What is a “MEDIUM of EXCHANGE”?

What is a medium of exchange and how
does a modern money become a medium of
exchange? So any modern money, if you
look this up on chat GPT or on Google or
you know Wikipedia, whatever, it’s going
to tell you money has three primary
attributes. It is a store of value. It
is a medium of exchange. It is a unit of
account. When something is becoming
monetized, it goes through those three
stages. initially as only a store of
value, then as a medium of exchange,
then as a unit of account. And
oftentimes you hear people criticize
Bitcoin because they say, “Hey, people
are not buying coffee with it every
day.” Well, I am. I don’t drink coffee,
but I buy stuff with Bitcoin all the
time. But people don’t understand that
those three stages do not happen
simultaneously. When something is
becoming a new money, it does not have
all three attributes simultaneously. It
goes through three stages. The first of
those stages is always store of value.
And the reason that stage is always
first is because people will not
exchange something that they do not
perceive to have value. So you would
never start a money and have it become a
medium of exchange immediately. And the
reason is because nobody will exchange
something that does not have value. So
they will only exchange things when
people on both sides of the transaction
perceive it to have value. And Bitcoin
does have value because of its monetary
properties. So eventually enough people
were using Bitcoin as a store of value
because of its monetary properties that
one person gave someone else Bitcoin for
something in the real world, a you know,
pizza or whatever it was. You know, the
very first transaction was for two Papa
John’s pizzas. But that is because one
person had Bitcoin, the other person
wanted Bitcoin, and that transaction
happened. uh but they both had to
perceive Bitcoin to be a store of value
first because otherwise they never would
have made that transaction. Okay. So
when a money is becoming a money, it
goes through store of value, then medium
of exchange, then unit of account. But
since this video is about medium of
exchange, let’s walk through what it
means to be a medium of exchange. Let’s
go through some simple examples. One,
when you buy something in the real world
with cash, your medium of exchange is US
dollar cash. And the recipient’s medium
of exchange is also US dollar cash. You
are handing them US dollar cash. They
are receiving US dollar cash. The medium
of exchange is US dollar cash for both
parties. But most transactions are not
done with cash. So let’s say the
transaction happens with a debit card.
So if if a debit card is used, your
medium of exchange is US dollars and the
recipient is also receiving US dollars,
although typically with a time delay.
Okay? But it gets more interesting if
you introduce credit cards because
people perceive credit cards to be
entirely a US dollar medium of exchange.
But if you think about it, and again I’m
not saying this is technologically
correct scientifically or you know
according to economics books. I’m just
saying let’s think through it together.
The way it logically makes sense is what
you are actually spending with a credit
card is not US dollars. You’re spending
US dollar credits because US dollars did
not actually leave your possession. what
what actually left your possession is
you became indebted to Visa or
Mastercard but the actual dollars did
not leave your account because that
happens later once a month or you know
if you don’t pay your credit card bills
it’s you know significantly delayed so
you are paying with US dollar credits
but the recipient even if it’s time
delayed is receiving US dollars from
Mastercard or Visa or American Express
so in that case you’ll notice that the
medium of exchange for both parties is
not the Same thing. Your medium of
exchange when you use a credit card is
US dollar credits, but the recipient is
receiving actual US dollars from Visa,
Mastercard, Discover, or American
Express, even though those companies are
not actually receiving the the US
dollars from you until the end of the
month or potentially if you don’t pay
your bills, a much delayed place. Now,
Bitcoin is often criticized by people
who say, “Wait, you know, if I’m using a
Coinbase debit card in the real world,
it’s not really Bitcoin because the
recipient is receiving US dollars.” That
is true, but that is also true every
time you use a debit card of any kind in
a foreign country. So, I travel down to
Honduras a lot to uh visit the our
development there on the island of
Roaton. Okay. Okay, when I’m in Honduras
and I’m using a Coinbased debit card,
let’s walk through a transaction. What
is my medium of exchange? My medium of
exchange is Bitcoin because when I swipe
or I use touchless payments on my Apple
Watch, that’s basically how I pay for
everything is with touchless payments on
my Apple Watch with the Coinbase debit
card. When I touch my watch to a payment
terminal in Honduras, I am having
Bitcoin reduced from the balance in my
Coinbase account, which I keep at pretty
low levels, but it’s always enough that
a debit card transaction will process.
Okay. So, I’m having Bitcoin reduced.
So, that is my medium of exchange is
Bitcoin. The recipient is getting
Honduran Limpira. So, their medium of
exchange is Honduran Limpira. My medium
of exchange is Bitcoin. Now again, some
people would criticize that and say
Bitcoin is not being used as a medium of
exchange. But the truth is, anytime
you’re traveling internationally, US
dollars are not your medium of exchange.
First of all, we already talked about
the fact that if you’re using a credit
card, your actual medium of exchange is
really US dollar credits, not actual US
dollars. But if you are traveling
internationally, whether you are using a
credit card or a debit card, the
recipient is typically not getting US
dollars. So, if you’re using a debit or
a credit card in Europe, the recipient
is receiving euros. If you’re in Japan,
they’re getting yen. If they’re in
China, they’re getting one. If you’re in
Switzerland, they’re getting the Swiss
Frank. If you’re in Honduras, they’re
getting the Limpira. And if you’re in
Venezuela, they’re getting the
Venezuelan Bolivar, if anybody even
accepts the Venezuelan Bolivar anymore
after 50 million% inflation. Literally
50 million% inflation. Um so in in that
case uh people think that the medium of
exchange is US dollars although they
don’t really realize it but the truth is
no Visa, Mastercard, American Express or
Discover are making a translation for
you. Part of the service that they are
providing in exchange for getting about
3% or around 2.9% credit card
transaction fees is making a conversion
for you. They are allowing you in the
case of a US dollar debit card, they are
allowing you to use US dollars as your
medium of exchange, but the person in
Europe is receiving euros as their
medium of exchange. Now, you could
criticize the US dollar in that
scenario, just like sometimes people
criticize my use of a Coinbased debit
card, saying that’s not real Bitcoin
because the recipient is not receiving
Bitcoin. Well, my question is, okay, if
you’re using a a US dollar debit card in
Europe, does that mean those are not
real US dollars? Well, of course they’re
real US dollars. Your bank account is
getting reduced by US dollars when you
use a debit card in Europe. The it just
so happens that Visa, Mastercard,
American Express, or Discover is doing
the courtesy for you behind the scenes
of transacting in foreign currency. They
are converting the US dollars that they
took from your bank account to euros and
they are handing those euros minus a
small processing fee to the recipient on
the other end. So in that case again
very often in the modern economy the
medium of exchange for each side of the
transaction is different. Um if you are
using a US dollar debit card your medium
of exchange is always US dollars. the
recipient is getting all sorts of things
and the the recipient’s medium of
exchange is whatever the local currency
is that they have negotiated to receive
by Visa, Mastercard, American Express or
Discover. Okay? So, if I’m using a
Coinbase debit card, then my medium of
exchange is Bitcoin because Bitcoin is
what I am losing as a result of
initiating a transaction. The recipient
if I use au a uh bitcoin debit card in
the United States is receiving US
dollars. But again their medium of
exchange is dollars. My medium of
exchange is bitcoin. But very frequently
in the modern economy the medium of
exchange is different for each side of
the transaction because we live in a
complex modern economy where Visa and
Mastercard are willing to make those
translations for us. All right, let’s
walk through one especially complicated
example, which would be the Coinbase
credit card. Not the Coinbase debit
card, but the credit card. Okay, when
you use a Coinbase credit card, you are
transacting, your medium of exchange is
US dollar credits, just like any other
credit card. So, the entire month
between billing cycles, your medium of
exchange with the Coinbase credit card
is US dollar credits to American
Express. in this case because Coinbase
uses American Express for their credit
card and they use Visa for their debit
card. But since we’re talking about the
credit card, that would be American
Express. So, you are using US dollar
credits on the American Express network
when you transact with the Coinbase
credit card. Now, when it is time to pay
off your bill, you can choose to pay it
off with your Bitcoin balance, which
because I keep effectively zero US
dollar balances, that means if I’m ever
using the Coinbase credit card, which I
alternate between the credit card and
the debit card depending on what I’m
buying or what I’m using it for. Uh the
credit card has a higher limit on it
more than $2,500 per day. So, sometimes
I use the credit card if I’m traveling
for airline or uh hotel accommodations.
If they exceed $2,500 for an entire trip
for my family, for example, I’ll use the
credit card from Coinbase. But once a
month, when it’s time to pay that bill,
I pay it from my Bitcoin balance. So, at
that point, my medium of exchange to
American Express via Coinbase is
Bitcoin. So in the case of a credit
card, there’s actually two medium of
exchanges for the person using it. The
medium of exchange at the time of
purchase is US dollar credits. The
medium of exchange at the time that the
uh the credit card statement is p paid
off in my case with the coinbased credit
card is Bitcoin. So again, we live in a
complex world. medium of exchanges are
easy to sort of interchange because
Visa, Mastercard, American Express, and
Discover and numerous others are willing
to do all sorts of fancy currency
conversions to allow you to spend
virtually any currency in virtually any
uh location and have the recipient get
the currency of their choice, which is
why it’s so easy for me to live
exclusively on Bitcoin. I can use the
Coinbased debit card, and with the
Coinbased debit card, my medium of
exchange is Bitcoin. The recipient’s
medium of exchange is whatever they’ve
negotiated uh with the credit card
processing organization. Now in the case
of Cash App uh you can actually choose
if the vendor allows you to pay with
Bitcoin and chooses to accept in Bitcoin
then the medium of exchange is Bitcoin
and Bitcoin on both sides. If the vendor
using uh the square payment terminals
which is made by the cash app people if
they have set it to receive US dollars
then uh the company square or
technically block is their company name
but the the product name is square and
it’s made by the cash app uh the company
behind cash app and bit key they’re all
made by the same company which is uh uh
run by Jack Dorsey the former founder or
the founder of Twitter before he sold it
to Elon Musk. Um, in that situation, you
can choose in the Square payment
terminals whether you want the medium of
exchange as the recipient uh of that
transaction to be Bitcoin, US dollars or
whatever. And then at the payment
terminal itself, you can choose whether
you want to pay in US dollars or pay in
Bitcoin and it will let you do either.
So hopefully this primer on medium of
exchange is helpful. As always, any
money goes through the process of
becoming a store of value first, then a
medium of exchange, then a unit of
account. That process often takes uh
definitely years, but often decades
between each of those stages. Bitcoin is
firmly uh in the store of value stage.
It is in the very early stages of medium
of exchange and almost non-existent as a
unit of account. Very very very rarely
do you see things that are priced in
Bitcoin. As soon as you start seeing
lots of things that are priced in
Bitcoin, you will know that Bitcoin has
started down the road of becoming a unit
of account in addition to its current
function as a store of value and the
emerging early stages of being a medium
of exchange. But again, with a credit
card or debit card network, you can have
lots of different medium of exchanges on
each side of the transaction. And with
things like Square and Cash App, you can
choose whether you want your medium of
exchange to be US dollars or Bitcoin on
both ends. So you can pay with US
dollars and the recipient can receive
Bitcoin. You can pay with Bitcoin, the
recipient can can receive uh uh US
dollars or you can pay in Bitcoin,
receive Bitcoin, or you can pay in US
dollars, receive US dollars. The Square
payment terminal lets you configure it
where depending on what they pay with,
you can choose how you get paid. And
again, that gives you four different
options. US dollars to US dollars, US
dollars to Bitcoin, Bitcoin to US
dollars, or Bitcoin to Bitcoin. And it
supports them all. And that is likely to
be the case for a lot of payment
processors uh for the near future where
as more and more come online, you have
the choice of Bitcoin or US dollars on
paying and receiving, and it will do
anything you want in between there to
give you exactly what you want. Uh
hopefully that’s helpful. I hope to do a
lot more videos on each of the different
functions of money, and I’m here to help
if you need anything. The bags.