Currency

A currency is a medium of exchange which facilitates trade in goods and services. Currencies may be comprised of tangible assets (precious metals or universally required commodities), or intangible assets like time, cash or electronically stored information.

While goods and services can be bartered directly, currencies eliminate the difficulties involved in finding bartering partners by allowing entities to trade indirectly.

Fiat currency

Fiat currencies are the most established form of currency. These are issued and regulated by government monetary authorities or central banks.

The base money which makes up fiat currency in circulation is comprised of cash in the form of banknotes and coinage. Book money – balances owed by banks or other financial service providers to investors who deposit base money with them, also plays a significant role in fiat currencies.

The value of a fiat currency is determined by supply and demand. The supply of fiat currencies is controlled by the monetary authorities or central banks which maintain them.

Community currency

Community currencies are currencies which serve as a medium of trade within a specific community. This may be a physical community (a municipality or region, for example) or an ideological community (a political or social movement, for example).

Cryptocurrency

Cryptocurrencies are currencies which are comprised entirely of electronically stored information and make use of encryption and (typically) blockchain technologies to prevent the duplication of currency units.

These are technically fiat currencies in a strict sense of the term, because they have no intrinsic value outside of the service which they provide in facilitating the transfer of value.

Most cryptocurrencies are maintained and controlled by entities such as companies or interest groups. Some are fully decentralized, with transactions being fully automated and decentralized computing power being used to power transactions.

Cryptocurrencies are more widely used as store of value than as transactable currency.

Precious metals

Precious metals like gold and silver are one of the most widely accepted forms of currency. They have served as currency for thousands of years due to their scarcity and physical properties.

The limited supply and high demand for these commodities means that they are highly liquid. However, today they are more widely used as stores of value than as a means of payment for goods and services.

Tradable commodities

Highly liquid commodities – goods for which there is a strong or universal demand – are also used as currency because the ability to trade them for other goods and services quickly and easily makes them a viable trade medium.

In the past, materials which were highly sought after such as cowrie shells and beads were used as currency in some regions.

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