The whole concept of cryptocurrency is based on the fusion of economics, mathematics and the working mechanism of money. It is therefore impossible while embarking on your journey to learning about cryptocurrency and blockchain technology without getting attached to some elemental knowledge of these fields especially of the idea of money and its ever unending relationship with cryptocurrency.
You cannot understand cryptocurrency without having an in-depth understanding of the concept of money. At the initial stage of your learning journey it might be slightly possible to ignore learning about the economics and mathematics aspects of cryptocurrency but the concept of money is an unavoidable topic of discuss on this journey.
An understanding of this concept will help you understand why there is a whole lot of belief and hype around cryptocurrencies as well as blockchain technology.
This is why this article have dedicated to help you understand the concept of money, its history, how it has evolved over time to what is currently obtainable and how these changes have led to the creation of the whole new disruptive cryptocurrency ecosystem.
What is Money?
If you go around asking different people in your neighborhood what is their ideal definition of money, you will be sure to get different answers to this question. A large percentage of the answers you will get will agree with the fact that money is a medium of exchange. This idea of money although very correct just gives a limited view of the concept of money.
A better definition of money should take the the form of:
Anything which is generally accepted to serve as a medium of exchange, a unit of account and a store of value.
A closer look at the above definition of money shows us four basic and intrinsic characteristics of anything referred to as money must possess.
Let take a closer look, shall we:
General Acceptability: For anything to be considered as money, it needs to gain acceptance by many people or groups of people depending on the location of usage. This is the reason why in the past, items such as cowrie shells and precious metals were considered as money, this feature is also the reason why the dollar is used in the United states of America as the country’s currency and not the Nigerian naira. Therefore whatever is generally acceptable as money is money, looks simple right, let’s move forward.
Serves as a Medium of Exchange: Another characteristic of money in addition to its general acceptability is its ability to serve as a medium of exchange either for goods or services, if it doesn’t serve as a medium of exchange, it isn’t qualified to be called money.
Unit of account: As a unit of account, anything generally accepted to be money must have the ability to be used to value goods and services, record debts and make calculations. Money as a unit a account must have the 3 important characteristics below:
- Divisibility: As a unit of account, the different components part from the division of money must be equal to the original value. If you divide the 5 naira into three different parts, the total value of this division should still be equal to the value of the 5 Naira note, in the same way if you cut a bar of gold into four pieces, the four pieces put together should equal the same value as the original bar as a whole.
- Fungibility: A unit of money should be viewed as the same as any other with no change in value. A dollar is the same as any other dollar and 12 ounces of 24-carat gold is no different from another 12 ounces of 24-carat gold elsewhere.
- Countable: As a unit of account, money should be countable and subject to mathematical operations. It should be easy to add, subtract, divide and multiply units, this is what allows people to account for profits, losses, income, expenses, debt and wealth.
Store of Value: Finally, anything which is generally accepted as money, serves as a medium of exchange as well as a unit of account should also be a store of value. This means that if money is saved, retrieved and exchanged at a later time, it should be useful when retrieved. In essence it must retain its purchasing power into the future.
History and Evolution of Money
The use of different tools to represent money have changed over the course of many years and to a very large extent has helped shape how society and commerce have developed. Before the introduction of various tools that represent money today, trade use to be done mostly by bartering or what is widely known as trade as barter, what happened here was the case of people exchanging one item of value directly with another item of value, for example if one person had excessive rice but needed yam, he would have to find someone with yam who needed rice to exchange directly.
Over time humans began to find this exchange battering inefficient largely due to issues arising from divisibility, long distance trade and wrong evaluation of value of the commodity being exchanged. As a result of this inefficiency of this method humans have been led to develop various tools with the aim of facilitating trade between people.
We will look into the sequence of this evolution briefly.
Use of Cowrie Shells: Cowrie shells in 1200 B.C., were implemented and used as a medium of exchange for goods and services in China, the Pacific’s and in some African countries.
Use of Metallic Money: In 1000 B.C., the Chinese started using small knives and spades and other tools which were made of bronze and copper as money since these metals were scarce and valuable at that time. This method proved to be less efficient leading to the abandonment of tools and weapons as a medium of exchange and replaced with metallic cowries using cast of bronze and copper.
Use of Coins: Although the Chinese are the first country to dive into metallic representation of money, the first minted coins were made in turkey, coins were made using a mixture of gold and silver with its back portion stamped, these coins had significant value as the metals used in its production were valuable.
Use of Paper Money: Metals such as gold, silver bronze and copper were valuable because they were scarce and thus difficult to obtain, therefore with the shortages of these ornaments in 806 A.D, China started the use of paper money.
During the 1600s, banks began to issue banknotes in England, these notes could be taken to the bank any time and exchanged for silver or gold coins. It was during this time gold became the standard of value to which paper notes were based upon and this was what led to enacting the Gold Standard Act in 1960. In 1933, the Gold Standard Act was dropped completely with the USD not linked to any specific asset and thereby leading to the creation of central banks and the current monetary system of the world.
Electronic and Digital form of Money: Paper money has continued to be the standard form of money with many innovations being created to help it become more efficient in usage. With the advancement of technology and the internet, money began to take new forms, the first version of the credit cards which allows for payment for transactions electronically were created in the 1960s, these electronic forms of money remain prevalent today with many countries still growing in its credit card usage.
Virtual currency or digital currencies are also becoming another widely accepted form of money set to disrupt the current monetary forms and dominance of fiat currencies. Digital currencies exist in many different forms built with different technological software and made efficient with the advancement of the internet, these digital currencies allow money to be recorded and transactions relating to them to be recorded and electronically carried out on the web. It is making it easier to carry out monetary transactions in any part of the world as opposed to previous forms of money.
How the Current Monetary System Works
All countries of the world operate with the same monetary system with the central bank of that country being in charge of the supply of fiat currencies that flows into the economy. As mentioned previously, the US dollar used to be backed by gold, that is gold used to be the standard for which the value of the USD and by extension other fiat currencies were measured with, this was known as the Gold standard Act in 1900. In 1933 the Gold Standard Act was abandoned thereby allowing the USD and by extension of course the majority of fiat currencies to be linked to no asset at all. By doing this power was shifted to the central banks to control the supply of any country’s currency supply, therefore the central banks have the power to print fiat currencies whenever it decides to do so and in whatever amount to meet up with certain economic policies or bail out other financial institution that might be in need of such gesture.
The current monopoly on monetary supply by the central banks have in time past led to issues of inflation and currency devaluation which in turn has led to harmful situations in the economy of the country which operates using this system. This current monetary system is being referred to by most economics experts as a “bubble” and there have been calls for the adoption of a more efficient monetary system that will solve the impending crisis that may arise when the bubble explodes.
Cryptocurrencies have been predicted by experts to become the technology that will help solve the current issues plaguing the current monetary and financial system. Cryptocurrencies are built with the technology of the blockchain which have a decentralized structure allowing them to exist outside the control of government and central authority.
It is believed that based on its unique features, cryptocurrencies can go on to disrupt many industries and usher in money in a new form.
As you learn more about these features, the beauty of this new technology will become clearer.
Let us take you on this journey!
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