In the past, when there were no cash or credit cards, COIN was used as money.
but why did we use coins as money, why were they valuable?
Well, these coins were made of gold! Of course, that makes them valuable! That is, you could use the coins to pay your rent, buy candy or do whatever you wanted.
The basic idea is that a physical element - GOLD - increases the value of the coins.
But what about our national currencies today, are they also made of gold? Why are they valuable then? No physical substance increases the value of a rupee or a dollar.
We use them, and the whole world uses them. It is because the government has authorised them. The country decides to legalise a certain form of money, making it valuable, rather than backing it up with a physical element. This is called fiat money.
The cash you used to pay for your groceries or cab is an example of this.
Someone like me might ask a question: So a government can arbitrarily assign a value to any piece of paper and turn it into currency? No, it's not that simple. The value of that fiat money depends on factors like the country's economic situation, interest rates, and so on. Know more here.
The basic idea is that no physical element is adding value, the country is. It has legalised its use and added value.
You can touch and feel the notes and dollar bills, right?! But there's one kind of money you can't touch.
Do you know how everything is online these days? Even money is!
It's called digital money. This money is intangible and exists only online.
You can access, transfer and settle this money through online electronic database systems. Here are three examples of digital money-
Cryptocurrencies are digital money. Traditionally, banks or governments issue money for us. A cryptocurrency isn't authorised by that central authority.
Wait a minute, how does that work?
Think of it this way: instead of governments, a bunch of computer codes store, transfer, and regulate all money. In this way, the central authority is eliminated.
It's a peer-to-peer network, meaning you can transfer money to anyone, anywhere, anytime. This system works on the blockchain. (Read my earlier article on blockchain here))
We have a secret password for our safe deposit boxes or UPI IDs. Cryptocurrencies also use a different mechanism called cryptography. It means "secret writing." Basically, we write messages in secret code to keep our money and data safe. That's where our name comes from - cryptocurrency.
The most popular cryptocurrencies are Bitcoin and Ethereum.
The basic idea is that it's digital money secured by a set of computer codes and not by banks or governments. Cryptocurrencies operate on the blockchain and use cryptography.
Read more here.
Another digital currency is called CBDC: Central Bank Digital Currency
Remember how cryptocurrencies are completely decentralised? Computers run the code on the blockchain and there's no third party involved.
CBDC is similar, but a central bank issues digital money/tokens in this case. It is the same as fiat currency and can be exchanged one-for-one with fiat currency. Only the form is different.
Example: In India, the central bank has issued the e-rupee, which is stored in digital wallets and issued as tokens. The e-rupee is equivalent to the normal fiat currency and can also be interchanged.
The value of cryptocurrency is not fixed and is determined by demand and supply. When the demand is greater and the supply is smaller, the price of the cryptocurrency increases.
As the name suggests, stablecoins are stable- their value is tied to a fixed reference value. This value can be a dollar, gold, rupee, etc.
For example, I tie my Stable Coin value to gold. If I say I have 4 units of Stable Coins, 4 units of gold are physically present somewhere in the world.
Some examples are:
1. Tether (USDT)
2. USD Coin (USDC)
Each of these forms of money has its advantages and disadvantages. At the end of the day, it all comes down to which currency suits your needs and priorities.
Besides, with all these digital forms of money, you can buy anything from a bag of apples to an Apple iPhone ;)
Comment down below your views!👍🏼👀