<aside> <img src="/icons/flash_gray.svg" alt="/icons/flash_gray.svg" width="40px" /> The Bitcoin Rabbit Hole: 2/10 ⚡ What really is money? How does money work? And why do we trust governments and banks with our money?

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Money is arguably the most important concept in modern society, though most people have no idea how money works or how we ended up with the money we use today. The goal of cryptocurrencies like Bitcoin is to improve money, so if we want to understand crypto, we need to understand what money is in the first place.

Money is a tool for measuring, exchanging and storing value. The more important or useful something is, the more valuable it is. Value can be created. One popular way to create value is to save people time. For example:

  1. You buy lettuce, carrots and dressing ingredients for $5
  2. You convert those ingredients into a salad and sell it for $10
  3. You have created $5 of value

Now let’s say you want to buy a car. You need money because:

  1. You can’t pay for your car with salads
  2. You might not want to buy the car until two months from now
  3. You haven’t sold a car’s worth of salads yet

Money enables you to do three things:

  1. Measure Value – Money is a unit of account, a standard numerical unit which allows you to measure and compare the value of one thing to another. For example, $5 vs. $10.
  2. Exchange Value – Money is a medium of exchange, used to exchange value for goods and services. For example, exchanging a salad for $10.
  3. Store Value – Money is a store of value, a way of maintaining value over time. For example, sticking the $5 of value you created in your wallet.

So what should we use as money? What object can best fulfill those three requirements? For hundreds of years many things like beads, shells, and cows (seriously!) were used as money, but we learned (the hard way) that the best forms of money are:

  1. Portable – Money should be easy to move and carry around
  2. Fungible – One unit of the same denomination should always equal the exact same amount as another unit of the same denomination (a $1 bill should equal every other $1 bill)
  3. Divisible – Money should be easily divisible into smaller units of value