Crypto ELI8: Currency vs. Money

The Crypto ELI8, or Explain Like I’m Eight, series is for anyone who wants to learn about the exciting world of cryptocurrency. Each post is organized around a specific term, concept, question, or other topic related to crypto.

For more on what the series is and a full list of posts check out this series guide.

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What do you think a dollar bill is? Is it currency? Money? Both? Why do people say cryptocurrency and not cryptomoney?

The answers to these questions aren’t always straightforward. Although currency and money have a lot in common, they are not the same thing. In this post, we’ll take a look at their similarities and differences*. And, hopefully, by the end you’ll be able to answer the questions above!

Imagine this…

It’s the day after Halloween. You and a group of your neighborhood friends — Alice, Bobby, Cameron, and Delilah — meet at your house to take stock of all the candy you got the night before. Your neighborhood is the best candy neighborhood in the whole state so you always get a big stash.

This year was an especially good year — you guys got twice as much candy as you ever have! In fact, it’s more candy than you can even eat before next Halloween without getting a bunch of cavities and feeling sick. Obviously, you’re not going to throw it away though.

You could give it to other people but you want something in exchange for your hard work trick-or-treating. In the past, you’ve traded candy with each other and with other kids at school. Sometimes you give candy for other things, too, like toys and even for other people to do your chores!

One problem with how you’ve done it in the past is that trades aren’t always fair and sometimes people’s feelings get hurt. For example, last year Alice ended up with almost all the Skittles because she traded everyone for them. She barely likes Skittles but she knew Cameron that’s Cameron’s favorite candy so she told him he had to give her 5 Snickers AND take out her trash for a week in exchange for one bag of Skittles. Everyone knew this wasn’t a fair trade but couldn’t do a lot about it because Alice had all the Skittles. Cameron got so mad that he didn’t talk to Alice for two weeks!

This year, now that you’re all older and wiser, you want to set some rules, or “standards”, that make things more fair. You want to figure out things like:

  • What’s a fair trade for taking out the trash for a week? Is it 5 bags of Skittles? How many Snickers would that be?
  • Since people like some types of candy more than others, how do you make sure no one takes advantage of someone else by saying one person has to trade way more than another person in exchange for the same piece of candy?
  • How do you make the rules fair for everyone?
  • How will your rules still work through next Halloween? After all, people are going to eat some of the candy!

You start by talking about how much candy is a fair trade for taking out someone else’s trash for a week. Alice says 7 bags of Skittles — one of each day of the week. Cameron says, “no way!” because he loves Skittles. He proposes 7 Snickers bars instead. You point out that Snickers won’t work for you because you keep your candy stash in a secret spot in your treehouse so your older brother doesn’t steal it, and in the summer time the Snickers will melt.

Then Delilah proposes an idea: what if you used candy corn?

Mrs. Jenkins lives on the far corner of your neighborhood. She’s an old lady who always gives out the worst treats. Last year she gave out toothbrushes. This year she gave you and your friends each a bag of candy corn. She tells you these bags are limited edition and she only gave the bags out to you because your costumes were the best. They are from when she was a kid and each piece of candy corn has a horse stamped on it. Disgusting!

None of you like candy corn and you’re pretty sure aliens made it because it never seems to go stale. Especially Mrs. Jenkins’ limited edition candy corn. Instead of throwing it away though, Delilah suggests that you trade with candy corn pieces.

Delilah explains her idea. She calls it the Candy Corn Corner system, or CCC for short, since Mrs. Jenkins lives on the corner.

Even candy can be used as currency in a candy money system if everyone agrees on its value! Image credit: Jeffrey Collingwood . Source: freeimages.com

Delilah explains:

Since each bag has 100 pieces of candy corn in it and since there are 4 of you and each of you has a bag, there will never be more than 400 pieces (100 x 4 = 400). You’ll always know what pieces are part of the CCC because they have the special horse stamp on them. Unlike chocolate, candy corn doesn’t melt and it doesn’t get smooshed or break like other candy, so you know it will last until at least next Halloween. And since a lot can fit in your hand or pocket, you can easily carry it and trade with one another. The last thing she suggests is that 1 piece of candy corn is equal to 10 pieces of Nerds and 2 Skittles.

Everyone loves the CCC system idea! This way you can talk about trading things in terms of pieces of candy corn. It makes it easier for everyone to be on the same page and helps to ensure that prices stay consistent.

You’re one smart bunch of 8-year-olds!

So, what’s the difference between currency and money?

Currency and money are not the same thing even though they can have a lot in common. At a basic level, currency represents money, a lot like words represent ideas in your brain.

It gets kind of confusing because sometimes the currency can look exactly like the money it’s representing. This is like saying exactly what you’re thinking. Even though the words you say are the exact same as the words in your head, they are different because talking and thinking are not the same thing.

In order for something to be money, it has to be three things: a unit of account, a medium of exchange, and a store of value. In other words, it has to answer yes to three questions:

  1. Can I count it with numbers and do all the things I’m counting look similar to one another? (unit of account)
  2. Can I easily trade it with others in return for things that I want or need? (medium of exchange)
  3. Over a long period of time, will it still be as valuable as it is today? (store of value)

Currency, on the other hand, answers yes to questions #1 & #2. It sometimes answers yes to question #3, but not always.

Let’s look at your Candy Corn Corner (CCC) system to illustrate these ideas. Remember that in the CCC system, you can trade Nerds, Skittles, and candy corn for all sorts of things from other candy (goods) to chores (services).

All 3 pieces of candy answer yes to questions #1 and #2. That is, they’re all units of accounts AND mediums of exchange.

But what about question #3, about being a store of value? Only candy corn makes that true. Why? Because you all agree that the same amount of candy corn that buys one thing today will be able to buy that same thing a whole year from now.

So in the case of the CCC system, candy corn is both a currency and money. Nerds and Skittles, on the other hand, are only currencies. You can use them to trade with each other because you all agree that they represent pieces of candy corn. However, there’s no guarantee that the same amount of Nerds or Skittles will be able to buy the same thing today as a year from now.

Of course, the CCC system is still a work-in-progress. Even though there is a fixed amount of special candy corn pieces, how do you make sure people don’t just buy more Nerds or Skittles at the store and use them to pay for stuff? Or, since it’s annoying to always walk around with candy in your pockets, can you come up with a way to represent candy corn with something that’s easier to carry, such as a piece of paper?

These aren’t easy questions to answer. Even the President and his team don’t know the perfect answer, even though they work hard to find it.

But you and your friends aren’t the president (yet). And for a group of 8-year-olds, you’re off to an awesome start with your CCC system.

So, why is it called cryptocurrency?

Remember the 3 questions we ask to determine if something is currency, money, or both:

  1. Can I count it with numbers and do all the things I’m counting look similar to one another? (unit of account)
  2. Can I easily trade it with others in return for things that I want or need? (medium of exchange)
  3. Over a long period of time, will it still be as valuable as it is today? (store of value)

Crypto answers yes to questions #1 & #2, but it’s answer to #3 is still unclear. The fact is, crypto hasn’t been around long enough to prove that it’s a good store of value.

Take bitcoin, for example. Bitcoin is the oldest widespread crypto and it’s only been around since 2009. At the time of this writing, that’s less than 11-years-old, just barely older than you!

That’s why people call it cryptocurrency and not cryptomoney. Only time will tell if it’s a good store of value, say, like gold, which has stood the test of time over thousands of years.

Summary

Currency and money are not the same thing, although it can appear that way sometimes. In basic terms, currency represents money. In order for something to be considered money it needs to be a:

  1. Unit of account
  2. Medium of exchange
  3. Store of value

Cryptocurrency is referred to as currency and not money because it hasn’t shown that it’s a store of value. Contrast this with gold, which has maintained value over thousands of years.

*DISCLAIMER: the distinction between money and currency is not clear cut or absolute. It can differ both across and within nations and economic systems. In a US court of law, for example, what defines a “currency” can differ from case to case, depending on the case’s context and facts presented. This article recognizes this complexity and ambiguity. It also recognizes that currency and money are not one in the same. The purpose, therefore, is to illustrate the fact that differences do exist. It does so using an example based on a commodity money system.

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