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October 13, 2018, 11:37:04 PM |
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For something to be defined as a currency, it need to meet the following criteria:
1. Fungibility For a currency to be fungible, its units has to be completely identical and interchangeable. For example, if you swap one US dollar for another, they are worth exactly the same amount of money.
The same applies to Bitcoin as an example, making it a fungible currency.
2. Shortage For something to be considered a currency, is necessary a limited supply of it. Otherwise it would have no value.
Using gold as an example: If the amount of gold is limited ( and it is). There is a finite amount in the world, which gives it a value as a currency. Something similar happens with Bitcoin, only 21 million of them will ever be released, which gives Bitcoin its value. If anything, fiat currencies like the US dollar have the weakest amount of scarcity, because central banks can simply print more money when they see fit.
3. Durability Because gold can withstand harsh weather conditions and there is no natural wear, we can rely on it to outlive us, which gives it its value. If we could not ensure whether our gold would still be around tomorrow, it wouldn’t have any value as a currency. Cryptocurrencies are arguably the most durable currency of all. As long as the network they exist on survives, they’ll retain 100% of their value.
Given that the networks cryptocurrencies are stored on are decentralised, it would be almost impossible to destroy them, meaning their durability is essentially guaranteed.
4. Transferability The purpose of a currency is to enable trade between people and the transfer of wealth from one entity to another.
5. Divisibility Finally, a currency needs to be able to be broken down into smaller fractions or units.
One of the main reasons humanity moved away from trade and onto currencies is because it’s impossible to trade half a animal (especially if you want it to live!). However, if you only want half a dollar’s worth of something, you can just pay 50 cents for it. This is called divisibility. Cryptocurrencies are divisible too.
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