What is money? What is currency? At first glance, most people would say that these questions are redundant. I believe that it is very important (now more than ever before) that we understand the difference between them. Money and currency both have several common traits, however, one very important trait is present in one, but not in the other. Money is a store of wealth that can stand up to the test of time, while currency is a mechanism that aims to emulate money while allowing controls (i.e. regulations) to be put in place to ‘manage’ the collective buying power or ‘value’ of the money / currency. I would assert that in reality, currency boils down to nothing more than an illusion. While I have arrived at this conclusion many times in prior contemplation of the nature of money and currency, I very quickly dismiss this reality and revert back to the fantasy world, shared by most people where money is ‘real’, and important. This is probably the reason I so frequently interchange the words ‘money’ and ‘currency’. This is another point that I think Mike Maloney describes very well in the First Episode of ‘Hidden Secrets of Money’. I hope to pay close attention to this detail in future posts when using the two terms. Currency is actually the proper characterization of most things that we typically refer to as money. The erroneous use of these terms actually gives currencies undue credibility and therefore further veils the risks of relying too heavily on its permanence.

The recent run-up of Bitcoin (and my year-long quest to understand this young currency / concept) has helped me to better wrap my head around the reality of a ‘currency illusion’. I personally find Bitcoin to be very intriguing. I don’t want to give the impression that I would endorse any large-scale investment or migration to the ‘experiment’ of Bitcoin at this time, but the nature of this currency is interesting on many levels. Stay tuned for more blogs on the topic of Bitcoin.

There are countless opinions about the viability of Bitcoin and just as many characterizations of what this young ‘cryptocurrency’ really represents. But let’s not get drawn into a false sense that it is anything other than another fiat currency (defined as ‘money without intrinsic value’). It has a few additional properties (not found in traditional currencies), but ALL of the same pitfalls as fiat currency. Having said that, I am convinced that Bitcoin (or some currency like it) may play a major role in the world’s monetary system in the near future. But, again, this will be covered in a separate post. I use Bitcoin as a model of imaginary currency because the nature of ‘cryptocurrency’ provides a better example of how fiat currency is really made up of nothing. Fiat currency is nothing more than the ‘faith’ that it’s users, investors, and/or recipients place in it. Bitcoin paints a more vivid picture of this fact because you cannot physically ‘hold’ a Bitcoin in your hand. Giving Bitcoin value as a currency requires another layer of abstraction from underlying (perceived) value. The lesson here is even more pronounced when we reverse our thinking in this comparison. Instead of explaining how Bitcoin is similar to traditional fiat currencies, let’s turn the analysis around and compare traditional fiat currencies to Bitcoin. The intangible nature of Bitcoin makes it easier to view it as an imaginary thing that is ‘given’ value by its adopters. And, given that traditional currency properties are very similar those of Bitcoin, it is therefore more plausible to accept the notion that our traditional currencies too, are illusory.

Through the evolutionary history of resource exchanges, starting with commodities (bartering), then money (physical assets such as precious metals used as a medium of exchange), and finally currencies (partially or completely detached from underlying assets), we appear to be changing our behaviors with respect to ‘spending’ our earned resources. We seem to be placing an ever-decreasing value on our instruments of buying power. For example, if I were to raise a calf from birth, investing resources to bring the animal to maturity so that it may be bartered for other items deemed necessary to myself and/or my family; I would place a significant amount of value in my commodity and would ensure that I receive a fair trade in any barter agreement. Furthermore, I would be much less likely to enter into a frivolous trade for items that are not deemed significant in the hierarchy of one’s life-sustaining needs. Similar, but not equal care would be taken in a ‘money’ (gold / silver) exchange. After all, there is only one degree of separation between my original commodity and the goods / services that I eventually acquire. I would assert that as we add more layers of abstraction between ‘hard assets’ and currencies, we become more likely to misuse (carelessly spend) our resources.

The currencies that we use today have gone through evolutionary changes as well. They started as derivatives of assets (i.e. paper notes redeemable for gold / silver). Next they were ‘partially’ redeemable or partially backed by gold / silver. Then their asset backing was completely removed and they became instruments of debt (i.e. government bonds). Finally, transactions are decreasingly conducted with ‘cash’, and are more frequently handled as electronic transfers / settlements.

It is obvious that we are doing what humans do best. We invent a solution to a problem, only to create a more complex problem in it’s wake. Then we rinse and repeat. Our further separation of assets (that have intrinsic value) from the instruments used in commodity exchanges will continue to push currency into the realm of the imagination. We may be able to continue on this path of outsmarting ourselves with increasingly inventive mediums of exchange. However, it seems that with each iteration of this evolutionary process, there are new exploits and injections of inequality. These flaws allow our animalistic tendencies toward competition and greed to further divide us as humans. While I am not sure there is much hope of turning the ship around, we can at least be skeptical of any mirages that we see on the horizon. While it may be necessary to utilize these illusions as a means of ‘working within the system’, it is best to see things for what they really are, so that we can hedge accordingly.