealth and keep our economy healthy.

Conclusion

In conclusion, these two functions are essential keys to understanding how money works. We have to remember that money is more complex than it seems. The devaluation of a currency or hyperinflation can seriously affect the economy. It can destroy workers’ purchasing power and diminish their quality of life. You should always try to invest in a store of value when possible.

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Edmund McCormack
Tech industry veteran and blockchain technology investor. Simplifying cryptocurrency for almost a decade.

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