“Thank you. Since we decided a few weeks ago to adopt the leaf as legal tender, we have, of course, all become immensely rich.”
– Douglas Adams, The Ultimate Hitchhiker’s Guide to the Galaxy
Historically, anything can serve as money: cigarettes in the prisoner of war camps, gasoline in Europe post World War II or token currencies during the Tughlaq dynasty in the 14th century. Paper currencies as we use them today were never the order of the day. While the very first banknote can be traced back to 7th century China, paper currency only gained prominence in the 17th century in Europe and slowly spread to the rest of the world over time. And just like many other forms of currency before it, paper currency could also perish one day, giving way to a new system of money. If the rise in the usage of digital payments is any indication, the expiry date for paper currencies may be fast approaching.
Anything can function as money as long as everyone accepts it as one. Cigarettes started functioning as money when people (prisoners in war camps mainly) were willing to trade goods and services in exchange for them. This function is known as a medium of exchange. To be considered as money, cigarettes also need to act as a unit of account. If everyone accepts that a book costs 5 cigarettes and a TV costs 100 cigarettes, then cigarettes can be considered a common unit of account. Finally, cigarettes can be called money if they remain valuable over time. If it can be used, not only today but also a year from now to purchase goods and services then they act as a store of value. Thus, according to economists, anything can serve as money as long as it serves these three functions of medium of exchange, unit of account and store of value.
Is Bitcoin the new money?
While switching to net banking and digital wallets has been hard enough for most people to wrap their heads around, cryptocurrencies, a form of digital asset that can be used for speculative investment purposes and as a medium of exchange to purchase goods, have recently gained popularity. While Bitcoin, introduced in 2008, has particularly gained prominence in the headlines in recent years, it is only one of many cryptocurrencies available in the world today. Albeit, being the most famous one, others like ethereum, dogecoin, Litecoin, etc. are also being widely adopted today.
The value of cryptocurrencies has also been growing recently because of investors who consider them a great speculative investment. In fact this year alone, bitcoins have grown over 96% to reach a high of US $57,000 on February 21 2021, spurred on by Tesla’s 1.5 billion dollar Bitcoin purchase, among many others. But the real danger of bitcoin lies in its volatility. Arguments about its real fundamental value and whether there is a bubble in the cryptocurrency market has been inconclusive. For comparison, Warren Buffet, the legendary investor has never bought a cryptocurrency and calls them worthless while Elon Musk, the CEO of Tesla, embraces them wholeheartedly.
But a word of caution on the volatility of bitcoins (and cryptocurrencies) has to be made here. The number of people who have lost their life savings by investing in bitcoins is no small number. If you had invested in bitcoin on February 21, 2021 because bitcoins had been growing consistently for months, and forgotten to check the value for two days, by the time you wake up on February 23, 2021 you would have seen your investment lose 15% of its total value. Even worse is when a small mistake, such as forgetting your password or entering the wrong address can decimate your entire bitcoin savings.
Stefan Thomas has two guesses left to figure out a password that is worth about $220 million. He is one of the many people who are locked out of their Bitcoin fortunes, with an estimated $140 billion in lost or otherwise stranded digital wallets.https://t.co/thdHaixBq8
— The New York Times (@nytimes) January 12, 2021