Is Cryptocurrency Real Money That You Can Use

Published: 3rd July, 2024 | Last Updated: 1st July, 2024

Markos Koemtzopoulos

Markos Koemtzopoulos is the founder and main writer of ElementalCrypto. He has been a lecturer at the University of Nicosia on cryptocurrencies and DeFi and has taught two courses on crypto and blockchain technology.

Cryptocurrencies are a type of money that you can use as a medium of exchange or a store of value. Bitcoin, the largest cryptocurrency by market value, is often considered a store of value due to its limited supply. Ethereum, which is the second largest cryptocurrency, is used to pay for transaction fees within the Ethereum ecosystem. In this post, I will explain why cryptocurrency is a form of money. 

infographic is crypto real money

Why Cryptocurrency is a Form of Money

Cryptocurrency as a Form of Money

1. You can sell cryptocurrency for fiat currency

It is easy to convert cash into crypto assets and vice versa on a crypto exchange. Crypto exchanges allow you to deposit fiat currencies such as US dollars, euros, or pesos on their platforms. You can then use that cash to buy cryptocurrencies. The large cryptocurrency platforms are very liquid, with thousands of buyers and sellers trading their digital currencies for fiat. 

2. Durability

Cryptocurrencies are durable, which means that the quality of the currency does not deteriorate over time. This is why gold, silver, and coins have been considered good forms of money throughout history. 

3. Portability

You can easily send your crypto from one person to another within seconds. This is also true for the digital euros or dollars in your bank account, though sometimes it can take 2-5 business days. 

4. Fungible

Virtual currency is uniform, meaning it doesn’t make a difference to you which one you hold.

My Bitcoin is as good as your Bitcoin. Just like my dollar is as good as yours.

Having said that, many cryptocurrencies can be traced.

If they have been used in illegal transactions, they can be identified and rejected.

For example, the government may prevent cryptocurrency exchanges from accepting tainted cryptocurrencies just like they can do with cash. 

5. Limited supply

Good money is limited in supply. Gold and Bitcoin are limited, for example. The US dollar isn’t.

For this reason, many Bitcoin maximalists argue that Bitcoin is a better form of money. 

Also, see what is the difference between crypto and bitcoin.

6. Medium of exchange

When we think of money, this is usually the first criterion we look at.

Can you use the currency as a means of payment for everyday transactions?

For most cryptocurrencies, this is not the case. You can’t walk into a grocery store and pay with Bitcoin.

However, this is beginning to change.

For example, the countries of El Salvador and the Central African Republic are investing in Bitcoin and encourage the use of crypto wallets and Bitcoin transactions.

Many companies that want to appeal to crypto holders also accept Bitcoin and other forms of cryptocurrency.

For example, over 50 businesses now accept Dogecoin, including VPN providers, website hosting companies, and airlines. 

7. Unit of account

The second aspect of money that people criticize cryptocurrencies for is their volatility.

We won’t see goods on the shelf priced in Ethereum any time soon.

If that were to happen, shopkeepers would need to keep updating their prices every few minutes. In addition, reading the price of an avocado as 0.0013 ETH would be meaningless to most.

However, some cryptocurrencies, known as stablecoins, peg their value to the US dollar or another fiat currency.

These are very popular in cryptocurrency transactions because it means you don’t need to cash out to a bank each time you want to exit a crypto investment. 

8. Divisibility

Cryptocurrencies are a good form of money because you can subdivide them into smaller pieces.

For example, you don’t need to purchase a whole Bitcoin. You can buy up to 1/100 million of a Bitcoin if you like. 

Crypto Vs Cash

Crypto Vs Cash

While crypto is a form of cash, there are some important properties that distinguish it from cash

1. Decentralization

Cryptocurrencies have no central authority.

There is no central bank or government to dictate their supply or who owns what.

Instead, cryptocurrencies live on distributed ledgers.

Anyone can own a copy of the ledger and use cryptography to participate in verifying transactions.

The incentive for doing so is rewards in the form of newly minted coins plus transaction fees. 

2. Regulation

Cryptocurrencies are developing at such a rapid pace that it is hard for regulators to keep up with the innovation in the space.

While cryptocurrency gains are taxed in most countries, they are not considered legal tender.

The Securities Exchange Commission in the United States has yet to categorize or designate clearly the status of cryptocurrencies. 

3. Volatility

Cryptocurrencies are inherently volatile. Their price can swing wildly from one day to another.

4. Storage

Unlike cash, you can’t store your crypto at a bank yet.

The regulatory status of crypto hasn’t advanced enough for this to happen.

Instead, you need to use a cryptocurrency wallet to store your digital tokens.

A crypto wallet is a piece of software that allows you to securely store your private keys on a blockchain.

You can store your crypto in a digital wallet that is connected to the internet, or you can use a hardware wallet to place it in cold storage.

Cold storage wallets are much harder to hack. However, you are solely responsible for them.

Also, there is no protection against wrench attacks. It is not uncommon for criminals who know you hold crypto to come and seek you out and steal your crypto by threatening you.

Unfortunately, there aren’t many good ways to protect against this kind of attack yet. 

5. Insurance

There have been many cryptocurrency scams and hacks.

Unfortunately, there is no government insurance policy to protect you from this.

If a crypto exchange goes insolvent, governments do not step in to bail it out.

In the United States, for example, the Federal Deposit Insurance Corporation (FDIC) protects users’ funds up to $250,000. 

6. Supply

The Federal Reserve controls the supply of dollars, whereas a blockchain’s network participants control the supply of a digital asset.

Together, the community can decide on the parameters of how much of a digital asset will be minted.

For some currencies, such as Bitcoin, the supply is very unlikely to change.

Bitcoin’s supply is set at 21 million, and it is this fixed supply that lends it the store of value narrative.

Contributors to the networks are unlikely to vote to change this.

Other cryptocurrencies, such as Ethereum, are inflationary. They will continue to print more coins in order to reward validators for verifying transactions.

The Federal Reserve, on the other hand, can print as much money as it likes, and when this gets out of control, it leads to inflation and the deterioration of traditional currencies.

7. Physical representation and use

You can withdraw traditional currencies from an ATM or bank.

Digital currencies do not have real-world representation. Attempts have been made (see what does a physical Bitcoin look like), but these were soon clamped down upon. 

How Do Cryptocurrencies Work? 

How Do Cryptocurrencies Work?

A cryptocurrency lives on a blockchain.

A blockchain is a string of files that are bound together and contain crypto transactions. Some people argue that cryptocurrencies have no intrinsic value and that they are make-believe money.

This is true.

However, it is also true of fiat currencies and other forms of money, such as gold.

Currencies are a common delusion and part of human culture.

As cryptocurrencies are becoming more and more embedded in our society, they start to seem less of a delusion and become more acceptable. 

Blockchains are distributed databases, meaning anyone can hold a copy and verify transactions using them.

Bitcoin uses what’s called a proof of work consensus mechanism, while Ethereum and other blockchains use a proof of stake algorithm.

In a proof of work, participants compete to add a new block of transactions to the blockchain in return for which they are compensated with newly minted Bitcoins and transaction fees.

In a proof of stake, blockchain validators lock up a certain amount of the native crypto coin. e.g., ETH,  and if they are found to be cheating, their stake is slashed. 

FAQs

Can you get real money out of crypto?

Yes, you can convert crypto for cash at an online brokerage or crypto exchange. You can also use a peer-to-peer platform to transact directly with others.

In the early days, people would meet in person to make a trade. Nowadays, crypto exchanges perform millions of crypto transactions on a daily basis.

Can you actually use cryptocurrency?

While you can use cryptocurrency to purchase goods and services with select vendors, the biggest use case of crypto is as an investment.

For example, you can lend your crypto in order to get a return, you can trade it by speculating on the price of the asset, or you can hold it for long-term capital gains.

Is crypto money real?

Cryptocurrencies do not have a physical representation; however, they are digital currencies that can be used within the world of crypto. 

Can you lose real money with crypto?

Yes, if you invest in a cryptocurrency and sell it after its price drops, you will lose real money. Cryptocurrencies are volatile, which means you can both make and lose money. 

Is it good to cash out crypto?

When you cash out crypto, you will have to pay taxes on any capital gains you have made. 

Is crypto like gambling?

For many, trading crypto can be similar to gambling. If you are not experienced in trading, you are likely to lose your money. However, a principled investment approach over the long term has led to lucrative returns for many without any of the stress. 

Can you spend Bitcoin like cash?

Yes, some places that accept Bitcoin, like cash, as a marketing gimmick. Examples include Amazon, Burger King, NameCheap, and Shopify. 

Markos Koemtzopoulos is the founder and main writer of ElementalCrypto. He has been a lecturer at the University of Nicosia on cryptocurrencies and DeFi and has taught two courses on crypto and blockchain technology.

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