What is money?

in money •  8 months ago

The common thing you hear about cryptocurrencies is that they are scam. "They are not money, how could they be?". The question that stops people in their tracks is "What is money?". We are so used to thinking that money is something with value, that we take it for granted.

So what is money actually?

What is your intuitive answer to this question? Is it something along the lines of "it is a government authorized and accepted form of payment, which is guaranteed more or less to be safe?". If so, you don't have to look far to realize you are on the right track, until we get to the most important part "safe".

The main reason we don't trust cryptocurrency is that we perceive it as not a safe alternative to maintaining its value. In that sense it is very true, however, what we fail to realize is that it is not safe if you don't want to profit. Because so far we have mainly seen the value of cryptocurrencies going up. Of course now we are in a situation when all the worthwhile cryptocurrencies are on sale and it seems that investing is a bad thing because the value might go down still, and probably will. But when it starts going up again, is it a bad thing that the value changes at a fast phase?

Getting back to fiat money such as US dollars, why do we regard them as safe? The reason is that we don't understand them and we have been more or less told that they are safe, or we never questioned the safety of the currency. Again, it doesn't take a lot of effort to find a fiat currency that just isn't doing too well, look at Zimbabwe for example, or Venezuela. Both countries have had a bad time with their national currencies and what do we do? We disregard it completely, we never stop to question the possibility of that happening in our own countries. Doesn't concern the USD, right? Well, that is what we like to think, but is it actually so?

How does money work

The way money used to work is that it was backed up by something. For years it was backed by gold in many countries. This was an efficient system for maintaining the value regardless of the financial situations in countries. It was and would still be a very good system if it wasn't for the situation we placed ourselves after leaving the system. I'm sorry, I accidentally blamed us for what the banks and governments did. Leaving the good system of backing value of money by gold was a calculated attempt to get the capitalistic system to work more efficiently. In the beginning this was exactly what it did and it still keeps doing to some extent.

So what did the governments and banks do? They simply stopped backing the value by anything and moved to what we might call price based on demand. The system that the USD for example works with is actually the same system that cryptocurrencies work with. If someone is willing to pay X amount for USD, then the value of USD is X amount. This also meant that now banks could print more money without affecting the price of one USD, because if they printed more at a steady speed people would still pay as much for the dollar.

The reason to print more money, was to increase the efficiency of markets during hard times. When money was tied to gold, the government needed more gold to print more dollars without affecting the price. When the system was taken apart, there was no need to first get more gold and then increase the amount, they could basically loan the money ahead of time and then increase the actual value. In theory this system works like a dream. What it actually does is create a completely loan based system, which could grumble if something went wrong.

We got our first real taste of this grumbling back in 2008 when the housing market fell in the USA and shit hit the fan. Luckily this happened in the strongest country, which could keep itself afloat by printing more money and assuring that things will still work out in the country. And to this day it still hasn't caught up to them. The economy has been able to extend itself. But that hasn't been the case in other countries like Zimbabwe.

So... what is money?

Getting back to this topic explaining money isn't simple. I'm not sure if I get it myself. But the best simple explanation I have come across is that money isn't what we like to think "something with value". It is actually a ledger. Ledger described by wikipedia:

"A ledger is the principal book or computer file for recording and totaling economic transactions measured in terms of a monetary unit of account by account type, with debits and credits in separate columns and a beginning monetary balance and ending monetary balance for each account." -Wikipedia

Now this sounds all "huh?" what does that mean. I know. Let me put it into words which make more sense. A ledger the way I understand it is a promise. It is when someone gives you something and tells you they will give you X back in return for this something. So essentially it is a loan of sorts. When you pay something in money, you are giving the person a promise that they will get the equal amount of things with this promise (money). The way it used to work is, you had a coin which was physical, you gave that and for bread. You promised that if they give the coin back to you later you can get a bread from you or a bread from someone else. Simple right? What happened?

The complexity of things transformed money into a complex entity not understood by the majority who use it

Nowadays these ledgers are so damn complicated that the first bread that was bought can now by a electronic component that didn't exist back then thanks to all the promises that have been made. It is no wonder no one really understands the complexity of it all.

Hello cryptocurrency. You evil unregulated ledger. You cannot be money! There is no physical coin of you!

If you're still on track, you should realize that cryptocurrencies are actually a ultimate for of ledgers. Each ledger can now publicly be tracked down to the first or middle promise or whatever promise you want to track, and by anyone!

Wow, just wow.

Are cryptocurrencies money? Well if you want to keep with the old system too complex to understand. No. Cryptocurrencies aren't money then. They are something better.

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