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Information about Digital currencies.

Information about Digital currencies.

What are cryptocurrencies?

Cryptocurrencies are digital tokens. It is a type of digital currency that allows people to make direct payments to each other through an online system. 

Cryptocurrencies have no legislative or intrinsic value; It is simply worth what people are willing to pay for it in the market. This is unlike national currencies, which get part of their value from legislation as legal tender. There are a number of cryptocurrencies - the most popular being Bitcoin and Ether.

The activity in the cryptocurrency markets has increased significantly. It seems that the fascination with these currencies was more speculative (buying cryptocurrencies for a profit) than related to their use as a new and unique system for making payments. 

In connection with this, there has also been a high degree of volatility in the prices of many cryptocurrencies. 

For example, the price of Bitcoin rose from around $30,000 USD in mid-2021 to nearly $70,000 USD at the end of 2021 before dropping to around $35,000 USD in early 2022. Competitor cryptocurrencies such as Ether have seen similar fluctuation. 

The extraordinary interest in cryptocurrencies has also seen an increased amount of computing power used to solve the complex codes many of these systems use to help protect them from corruption. 

Although the level of interest in cryptocurrencies has increased, there are doubts about whether they can replace traditional payment methods or national currencies.

How does a cryptocurrency transaction work?

Cryptocurrency transactions happen through emails that are sent to the entire network with instructions about the transaction. 

The instructions include information such as the electronic addresses of the parties involved, the amount of coin to be traded, and the timestamp.

Suppose Alice wants to convert one unit of cryptocurrency into Bob. Alice initiates the transaction by sending an email with her instructions to the network, where all users can see the message. 

Alice's transaction is one of a number of transactions that have been submitted recently. Since the system is not instantaneous, the transaction sits with a bunch of other recent transactions that are waiting to be collected into a block (which is just a collection of the most recent transactions). 

Information from the block is converted into cryptographic code and miners compete to solve the code to add a new block of transactions to the blockchain.

Cryptocurrency is money!!

A frequently asked question is whether cryptocurrency can be defined as "money". The short answer is that cryptocurrency is not a form of money. 

To understand why, we can ask if the characteristics of cryptocurrencies match the main characteristics of money:

Widely Accepted Payment Methods - Can cryptocurrencies be used to buy and sell things? Money generally comes in the form of the country's currency, and it is widely accepted as a means of payment. 

While cryptocurrencies can be used to buy and sell things, they are not widely accepted as a means of payment, and surveys indicate that only a small portion of cryptocurrency holders regularly use them for payment.

Store of Value - Can cryptocurrency's purchasing power (its ability to buy a similar basket of goods and services) be maintained over time? The large fluctuations in the prices of many cryptocurrencies mean that their purchasing power is not maintained over time, which reduces their effectiveness as a store of value.

Unit of Account - Are cryptocurrencies a popular way to measure the value of goods and services? In Australia, prices of goods and services are measured in Australian dollars. While some companies may accept cryptocurrency as payment, it is not commonly used to measure and compare prices.

Therefore, while cryptocurrencies can be used to make payments, their use as a payment method is currently limited and they do not display the main characteristics of money.

However, there is one type of digital currency that can be considered money - the digital currency issued by a central bank.

What is a central bank digital currency?

Central Bank Digital Currency can easily be understood as a digital form of money. It can be issued by a central bank, accessible to the general public, and used to settle transactions between businesses and households. 

The unit of account will be the national currency, and it can be exchanged on par (i.e. one for one) with other forms of money, such as physical currency or electronic deposits with well-regulated financial institutions.

What are the main differences between cryptocurrencies and CBDCs? In other words, what makes CBDCs money? 

A central bank has the ability to ensure that the digital currency it issues exhibits the three main attributes of money - namely, that a central bank digital currency can act as a widely accepted means of payment, a store of value, and a unit of account.

Since it is issued by a central bank, a central bank digital currency will have legal tender status, making it widely accepted as a means of payment. 

A central bank digital currency would also be an equivalent store of value to other forms of money, as it could be exchanged for an equal value of physical cash or electronic deposits. Finally, the unit of account for the central bank digital currency issued by the Reserve Bank will be the Australian dollar. 

This means that it can be used to measure the value of goods and services. These and other key features are summarized in the table below.


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