If you haven’t noticed, everyone has been hysterical lately about Bitcoin (to say the least). We talked to Professor Edward Castronova, an expert on investing in cryptocurrency to talk about how the market works.
What is the definition of money?
According to economists, anything used as a medium of exchange, as a unit of accounting, and as a store of value. This is why anything from the dollars in our wallets to cigarettes in POW camp, to Bitcoins can be considered money.
What makes it money?
Social expectation. If you have a stone and someone is willing to trade your stone for a cup of coffee, then your stone is money and has value.
The difference in forms of currency is how well they perform. Stones are bulky and heavy, dollars are small and lightweight. A dollar also has security. Legally dollars must be accepted as a form of payment. There is no such law governing stones. If a vendor won’t accept your stone for a coffee, your stone is worthless.
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Cryptocurrencies are not regulated
And also not taxed. Crypto transactions happen at a microscale and are not easily traced by the government. When Bank of America, Visa, MasterCard, PayPal, and Western Union blocked donations to WikiLeaks in 2010, WikiLeaks set up a page to accept Bitcoin donations.
Invest in cryptocurrency?
One day we may all have multiple bank accounts each holding different types of currencies that we use for different things. The danger of these currencies would be if one major sector of the economy, the housing market, for example, was dominated by one type. If that currency plummeted, it could cause a panic.
Of course, dollars have caused panics so that is not unique to cryptos. They will also need to become as easy to use as dollars and currently they are a bit complicated.
Wildcat Currency: How the Virtual Money Revolution is Transforming the Economy. Professor Castronova’s book on cryptocurrencies.