Cryptocurrency as Money
Money is a store of value, medium of exchange, a standard of deferred payment and a unit of account. “Fiat money” adds a particular socio-economic context such as a country or regulation (Mankiw 2007). Hayek advocates in his book Decentralization of Money that a competitive private market for money to replace the government monopoly of fiat money (von Hayek 1977). He argues against inflationary money (Economica 1931) and posits a model where any financial institution can issue their own currency. In his model, there can be several concurrent currencies. These currencies require the institutions to compete in order to maintain the value of the currency through productive activities (Ferrara 2013).
Initially, non-monetary societies have operated along with the principles of debt and gift economy (Graeber 2011). Barter was also used, but primarily between potential enemies and complete strangers (Graeber 2001). Eventually, many cultures around the world developed commodity money. The value of commodity money derives from the value of the object itself. For example, gold and silver are commodities that have been used as mediums of exchange (O'Sullivan & Sheffrin 2003).
Representative money or banknote was introduced when gold and silver merchants issued notes such as gold certificates to their depositors. These notes were redeemable for deposited commodity money such as gold (Mundell 2002). Gold backed notes is known as the gold standard, these notes replaced gold coins as currency in 17th-19th century Europe and redemption of the notes into gold was discouraged. By the 20th century, a majority of all countries has adopted the gold standard (Eichengreen & Temin 2000).
After the second world war the Bretton woods agreement state issued money based on the gold reserve of the country, or gold-backed national currencies (Mankiw 2014) changed. Many countries fixed the exchange rate of their national currencies to the united states dollar. The dollar was still pegged to gold and therefore all currencies pegged to the dollar value had a value in terms of gold (Ipsey 1975).
In 1971 united states president Richard Nixon ended international convertibility from the united states dollar to gold creating a kind of money called (Wong 2016). In 1976 references to gold were removed from the statues of the united states dollar creating a new state-issued currency named “diat money”. From this point until the time of writing the global monetary system was made of fiat money. Fiat money is not pegged to anything in the physical world directly and has no intrinsic value (Kiyotaki & Wright 1991).
In fiat money central banks can introduce new money into the economy by means such as lending money or buying financial assets. For example in the united states the money supply grew from $6.407 trillion in 2005 to $8.319 trillion in 2009 (Federalreserve.gov 2009). Commercial banks then use this money for fractional reserve banking. This again expands the total supply of money (Abel & Bernanke 2005). Thus, fiat money is controlled by centralized states and organizations and is a centralized form of money.
The definition of cryptocurrency follows from the Oxford dictionary (Oxforddictionaries.com 2005) and the authors description of blockchain: “A cryptocurrency is money in the form of a digital currency. transactions are verified on a decentralized network based on a consensus protocol.” What backs money is being accepted by many people. A populace can buy into the illusion of the money as a concept. Thus, if a larger number of people accepts the notion of cryptocurrency as money, starts accepting and trust them, tokens can become as liquid as fiat money (Swan 2015, 70).
“There are no gods in the universe, no nations, no money and no human rights — except in the common imagination of human beings.”
(Harari 2014)
Cryptocurrencies are currently being more and more accepted as a payment for services, goods (Das 2017). A cryptocurrency can be used as a medium of exchange by sending cryptocurrencies such as Bitcoin from one address one individual controls the private key of to the address another individual controls the private key of. Cryptocurrencies can also be used as a store of value. Bitcoin can for example be saved, retried and exchange at a later point in time and when the Bitcoin is retrieved it is predictably useful due to the strong antifragility and immutability of the Bitcoin network (Nakamoto 2008).
References
Mankiw G. (2007). Macroeconomics. 6th ed. New York: Worth Publishers. pp. 22–32.
von Hayek, F. (1977). Denationalization of Money: An Analysis of the Theory and Practice of Concurrent Currencies. London: Institute of Economic Affairs .
Economica (1931). The ‘Paradox’ of Saving. Economica. 32.
Ferrara, P. (2013). Rethinking Money: The Rise Of Hayek’s Private Competing Currencies. [online] Available at: https://www.forbes.com/sites/peterferrara/2013/03/01/rethinking-money-the-rise-of-hayeks-private-competing-currencies/#76d74ba83bab [Accessed 14.05.2019].
Graeber D. (2001). Toward an anthropological theory of value: the false coin of our own dreams. Basingstoke, United Kingdom: Palgrave Macmillan. pp. 153–154.
Graeber D. (2011). Debt: The First 5000 Years. New York: Melville House Publishing.
O’Sullivan A. & Sheffrin S. (2003). Economics: Principles in action. Upper Saddle River, New Jersey: Pearson Prentice Hall. pp. 246.
Mundell R. (2002), The Birth of Coinage. [online] Available at: https://academiccommons.columbia.edu/catalog/ac:114141 [Accessed 14.05.2019].
Eichengreen B. & Temin P. (2000). The Gold Standard and the Great Depression. Contemporary European History, 9(2). pp. 183–207.
Ipsey R. (1975). An introduction to positive economics. London, United Kingdom: Weidenfeld & Nicolson. 4th ed. pp. 683–702.
Wong A. (2016). The Untold Story Behind Saudi Arabia’s 41-Year U.S. Debt Secret. [online] Available at: https://www.bloomberg.com/news/features/2016-05-30/the-untold-story-behind-saudi-arabia-s-41-year-u-s-debt-secret [Accessed 14.05.2019].
Kiyotaki N. & Wright R. (1991). A Contribution to the Pure Theory of Money. Journal of economic theory. 53. pp. 215–235.
Federalreserve.gov (2009). Federal reserve statistical release. Archived June 5, 2009, at the Wayback Machine. [online] Available at: https://web.archive.org/web/20090605101615/http://www.federalreserve.gov/releases/h6/hist/h6hist1.htm [Accessed 14.05.2019].
Abel A. & Bernanke B. (2005). Macroeconomics (5th ed.). New Jersey, United States: Pearson. pp. 522–532.
Oxforddictionaries.com (2005). Definition of cryptocurrency in English. [online] Available at: https://en.oxforddictionaries.com/definition/cryptocurrency [Accessed 14.05.2019].
Swan, M. (2015). Blockchain: Blueprint for a New Economy. O’Reilly Media, Inc.
Harari Y. (2014). Sapiens: A Brief History of Humankind. London: Harvill Secker.
Das S. (2017). Bitcoin Could Be Accepted at 300,000 Japanese Stores in 2017. [online] Available at: https://www.cryptocoinsnews.com/bitcoin-accepted-300000-japanese-stores-2017 [Accessed 14.05.2019]
S. Nakamoto (2008). “Bitcoin A Peer-to-Peer Electronic Cash System.” [online] Available at: https://bitcoin.org/bitcoin.pdf [Accessed March 6, 2019].
