Bitcoin and other cryptocurrencies are not currencies in their true sense. To understand that, it is useful to look at the history of currencies.
First, people were trading with each other by exchanging food and products of their labor directly. Such exchange is also known as barter. For example, a woodworker would exchange the products of his labor for clothing or something else. The exchange was happening directly between the people. The biggest problem with barter is that it is only applicable on a small scale. Measuring value and agreeing on value may be hard even for two parties. As the number of parties grows, reaching such agreements becomes harder and harder. With barter, there is also an issue with lending and borrowing because there is no money that can be used as deferred payment. Finally, it is almost impossible to accumulate and store wealth.
Gradually, people started using precious metals as currency. Precious metals were an excellent choice for two reasons. The first reason is that there was scarcity. Precious metals were not readily available. Finding and mining them was and to this day remains to be hard work, which means that a person could not go and easily get a few pounds of gold or silver just because they wanted to. The second reason was that precious metals had qualities that other metals didn’t. For example, gold doesn’t rust. It is one of the most non-reactive metals and it never reacts with oxygen. This means that it doesn’t rust and doesn’t tarnish. Gold is also an excellent conductor of heat and electricity. Finally, the metal has an attractive shine to it and is heavy, which meant that even small gold coins would still have some weight to them.
The second most popular metal used as currency in ancient times was silver. This metal is the best conductor of heat and electricity known to mankind. Just like gold, silver is strong and can retain its shape in a wide range of temperatures.
Eventually, states and rulers started printing paper money. Historians believe that the first country to use paper money was China. The Chinese started carrying paper bills during the times of Tang Dynasty that ruled from 618 AD to 907 AD. Initially, paper was backed by precious metals. This means that a person could exchange a paper bill for gold or silver. Around 1000 AD, also in China, people started using fiat money. The term “fiat money” means that the money has no intrinsic value. There is no gold, silver or anything else behind it, just laws and government regulations. Eventually, all countries in the world have switched to fiat currencies. The last country to switch was Switzerland. The Swiss Franc was backed by gold until 2000, which is when Switzerland had a referendum that removed the link.
Similarities between cryptocurrencies and regular money
The fact that all countries in the world today use fiat currencies means that no currency in the world has any intrinsic value. The money people use, be it US Dollar, Swiss Franc or Euro, has value only because people agreed that it will have value. In the same manner, bitcoin and other cryptocurrencies have value because people place their trust in cryptocurrencies and agree that they have value.
Benefits of cryptocurrencies
Cryptocurrencies are not currencies in the regular sense of the word because there is no central bank that issues or manages them. Bitcoin and other digital coins are digital methods of payments. At the same time, many merchants, individuals and investors do trust bitcoin and other cryptocurrencies to be their payment methods and ways of wealth accumulation. There are several main reasons why they choose to do so.
First, cryptocurrencies run on a decentralized network. This means that a bank can’t suddenly decide to print more cryptocurrency money. In this sense, the system is more stable, predictable and transparent than the current financial system.
Next, there are no intermediaries and extra costs associated with accepting payment in bitcoin and other currencies. All transactions happen directly between the involved parties. Finally, to use a cryptocurrency a person or an organization doesn’t need to set up any additional infrastructure. The infrastructure is already there.
If you are a merchant, you can use tools to integrate bitcoin and some other digital currencies into your online store and even your physical brick-and-mortar locations. In either case, you will be able to accept payments in bitcoin and then convert them into your local currency immediately and deposit your local currency into your regular bank account the next business day.
From the consumer standpoint, using bitcoin means that you don’t any to spend any cash or use your debit or credit card. At the same time, to get started with bitcoin, you will need to exchange some of your regular money for bitcoin or earn some bitcoins without investing any money upfront.
Bitcoin and other digital currencies are all about users being fully in charge of their money. This idea scares some people because they are used to the fact that there is a bank or a location that created their money.