How does money get its value? That’s something almost everyone asks at some point in their lives, but almost no one ever learns the real answer. In reality, though, the answer to that question is much simpler than it seems.
What Gives Money Value?
Money gets its value when the actors in a market accept it as a valid method of indirect exchange. In other words, an object becomes money when people decide it’s money. It’s that simple.
Even better: this process applies to any potential currency, be it shells, pieces of paper, or bits of encrypted computer code.
Once a currency gains its initial value as money, its purchasing power fluctuates based on supply and demand.
Why Fiat Is Bad Money
That is how the process works for any type of money, be it fiat, gold, or cryptocurrency. The problem, however, is in how a market accepts a medium of exchange as money, and whether or not it’s supply can be centrally controlled.
Fiat, for example, is potentially the worst form of money. It becomes money just like any other object, but the way in which markets accept a fiat currency is problematic.
Fiat currency becomes money through government decree. In other words, the government presiding over a certain market forces its participants to use fiat currency as their primary money. And because the government forces the market to accept it, the government also has the power to regulate the currency’s value — usually through the manipulation of its supply.
Thus, governments can devalue a fiat currency through inflation, creating business cycles and destroying value for savers. While the government takes these actions, the market has no choice but to accept them, since they have a legal requirement to accept the currency.
How Bitcoin Can Change the World
Bitcoin, while gaining its value the same way as every other currency in history, is different than all the rest. Different in that there is virtually no way for a centralized entity to gain control over its supply. And although a government can force people to accept bitcoin, the cryptocurrency counters that by making it next to impossible for governments to force people to not accept and use it.
Simply put, governments can’t kill Bitcoin by monopolizing and inflating its supply, nor can they destroy it by banning its use. Only the people can make Bitcoin go away by not using it. Thus, this cryptocurrency is truly the most democratic form of money that has ever existed.
This is how Bitcoin can change the world: people can use it freely and do not have to worry about losing value when holding it. And when their governments implement havoc-wreaking economic and monetary policies, the people can subvert the system by using Bitcoin, and no one can stop them.
Bitcoin can change the world because it is, at its core, freedom.
Do you think Bitcoin can change the world? Share your thoughts in the comments section.
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