Australia and the World Past and Present

Cryptocurrencies are a relatively new form of digital asset that seek to perform some or all of the traditional functions of money (act as a medium of exchange and maintain value over time) without relying on a central authority such as a central bank. They are built on distributed ledger technology, most commonly blockchain. At their core, cryptocurrencies are entries on a digital ledger.

One crucial question is whether cryptocurrencies are “backed” by anything tangible. Traditionally, money was often backed by a physical commodity. Under the gold standard, for example, national currencies could be exchanged for a fixed amount of gold. In that sense, they were directly backed by a tangible asset. However, most modern national currencies are fiat currencies. They are not redeemable for gold or any other commodity. Instead, they are backed by the authority of the state. Governments require taxes to be paid in fiat currencies and they declare them legal tender. Their value ultimately rests on trust in the issuing government and its economic management.

Cryptocurrencies differ from both commodity-backed and fiat currencies. They are not claims on a tangible asset like gold, nor are they backed by the power of a state. In this traditional sense, most cryptocurrencies are not backed by anything tangible.

That said, proponents of cryptocurrencies argue that their value is supported by several intangible but powerful factors.

One is scarcity. Many cryptocurrencies have a limited supply. Bitcoin, for example, has a maximum cap of 21 million coins. This engineered scarcity is often compared to precious materials, which are valuable in part because they are rare. Diamonds are a good example. Diamonds are stockpiled and released on to the world market at a somewhat controlled rate. This increases their scarcity on the market and inflates their value.

Second, networks impact upon cryptocurrencies. The value of a cryptocurrency often increases as more and more people use and accept it. If millions of users adopt a particular coin, then it gains utility. The backing here is social and technological rather than physical.

A special category, stablecoins, attempts to address the volatility and “backing” issue more directly. Some stablecoins are pegged to fiat currencies.

Cryptocurrencies tend to be highly volatile. Prices can swing dramatically based on speculation, regulatory news or shifts in market sentiment. Because they lack a central authority committed to stabilising their value (like a central bank), their price is determined almost entirely by supply and demand.

In philosophical terms, cryptocurrencies make explicit something that has long been true of money more generally – that money’s value depends on collective belief. Fiat currency also relies on trust. Cryptocurrencies push this logic further by removing the state and any physical anchor from the equation.

Most cryptocurrencies are not backed by tangible assets in the traditional sense. They are not redeemable for gold or commodities. However, they are affected by scarcity, network adoption, and a collective belief in their utility and future acceptance.

Money is often defined as any widely accepted medium of exchange used to facilitate transactions for goods and services, and reasonably retains purchasing power over time.

Transactions using cryptocurrencies were rare when they first arrived on the scene. This is understandable. A new system faces much suspicion. Acceptance of them as a form of payment has increased over time, but acceptance is still patchy.

A currency is often defined as money officially issued or authorised by a government for use as legal tender. It is typically issued by a central bank or treasury.

While the use of crypto has increased within certain quarters (mostly among individuals interested in this new form of digital asset) most governments still do not issue or authorise them. So they are still viewed with a high degree of suspicion by the traditional financial authorities.

Users of crypto often interpret this as the establishment gaming the system in their own favour – making the rules to benefit themselves and at the same keeping cryptocurrencies at a disadvantage.

Of course, the traditional financial authorities contend that there remain real issues with crypto, that they are highly speculative, highly volatile and not subject to the same rigorous financial oversight and management as fiat currencies.