What is Money?

To better understand or appreciate cryptocurrencies, it's important to get a good grasp of the nature of money. This is because cryptocurrencies are a form of money and by understanding the true nature of money, especially what important characteristics it should possess, you'll be able to better appreciate and understand the nature of cryptocurrencies. And in turn, you'll be able to better understand the principle of hodling.

What is Money?

At its very core, money is something that is used to represent the value of other things. If you study history, you'll see that the values of things have been expressed in different forms and money, the primary way by which values have been expressed has come in different shapes and materials. Case in point, things like gold, shells, wheat and salt have been used in the past to represent value and as a medium of exchange. But for something to be able to continue representing value, the people who are using it must continue trusting that a medium of exchange is indeed valuable and more importantly, its value will persist for a long time so that they will still be able to benefit from it in the future.

How People's Trust in Money Has Evolved

Only until one or two centuries ago, societies had always placed their trust in something when it comes to the value or representation of money. But the way people trust in money has shifted from trusting something to trusting someone. What do I mean by this?

In the past, people would use stuff like gold, wheat, salt and even seashells as a medium of exchange or money. But over time, people caught on to the fact that using such things as a measure of value and medium of exchange can be quite burdensome. Can you imagine buying your groceries with seashells or salt? What if inflation was very high the last several years and you want to buy a month's worth of groceries? Can you imagine bringing that much salt to the supermarket? And if you're the grocery owner, can you imagine having to weigh the salt being paid to you by your customers and needing a very large space and vehicle to store and transport all that salt? And what if it rains? Do you get the picture?

Because of such inconvenience, people were forced to improvise and come up with a more practical value storage and payment solution; paper money! So this was how it worked in the beginning. When you take up a bank or the government's offer to take physical possession of your gold bars for storage, they'd issue you certificates or bills for the amount or value of the gold you deposited with them. Say your gold bars were worth $500, the bank or the government taking possession of your gold bars would issue you a paper certificate or bills worth $500.

Now think about this. Which is easier to carry around - paper bills worth $500 or gold worth

$500? Another thing to think about is this. Which is easier to cut in smaller pieces or value, paper bills or a gold bar? If you want to buy a bag of chips for $5, you'd only have to give the cashier five $1 bills, but if you're carrying around $500 worth of gold, you'd have to cut it proportionately to an amount that closely or exactly represents $5.

Another thing worth thinking about back in the day is this. If you wanted your gold bars back, all you'd need to do is give $500 worth of bills or certificates back to the bank or government to redeem your gold bars. It's that simple. Because of the convenience and practicality it brings, paper money has grown so much in popularity and has become the primary means by which goods and services are bought and sold all over the world today.

Back in the day, the value of the United States dollar was linked or based on gold. The money of the United States of America was valued based on its gold holdings. This was referred to as the Gold Standard. But over time, the macro economy has changed and as a result, the link connecting the value of the United States dollar to the value of gold was cut. As a result, Americans - and the rest of the world, considering the US$ has become the world's primary currency - had been conditioned to shift their trust from gold to the Federal government. 

In other words, people have been conditioned to shift their trust when it comes to monetary value from something - gold - to someone who assumed responsibility for the value of the dollar, which is the Federal government. And the only reason this system continues to work is trust because let's face it, there's no real underlying asset of worth behind the value of the dollar or other currencies. This was how fiat or paper money was born.