Ether’s Sound Money Argument – What It Means And Whether It’s True

These days, plenty of Ethereum is enthusiastic about the upcoming merge. Many of them hold the opinion that this will make Ether ‘ultra sound money.’ However, it’s still a confusing concept for some, which prompts them to ask what ‘sound money’ means.

What’s Sound and Ultra Sound Money?

Sound money is often referred to as hard money, and a common definition is that it’s a stable and reliable store of value. Consequently, it means that sound (or hard) money will retain its purchasing power. So if $1 can buy a sandwich today, it should be enough to buy a sandwich tomorrow, the following week, and so on.

What’s Unsound Money?

By this definition, unsound money, also called soft money, is the opposite. It’s the currency that doesn’t act as a stable and reliable store of value. Generally, people expect that the value of soft money will change at an unpredictable rate. One example of unsound currency is the British pound and euro, both of which lost over 15 percent of their value compared to the USD over the last few years.

Then, by extension of the sandwich analogy, a sandwich that costs $1 can cost $5 after a couple of years, and so on.

How Ether and Bitcoin Aren’t Sound Money

With so many crypto proponents claiming that the top coins are sound money, it raises questions as to where this thesis comes from. The reason why Bitcoin fans call it sound money is that it has a fixed supply cap and a rather predictable issuance schedule. The number of Bitcoins that will come to be is common knowledge, as well as how they will eventually enter circulation.

As for Ethereum, this belief stems from the Merge implementing a mechanism to the network that will steadily reduce the supply of Ether. Hence, the Ether supply will be capped and the Ethereum network will begin burning the coins to reduce the supply. This brings them to the conclusion that if Bitcoin is sound money, after the Merge, Ether will become sound money as well.

However, there being a cap on the number of crypto coins doesn’t mean that the cryptocurrency is sound money. While both tokens have been excellent stores of value over the past couple of years (as both of them saw increases in value by a hundred-fold), this isn’t always the case. Both coins have seen over a 50 percent decrease in value over the past year.

Hence, just because the cryptocurrency has a deflationary issuance schedule and fixed supply doesn’t mean that it’s sound money. So even if it’s known that there will be only 21 million Bitcoins, it still doesn’t store value over time, making it unreliable.