It has been a long term intention of mine (the past few years) to understand the world of Bitcoins, Tokens, Blockchains, NFTs and the like. I have been reading articles, listening to podcasts, watching youtube videos, and even attending a few talks on some of these topics. Each time I learn a bit more, I understand it better. But I never put in the study required to understand cryptocurrency and crypto-assets.
These technologies are becoming more ubiquitous and getting into the mainstream psyche and conversation with each passing day. I have found that while most people have a very general notion of these technologies (like me), very few people have understood or studied them in detail. Sometimes, I would hear something that contradicted my understanding. On other occasions, conversations revolved around a deep need to get on top of these technologies. Sometimes, it was about how someone made or lost a lot of money. Some conversations were about new technologies and companies that are entering the space. Then there is the craze for NFTs, centred around the arts (in the mainstream).
"Why is it important to understand these technologies? As a normal individual, how does all this affect me? Why are people so hyped about this? Why are companies putting so much money and effort into these technologies? Why are governments concerned about these digital assets? Why is there so much news revolving around this?". These are just some of the many questions that have been swirling in my head. But until very recently, I never thought of addressing them or getting a better understanding of these technologies.
So what changed? Why write about this stuff now?
The only reason that comes to mind is the Indian Governments intention to launch a digital rupee. It seems silly, I know. Frankly, I haven't even read up enough about this plan by the govt. To know precisely what it is about. But, just reading a single sentence in an article addressing the 2022 budget mentioned that the government is working on launching the digital rupee soon caught my eye. Suddenly, I felt this urgent need to understand all this is about. "Why would a "State" want to issue a digital currency?"
Clearly, a country like India, which has embraced digital transactions of "Regular Money", doesn't need to create a "digital rupee"? What purpose does it serve? How will it be different from "money" as we know it today? Will the "digital rupee" be a cryptocurrency like Bitcoin? Many things in our lives fall into sound but are not essential to understand (sugar, exercise, cars, house, etc., the list is never-ending). Obviously, few experts genuinely understand what it is, and we trust that they do, so we are more than happy to leave it to them. I have finally come across something that forces me to push past this barrier and seak out the knowledge. I had to get to the bottom of crypto, so I decided to start from the beginning. The only way to truly learn something is to read a book. And the first book I picked up (digital version) started off by addressing the most important question first.
WHAT IS MONEY?
Seems like a simple, straightforward question. I would hazard a guess that over 50% of people who read this article do not really know what money is or have a limited understanding of it. Isn't it strange that we depend on money almost every day and do not truly understand it? For most people, it serves a simple purpose, and as long as it continues to do so, they don't really care what it is. But to really understand cryptocurrency and crypto assets, it is crucial to understand money. When I use the word "Money", I am referring to "Currency". Your local "Currency" should be front and centre when you see "money" mentioned anywhere in this article.
Modern economic theory or understanding of money revolves around three crucial societal roles.
Money is a "Medium of Exchange"
Money acts as a "Unit of Account."
Money can be a "Store of Value."
I have intentionally phrased these roles to better articulate my following points. As you continue to read, I would like you to keep in mind that I am still a student of the topic and nowhere near being an expert. I intend to use this medium to articulate and gather my thoughts in a structured manner for future study (and embarrassment). Please feel free to point out any flaws or inaccuracies in my understanding. Still, I must warn you that I will probably not respond or edit this article (at least not soon).
Money is a "Medium of Exchange"
This is the most prominent role of money and what most people think money is for. I want to buy a coffee; I pay cash to the barista. I want to take a taxi; I spend money on the driver (or Uber). I want to buy eggs, and I pay cash to the store owner (except Tarsh - who has his own chickens that lay eggs). You get the point, right? But what is actually happening? Why do people accept physical cash or online currency in exchange for goods or services? Well, some brilliant people (who wanted to control everything) figured out (thousands of years ago) that as societies, cities, and civilisations grew, bartering wasn't practical. So they introduced tokens (initially as gold/silver and later as paper) that could be exchanged for goods and services (clearly, I am oversimplifying, but humour me). So instead of giving a bag of rice in exchange for some eggs, you could agree with your neighbour (store owner) to provide "money" instead. Who decides how much an egg costs or a bag of rice costs is a significantly more difficult question to answer and beyond the scope of this article. Of course, for money to act as a "medium of Exchange", it should be accepted by the seller. Hence, governments intervene and enforce its acceptance.
The reason that I used the words "is a" in the subtitle of this section is because, for most of the world's population, "money" is the only "medium of exchange" for goods and services. But is it the best "medium of exchange". This is something that I will address later.
Money acts as a "Unit of Account."
This is a less prominent role of money. Agreed, we use it for this purpose every day, but we do so without understanding what we are doing. Let me try and explain. How did the ancients manage this transaction in the above example of the bag of rice for some eggs? After all, the barter system existed for several millennia before the introduction of money. Once you agree on how valuable each commodity is, you consider it when bartering with your neighbour. For example, if one bag of rice was worth 12 eggs, but you had to give two bags of rice for a precious necklace, the egg seller would know that he has to barter 24 eggs for the same chain. This gets very complicated, especially as the number of commodities increases, which is why money has taken the place of "Unit of Account". Since we know how much money is required for each of the different things we need (or desire), it's easy to account for it. Similarly, to understand the value of all the assets in your possession, it is essential to peg it against a standard "Unit of Account" like money. Of course, for all this to work, everyone must accept the price fixed for each asset and once again government have very clever ways to ensure that this happens.
I used the words "acts as a" in the subtitle of this section because I could choose to use something else as "Unit of Account", and even governments choose to do so. For the longest time, money itself acted as a substitute for something else, the actual "Unit of Account". Yup, you guessed it - GOLD. I could, in fact, use Gold as a "Unit of Account", or maybe coconuts or BMW cars. For example, I could say that I have 1 BMW car worth of land as an asset (Ridiculous example, I know).
Money can be a "Store of Value."
If your money doesn't hold its value, at least in the near term, how will you know how many goods or services it can get you in the future? In the previous roles mentioned above, we have skirted around this subject. Still, in reality, money plays a specific function and is something crucial for us to understand as we go forward. Ideally, good money should be a good "Store of Value". But once again, our friend, the government, has figured out a way to effect/impact this "Store of Value" associated with money. It is called "Inflation". We will not get into why inflation is necessary or how its managed. Still, it is safe to say that on account of this concept of "inflation", money is not the best "Store of Value". Every year the value of money that you have (either as cash or in your account) reduces marginally until, at some point, it becomes almost worthless. Ideally, this should happen very slowly, unless there is "Hyperinflation" when the loss of value is drastic over a short period. Most rich and intelligent people know this. They exchange their money for other assets that act as a better store of value like land, houses, businesses, etc.
I used the words "can be a" in the subtitle of this section because though it can be a store of value, it may not be the best at this role.
Phew! That is so much to think about on our first outing! I hope this has left you craving for more, or at least wondering when I will start talking about the sexy topic of cryptocurrency. Whatever is the case, do subscribe to my newsletter.