Is it time to take cryptos seriously as central banks explore digital currencies?

By  Bradley Barnes, Partner

29 October 2022

Is cryptocurrency money?

A question often asked is whether cryptocurrency is money. The short answer is no because cryptocurrency is not a widely accepted means of payment used to buy and sell goods and services. Money generally comes in the form of a nation’s currency and is accepted as a means of payment. While cryptocurrencies are occasionally used to make transactions, they are not widely accepted. 

Unlike money, cryptocurrency isn’t much good as a store of value because of the massive price fluctuations. These value instabilities mean that the purchasing power of cryptos such as Bitcoin oscillate over time, reducing the effectiveness of cryptos as a store of value.

While some businesses may accept cryptocurrencies as payment, they are not commonly used to measure and compare prices. Moreover, unlike cash, cryptocurrencies are not a common way of measuring the value of goods and services. In Australia, the Aussie dollar measures the costs of goods and services.

What are cryptocurrencies?

Cryptocurrencies are digital tokens and are a type of digital currency that allows people to make payments directly to each other through an online system. Cryptocurrencies have no legislated or intrinsic value and are simply worth what people are willing to pay for them in the market. 

This contrasts with national currencies such as the Australian Dollar, which are legal tender. That the Aussie Dollar or US Dollar is legal tender gives it an intrinsic value. 

How do cryptocurrencies work? 

Cryptocurrency transactions occur through electronic messages that are sent to the entire network with instructions about the transaction. The instructions include information such as the electronic addresses of the parties involved, the quantity of currency to be traded, and a time stamp.

Cryptos don’t exist as physical coins or notes, but as digital tokens stored in a digital wallet. These digital tokens rely on cryptography and technology such as blockchain for security and other features. 

A digital wallet is typically an app on a mobile device that can be used to store information that can be easily accessed by the user. Not only can you keep Bitcoins in a digital wallet, but like an old-school leather wallet you can also store credit cards, access cards, movie tickets and much more. 

How are cryptocurrencies different from each other?

At its core, a cryptocurrency is a piece of computer code. It’s like a little set of instructions or conditions contained within every coin.

Different cryptocurrencies can have other things programmed into them. Some cryptos are designed for quick payments. Some are programmed to keep their owner anonymous, and some are designed to split in two should a certain amount of them start circulating.

There are over 10,000 cryptocurrencies in circulation, with different uses and functions. The value of these cryptocurrencies changes how much the market values the functionality they’re programmed to do. Interesting, Bitcoin doesn’t have any special features and was created as an alternative payment system that would operate free of central control but otherwise be used just like traditional currencies.

Generally, the way to access cryptos, whether it’s Bitcoin or any other competitors, is to swap them for Australian Dollars and then trade those for a new coin.

Disclaimer

The information provided in this article does not constitute advice. The information is of a general nature only and does not take into account your individual situation. It should not be used, relied upon, or treated as a substitute for specific professional advice. We recommend that you contact Brentnalls SA before making any decision to discuss your particular requirements or circumstances.