Sound money

What Is Sound Money in Crypto?

The concept of “sound money” refers to a form of money with certain fundamental attributes that allow it to retain its stability, reliability, and purchasing power over time. This is opposed to hard money, which refers primarily to currency directly backed by a real asset.

In cryptocurrency, sound money is any digital asset that can retain its value and stability, remain consistent as a unit of account, and serve as an effective means of exchange over time. As the oldest and most tested, Bitcoin is a good example of a cryptocurrency that exhibits these qualities. 

Simply put, the essence of stable money is to instill confidence in its users, enabling them to save, invest, and plan future endeavors without fearing their money losing value due to inflation.

What Makes Bitcoin Sound Money?

Apart from having limited supply and intrinsic value, Bitcoin also closely aligns with other tenets or principles of a sound form of money including divisibility, scarcity, durability, and portability.

For example, unlike fiat money which can effectively be created out of thin air, Bitcoin’s supply is finite. Its algorithm mandates a fixed maximum supply or hard cap of 21 million coins. This means that beyond this point, no more coins will be mined or created. In addition, the rate at which new Bitcoins are created is often reduced by 50% approximately every four years through a process called halving, making it scarce and thereby serving as a hedge against significant inflation.

In addition, Bitcoin operates on a decentralized network, making it free from the control and manipulation of central banks or governments while enabling financial inclusion. As a digital currency, it is immune to physical wear and tear, making it more durable than physical forms of money. What’s more, its inherent nature as computer code implies its perpetual existence as long as at least one node on the network exists. 

Furthermore, it enables efficient cross-border payments as it can be sent over the internet, thereby providing it with the essential portability of a stable currency. Bitcoin is also easily divisible into smaller units (satoshis) while maintaining uniformity. Additionally, it can be exchanged for other assets or forms of money, making it a convenient means of trade.