Editor’s note: I am using enough of the ideas of bitcoin enthusiast Ed Clements that this post should be considered collaboration between us. For more, check out his site, ThinkingInBitcoins.com.
Currency is a medium of exchange that is generally accepted as money. A lot of different currencies exist. They generally fall into 3 categories.
Asset – based currencies have value in and of themselves. Some examples:
- Gold – has been recognized as money for nearly 3.000 years
- Silver – has been a favored medium of exchange for small transactions since it is less rare than gold
- Barter – trading goods requires face-to-face negotiations and has complicated tax consequences
- Time – time exchange networks have caused simple labor exchanges to regain popularity. I am a member of the Austin Time Exchange Network.
Asset-based currencies are generally the “push” type. That means the party sending the transfer of currency initiates the transaction by pushing it to the receiver.
Debt-based (also called fiats) are the creation of government-sponsored banks (central banks). Their value is guaranteed by the “full faith and credit” of the issuing nation. Most started out as asset-based (the US dollar was 1/20 oz of gold for most of its history). A complex mechanism called “fractional reserves” is typically employed to allow fiat currencies to be manufactured.
Most debt-based currency transfers are the “pull” type. The party receiving the money initiates the transaction. Push and pull each have advantages. Here is a chart:
Proof-Based aka Cryptocurrencies
Cryptocurrencies are backed by cryptographic proof that each unit of the currency exists only once. They also have the advantages of both “push” and “pull” type mediums of exchange:
But wait, there is more! Cryptos have the following additional benefits for merchants:
- Proof-based currency transactions are irreversible. That means there are no charge backs or fraudulent transactions. These issues are significant problems for vendors accepting credit cards.
- The sender pays transaction fees. Credit and debit card fees are actually very high but the merchant absorbs them – passing them on to consumers as hidden higher costs.
- There are negligible setup costs to start accepting Cryptos. It simply involves downloading some software and setting up an account with a currency exchange.
The ability to conduct transactions in cryptocurrency is going mainstream. You should grab lunch at Subway today and pay with bitcoin!