Understanding the Concept of Money
What is money?
Money refers to anything that gets assigned value by a group of people, so it can be used to pay for goods and services.
For example, in the U.S. we have dollar bills and coins that each have a specific value. So, you can use a $10 bill to pay for an item that the seller says is worth $10.
If we didn’t have money, then everyone would have to barter for everything. You would have to offer an item in trade for something you wanted. For example, to get three apples, you’d have to offer the farmer growing them three oranges.
That would get complicated. So, we have money because it makes getting the things you need much easier.
Currency
As we say above, money can be anything that a group of people assigns value. But the most common form of money is known as currency.
Currency refers to those dollar bills and coins that you can use to pay for things. In the U.S. our currency is the U.S. dollar. Everyone, everywhere in the United States uses dollars and coins (which are each a small percentage of a dollar). So, whether you are in New York or New Mexico, you can pay for things the same way with the same amount of money.
But other countries use their own currency. For example, if you go to Mexico, the currency is the Mexican peso. In Europe, they use the Euro. In Canada, they have the Canadian dollar.
Exchange rates
When you travel to another country, you must change your U.S. dollars to the currency of that country so you can pay for things.
The money from different countries has different values. For example, the value of one Canadian dollar is not equal to the value of one U.S. dollar.
If you go to Canada on vacation, you will trade in your U.S. dollars for Canadian dollars based on an exchange rate between the two countries. Let’s say the exchange rate is 1.25. That means every U.S. dollar is worth 1.25 Canadian dollars.
So, if you have $20 U.S. dollars, you’d have $25 in Canada.
Types of currency
For most of history (since about 5000 B.C.) people have used things like coins and bits of metal as currency. Eventually, people switched to using paper money because, let’s face it, carrying around a bunch of coins is heavy.
But “physical” currency (money you can touch) was the standard for centuries.
However, as computers and technology have evolved, currency has become “digital.” You can have money without having physical dollar bills in your hand. But that system is still based on the value of the dollar. So, even though you may rarely have physical cash (dollars and coins), you still have those dollars saved in an account digitally.
Cryptocurrency
Recently, the concept of money has evolved even more in the digital world. Cryptocurrency is a new type of currency that doesn’t follow geographic boundaries. Special technology known as a blockchain allows people to “mine” and create coins. This digital currency can then be purchased. How much people want a specific type of cryptocurrency determines its value.
Bitcoin is the most popular cryptocurrency, but there are thousands of different cryptocurrencies available now. But most cryptocurrencies can only be used to buy things in the digital world.
The value of cryptocurrency can be very volatile, meaning the value can be high one day and drop to almost nothing the next. Currently, only one country in the world (El Salvador) accepts Bitcoin as currency, meaning you can use it to buy things in stores. But some stores in the U.S. are starting to accept crypto as currency, too, even if its not recognized by the government.
Smart Money Tip: Assess the value of new currency carefully
You need to use U.S. dollars to purchase cryptocurrency. And established cryptocurrencies like Bitcoin can be expensive to buy because, in the case of Bitcoin, there are only a set number of Bitcoins in existence.
But other newer cryptocurrencies are even more uncertain. For instance, a cryptocurrency called Dogecoin was created as a joke. But lots of people are paying a lot of money to buy it now because they think it has value.
Be very careful about using your real U.S. dollars that have real value to buy the things you need to purchase cryptocurrency—especially new forms of it.
Is better to think of cryptocurrency as an investment because the value can grow over time. But just like other investments such as stocks, you can lose all your real money on bad cryptocurrency investments.