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Money And Bitcoin- How Does Money Work

A new technology, Bitcoin, is being used to address a problem that has plagued mankind for as long as we can remember: how to transfer economic value from one place to another through time and space. If one wants to understand Bitcoin, one must first comprehend money, and there is no substitute for studying the function and history of money.

William Willis
Mar 10, 202222784 Shares312104 Views
A new technology, Bitcoin, is being used to address a problem that has plagued mankind for as long as we can remember: how to transfer economic value from one place to another through time and space. If one wants to understand Bitcoin, one must first comprehend money, and there is no substitute for studying the function and history of money and bitcoin.

Direct Exchange And Barter

Exchange of valuable items is the most straightforward method of exchanging value. Only in tiny circles with a limited number of commodities and services can this kind of direct trade, known as barter, work. There would be little room for specialization or commerce in a hypothetical economy of a dozen people cut off from the rest of the world, making it possible for each person to produce the bare necessities of life and trade them directly amongst themselves.
Barter has been around for a long time and is still used today, although it is very impractical and is only used in extremely rare situations, such as when two individuals have a long-standing relationship with each other.

Coincidence Of Wants

Having access to a more sophisticated and expansive economy opens up new opportunities for individuals to specialize in the production of more goods and trade them with an increasing number of strangers, with whom it is impossible to keep track of the goods, services, and favors they have exchanged with them. Specialization and exchange may thrive in larger markets, but this comes at a price: you may find yourself competing with someone who doesn't have a need for your product. There are three separate aspects to the issue, not just various demand for different things.
A woman holding a bitcoin
A woman holding a bitcoin

What You Want Might Not Be Equal In Value

To begin with, there is a problem with scales; you may not be able to divide one of your assets into smaller units if you want to get a sense of how much you have. You can't buy a house in small pieces, each worth the same as a pair of shoes, and the homeowner doesn't want to own all the shoes worth the same as the house. It's also difficult to accumulate enough perishable goods to exchange for a more durable and valuable item at the same time because of the lack of coincidence in timeframes.
Getting enough apples for a vehicle swap is difficult since they spoil before the transaction is finalized. To make matters more complicated, you can't just purchase a home in one area and sell a house in another since houses can't be moved. Direct trade is impracticable because of these three issues, which need more complex exchanges to meet economic demands.

Indirect Exchange

To get around this, the only option is an indirect trade: you attempt to discover some other product that someone else would like and find someone who would swap it with what you're trying to sell. While any item can be used as a medium of exchange, as the economy grows, it becomes impractical for people to constantly search for different goods that their counterparty is looking to exchange, conducting multiple exchanges for each exchange they want to conduct.
This solution will naturally emerge, if only because those who discover it will be far more productive than those who don't, and a single medium of exchange will emerge for everyone to trade their goods for. This will be the most efficient solution. The term "money" refers to a good that serves as a widely accepted medium of exchange.

Summary

Money's primary role is to serve as a medium of exchange, not to be consumed or used in the manufacture of other products, but rather to be traded for other things.
Investment is distinct from money in three ways: First, it provides a return, which money does not; second, it always carries a risk of failure, whereas money is supposed to carry the least risk; and third, investments are less liquid than money, necessitating significant transaction costs every time they are spent. Investing is not the same as money. Because money will always be needed, and because investments cannot completely replace money, we may learn from this.
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