You might have already asked yourself, what exactly money is. Even though we encounter them in everyday life, we don't always realize what money really is. One of the broadest definitions says that money can be understood as any asset that is generally accepted as a medium of exchange.
One of the most famous American economists, Milton Friedman, often pointed out that the form of money doesn't matter at all. What's important is that the participants in the exchange (i.e., buyers and sellers) believe that a particular asset can be used as a means of payment.
For such an asset to have a chance to become money, it should meet several criteria: it should have relatively large purchasing power (so that carrying a huge amount of money for large purchases isn't necessary), it should be easily divisible (so that we can easily make small purchases), it should be homogeneous (so that different quality of money doesn't circulate in the economy), and it should be durable (so that money doesn't degrade, and we aren't penalized for postponing some expenditures).
It can be said that money evolved hand in hand with the development of civilization and trade. Over millennia, they have taken various forms and have evolved into today's banknotes, coins, and non-cash form of money held in bank accounts. Here we are talking about money with forced circulation (so-called fiat money). These are money established by law, i.e., by the will of the state.
However, for such money to truly be money, i.e., for us all to accept them as a means of payment, they must have our trust. In short, we must believe that money can maintain their purchasing power and that their value won't plummet by tens or even hundreds of percent from one day to the next. If money doesn't have this basic trust, it's irrelevant that their use is mandated by law.
To ensure that money don't lose their value, central banks oversee them in standard market economies. Their task is to ensure price stability, and therefore the purchasing power of money. For central banks to fulfill this basic function correctly, they must be independent of the political establishment, i.e., not subject to pressure or influence from politicians whose main interest is to stay in power.
Cryptocurrencies
With technological development, however, the form of money has also changed, or new types of money have begun to appear. We're talking about digital money, or cryptocurrencies. These money cannot be transferred into physical form and only exist in electronic, digital form. Their existence is documented by a kind of computer "code," of which the owner is also the owner of the corresponding amount of cryptocurrency.
The oldest and most widespread cryptocurrency is Bitcoin, which is created through so-called mining. Simply put, this process involves endless solving of a mathematical formula, with the solver receiving a reward in the form of one Bitcoin for solving a so-called block. The catch is that Bitcoin mining is constantly slowing down, and the number of Bitcoins to be mined is predetermined.
In addition to Bitcoin, hundreds and thousands of other types of cryptocurrencies have emerged, issued by various entities, and it's certainly not possible to consider all types of cryptocurrencies as equivalent. The rule we encountered when defining money also applies here. They must have the trust of exchange participants.
Advantages, disadvantages, and risks of money and cryptocurrencies
One clear advantage of standard money with forced circulation is that we can rely on them to maintain their purchasing power, and their value doesn't fluctuate on a daily basis. Stable currencies include those most used in international trade or as reserve currencies. These include the US dollar, euro, British pound, Japanese yen, Swiss franc, as well as the Chinese yuan. Certainly, the Czech crown or other currencies of EU member states also belong here.
The risk for standard money is when they are handled irresponsibly by the central bank. That is, when they don't fulfill their basic function but succumb to political pressure. A good example of such behavior is the Turkish central bank, which is under direct influence of Turkish President Erdogan. While standard central banks try to reduce inflation (i.e., the rise in the price level) by raising interest rates, the Turkish central bank acts completely opposite to the orders of President Erdogan. The result is huge inflation and the collapse of the Turkish lira.
Cryptocurrencies, on the other hand, are not subject to any central authority, which may seem like their advantage. However, the risk is that cryptocurrencies obtain their valuation on the market, and therefore it's not uncommon for their value to fluctuate significantly. We could see this especially in the past year, when, for example, Bitcoin rose to a value of almost $70,000 and then plummeted to the current approximately $19,000. Also, for this reason, a considerable part of investors sees Bitcoin and other cryptocurrencies as a very risky investment asset rather than money.
