Most people have heard the saying, “money makes the world go around,” at least a few times in their life.

The basis for money is the exchange of goods and services between two parties.

Rather than exchanging goods or services, people now tend to exchange money when they want to buy or sell something.

Even casino chips are examples of how people take a particular item, attach a financial value to it, and then use that item to gain even more wealth.

Below is a rundown of how money works, along with an explanation about cryptocurrencies.

The Basics of Money

The best way to define money is to call it a medium of exchange. People have been exchanging goods or services since the dawn of mankind.

If one person has an item the other wants, while the second person has an item that interests the first person, they can exchange those goods to their mutual benefit. The problem with such a process is that it is cumbersome, imprecise, and not always scalable.

That is where money comes into the picture.

Commodity Money

The first form of money as we know it in the Western world was called commodity money. Countries would use specific items, such as beaver pelts, dried corn, or other unneeded items, and attach a financial value to them.

Having those items would allow people to trade with others who also accepted that form of commodity money. Precious metals also played a role in the exchange, with gold, silver, and copper used to back up the commodity money.

Eventually, nations such as the United States moved on to paper money and coins, the currency that we know today.

Flat Money

When we assess different currencies around the world and their exchange rates, we are not discussing commodity money. Modern-day currencies are flat money, which means their value is not backed up by another physical commodity.

A flat currency, such as the United States Dollar, Euro, or Japanese Yen, gets its value from the supply and demand. When financial experts understood that commodities such as gold were finite resources, creating a different system of money became necessary.

A significant change in this direction came in 1971, when the United States Dollar was taken off the gold standard. That meant a person could no longer redeem a dollar in gold, while the price of gold and the dollar did not have a specific link anymore.

Asset Liquidity

When you listen to people talking about wealth and savings, they may refer to the liquidity of a specific asset. The reason why flat money is so useful is because of its liquidity.

A person can go into a bank and withdraw their entire account balance, or ask for a check to provide to another person or financial institution. If you have valid cash in your pocket, you can likely redeem it anywhere in the world with a little bit of effort.

Other assets, such as property or jewelry, are not as liquid. If you own a house, but do not have any cash, you would have to sell your home to increase your liquidity.

Understanding Cryptocurrencies

The cryptocurrency market has taken the financial world by storm in the past few years. A cryptocurrency is one that is digital-only, and does not have any physical element.

When you are investing in cryptocurrency, you are investing in a form of money that works by recording transactions into a digital ledger. No one can fake or overwrite a transaction, which adds a great deal of security into the process.

Crypto ledgers are 100 percent public, always online, and do not involve the control of any central bank or government. These currencies, such as Bitcoin or Dogecoin, are protected by high-end encryption that is all but impossible to break.

No one can fake cryptocurrency, which means that counterfeiting is not an issue. Since it takes a great deal of resources to “mine” each block of cryptocurrency, there is a finite amount in the digital space. That is why supply and demand play a heavy role in the value of cryptocurrencies, relative to each other and regular currencies.

Roughly 90 percent of the Bitcoin that will ever be created is already present, which is why the price of a single Bitcoin has gone up from a few pennies to tens of thousands of dollars in the past eleven years.

Mining Crypto

A lot of people assume they can get rich if they spend all their time mining cryptocurrencies, but that is almost never the case. The resources required to mine a single Bitcoin are enormous, and cannot be replicated by standard desktop or laptop computers.

Even if someone had access to a powerful computer, any Bitcoin they mined would have to compete against the money they were spending on electricity to power that computer. Making a profit on crypto mining is only possible for very large organizations, not regular people.

Practicing Safe Trading

As people learn more about money and cryptocurrency, they become curious about investing in Bitcoin or other crypto. While such an idea is clever, as you can make a lot of money by smartly investing in currencies, you must be careful.

Cryptocurrencies are known for routinely crashing in value by extreme amounts, which is why they are not commonly used for financial transactions. They can also significantly rise in price in a short time, leading to some lucky investors making large profits.

Start small if you are curious about investing in crypto. Only invest an amount you are happy to lose, and then you can assess your ability to buy and sell at the ideal moment before you make any further investments.