A medium of exchange is 'something of value' exchanged for goods and/or services. An important characteristic of a medium of exchange is that it represents a generally accepted standard of social value.
How a Medium of Exchange Works
A medium of exchange is not necessary in commerce. Goods and/or services can be exchanged for like value (see: barter), however due to the lack of divisibility of goods and services, mediums of exchange are preferential.
A medium of exchange is an intermediary component of most transactions and can be anything (tangible or intangible) which is generally accepted by the parties to the transaction.
For a medium of exchange to exist, it must fulfil these 6 characteristics:
- Durability - Must be made to last
- Portability - Easy to transport
- Acceptability - The parties to the transaction must agree to its use
- Divisibility - It must be easily divided
- Uniformity - Its must be of similar size, shape and unit of measure
- Supply - The supply must either be fixed or otherwise regulated
Money as a Medium of Exchange
Money acts as a unit of account, a medium of exchange and a store of value. Money fulfils the six characteristics of a medium of exchange as it is easily divisible (using multiple bank notes and coins), it is durable (bank notes and coins last for many years), it is portable (easy to carry), it is accepted by society (US dollars), its uniform (all notes and coins are the same shape and size) and the supply is either fixed or regulated.
Cryptocurrency as a Medium of Exchange
Many alternative currencies have entered the market throughout time but none that offer the qualities of cryptocurrency.
Cryptocurrency as a medium of exchange fulfils the six characteristics of a medium of exchange and more. Cryptocurrency is significantly more divisible then traditional fiat currency (Satoshi = 1⁄100000000), generally accepted by society (Bitcoin), uniform, created with a fixed supply, easily portable and could be easily argued far more durable than traditional money.