Oftentimes, we use the words “Money” and “Currency” interchangeably to imply the same thing. After all, most people believe money and currency to be something they can buy a product, pay for a service, and get paid for providing a service or product. However, economists would disagree with this generalization. Experts believe money and currency are not quite the same. But how’re they different? Let’s understand.
Differences Between Money and Currency
Primarily, money is an intangible concept that signifies the medium of exchange, the store of value, the accounting unit, or the payment standard, while currency is a tangible concept, which may be the promissory note or coin presented in the form of money.
Being intangible, money takes the form of numbers, whereas currency may come in the form of coins, paper notes, or plastic. Money has the support of many different things, while the currency is backed by the country’s government or the central bank. As far as the support elements are concerned, if someone has money in their bank account – a cheque would be supported.
Examples of money include online mode, cheques, savings bank accounts, etc. Currency comes in the form of coins, currency notes, etc. Since money is not a physical thing, intangible and ready to be stored in bank accounts, it is transferable online. In the case of currency – one must transfer it via physical means.
To have currencies in plenty, one must print them, similar to what the government or the central bank does. However, money does not need printing as it is intangible and can only be seen in numbers.
The Purpose of Money
To know how these concepts work and often distinguish one from the other, we must be aware of the purposes served. Since money serves as a medium of exchange, standing as an intermediary between the buyer and the seller, it has to be widely accepted in the markets for goods, labor, and capital.
Money should also serve its purpose as a store of value in that one needs not to spend it immediately, fearing quick and rampant depreciation. As a unit of account, money should also act as a common denominator.
If one item is available for US$X, two items of the same kind must be available for US$2X. Finally, money should also serve as a standard of deferred payment so that loans and future agreements can be devised in monetary terms.
Money has to be portable for one to carry it and transfer it when required. However, what we carry as money are currencies. It should not be indivisible.
A US$100 bill should hold the same value as five US$20 bills. It also has to be fungible. A US$20 bill must imply the same value, immaterial of who its owner is. And it must not lose its worth or utility over repeated use.
Finally, the supply of money should be limited so that its value or worth remains relatively constant.
Digital Assets or Digital Money?
There is a new coinage these days. It’s called Digital Money or Digital Currency. It refers to any payment that is there in a purely electronic form.
While it is not tangible as money in the traditional sense, it can represent fiat currencies such as Dollars or Euros. It complies with the conventional accounting system and can be transferred online. Digital Money or Currency includes crypto assets like Bitcoin as well. Click here to learn all about investing in Bitcoin.
When we look at the similarities and dissimilarities between Digital Money and Cash, we find a few pointers on both blocks.
Digital Money behaves the same as cash in that both are units of account and are usable as a medium for daily transactions. Yet, Digital Money or Digital Currency is not cash since you can not obtain them physically when you need them. But you can withdraw cash in its physical form from an ATM.
At a functional level, Digital Money helps streamline the monetary transaction process as transfers, especially cross-border ones, are faster than cash and easier than standard money.
Digital money leverages cryptography, which helps make transactions tamper-proof, and censorship-resistant and takes them beyond centralized control and manipulation.
Types of Digital Money
So far, we have discussed Digital Money as a monolith. However, Digital Money or Digital Currencies can differ in nature and the categories they fall into.
CBDC: CBDCs or Central Bank Digital Currencies come from a country’s Central Bank. They are distinct from a nation’s fiat currency because it does not require intermediaries, such as banks and financial institutions, to distribute these currencies. It eases monetary policy implementation by establishing a direct connection between the government and its citizens. CBDCs can also be either retail or wholesale. Retail CBDCs help in daily transactions, while wholesale CBDCs facilitate transactions between banks and financial institutions.
Cryptocurrencies: These are distinct forms of digital currencies that extensively leverage cryptography. The use of cryptography in these currencies – as cited earlier – can enhance security and make transactions tamper-proof. Some cryptocurrencies fit some properties of money and some digital assets, and we can call them Digital Money. There are ways to invest in these currencies, such as Bitcoin, Ethereum, Ripple, Litecoin, etc. We will discuss ways to invest in them briefly in the next segment. But before that, we should look at the third form of Digital Money, which we can also consider to be a sub-segment of cryptocurrencies – and those are the Stablecoins.
Stablecoins: Stablecoins, a variety of cryptocurrencies, came into the digital assets world to combat the price volatility noted in regular cryptocurrencies. Its price follows the price of a specific fiat currency, such as the Dollar or Euro, or a basket of goods that maintains standard stability over time.
Investing in Digital Assets
There are many ways to become an investor in digital assets: direct and indirect.
- You can buy any of the cryptocurrencies directly from an exchange. First, you must choose a reputable, trustworthy exchange that enlists a vast selection of popular currencies.
- You then have to create a personal account on the exchange before you can fund it with Fiat Money.
- Once you’ve decided on the currencies, you’ll have to place a buy order. Upon completing the purchase, you can store the asset in your digital wallet.
As a cryptocurrency investor, you can also participate in the ecosystem by investing in companies that are into mining, manufacturing mining hardware, etc. Investing in crypto funds, including Exchange-Traded Funds or ETFs, index funds, or future funds, is also an option. You can become a direct stakeholder in the process by choosing to become a crypto-miner or validator on the network if you so wish.
Is Cryptocurrency an Apt Name?
Is calling a specific type of digital asset Cryptocurrency correct only because it leverages cryptography? If we delve deeper, we will see that it is not at all a misnomer.
Like their physical counterpart, Cryptocurrencies can act as a medium of exchange. However, unlike physical currencies, it is only present in the digital or virtual world. Yet, keeping cryptocurrencies stored in your account may profit you in the long run. Moreover, keeping currencies saved in an account may earn you interest. In the case of cryptocurrencies, the earning is in the form of appreciation in value.
Just like physical currency notes and coins, you can use cryptocurrency to make payments. The only difference is that in the latter case, the payment would necessarily have to be in a digital mode.
Also, like physical currencies, you can use cryptocurrencies, especially stablecoins, to meet your foreign exchange needs or make cross-border payments and transfers.
The cryptocurrency is storable in your digital wallet as it happens with a physical wallet and physical currency.
Altogether, there is no harm in seeing crypto assets as currency as they serve almost all the purposes that fiat currencies do, except that you can never realize it in a physical form. Except for transacting hand to hand, there is nothing that limits thinking of crypto as currencies.
