Bitcoin And Centeralized Money World

Bitcoin And Centeralized Money World

    Money

    Bitcoin is the newest technology to serve the function of money—an invention leveraging the technological possibilities of the digital age to solve the problem that has persisted for all of humanity's existence: how to move economic value across time and space. In order to understand Bitcoin, one must first, understand money, and to understand money, there is no alternative to the study of the function and history of money.

    The simplest way for people to exchange value is to exchange valuable goods with one another. This process of direct exchange is referred to as barter but is only practical in small circles with only a few goods and services produced. In a hypothetical economy of a dozen people isolated from the world, there is not much scope for specialization and trade, and it would be possible for individuals to each engage in the production of the most basic essentials of survival and exchange them among themselves directly. Barter has always existed in human society and continues to this day, but it is highly impractical and remains only in use in exceptional circumstances, usually involving people with extensive familiarity with one another.

    In a more sophisticated and larger economy, the opportunity arises for individuals to specialize in the production of more goods and to exchange them with many more people—people with whom they have no personal relationships, strangers with whom it is utterly impractical to keep a running tally of goods, services, and favors. The larger the market, the more the opportunities for specialization and exchange, but also the bigger the problem of coincidence of wants—what you want to acquire is produced by someone who doesn't want what you have to sell. The problem is deeper than different requirements for different goods, as there are three distinct dimensions to the problem.

    First, there is a lack of coincidence in scales: what you want may not be equal in value to what you have and dividing one of them into smaller units may not be practical. Imagine wanting to sell shoes for a house; you cannot buy the house in small pieces each equivalent in value to a pair of shoes, nor does the homeowner want to own all the shoes whose value is equivalent to that of the house. Second, there is a lack of coincidence in time frames: what you want to sell may be perishable but what you want to buy is more durable and valuable, making it hard to accumulate enough of your perishable good to exchange for the durable good at one point in time. It is not easy to accumulate enough apples to be exchanged for a car at once, because they will rot before the deal can be completed. Third, there is the lack of coincidence of locations: you may want to sell a house in one place to buy a house in another location, and (most) houses aren't transportable. These three problems make direct exchange highly impractical and result in people needing to resort to performing more layers of exchange to satisfy their economic needs.
    The only way around this is through indirect exchange: you try to find some other good that another person would want and find someone who will exchange it with you for what you want to sell.

    That go-between sensible could be a medium of exchange, and while any good could serve as the medium of exchange, as the scope and size of the economy grows it becomes impractical for people to constantly search for different goods that their counterparty is looking for, carrying out several exchanges for each exchange they want to conduct. 

    A far more efficient solution will naturally emerge, if only because those who chance upon it will be far more productive than those who do not: a single medium of exchange (or at the most alittle variety of media of exchange) emerges for everybody to trade their merchandisefor.
    A good that assumes the role of a wide accepted medium of exchange is termed cash.

    Being a medium of exchange is the quintessential function that defines money—in other words, it is a good purchased not to be consumed (a consumption good), nor to be employed in the production of other goods (an investment, or capital good), but primarily for the sake of being exchanged for other goods. While investment is also meant to produce income to be exchanged for other goods, it is distinct from money in three respects: first, it offers a return, which money does not offer; second, it always involves a risk of failure, whereas money is supposed to carry the least risk; third, investments are less liquid then money, necessitating significant transaction costs every time they are to be spent. 


    This can help us understand why there will always be a demand for money, and why holding investments can never entirely replace money. Human life is lived with uncertainty as a given, and humans cannot know for sure when they will need what amount of money.1 It is common sense and age‐old wisdom in virtually all human cultures, for individuals to want to store some portion of their wealth in the form of money, because it is the most liquid holding possible, allowing the holder to quickly liquidate if she needs to, and because it involves less risk than any investment. 

    The price for the convenience of holding money comes in the form of the forgone consumption that could have been had with it, and in the form of the foregone returns that could have been made from investing it.


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