What is money? It’s a simple question with no simple answer.

Most Americans assume money is the U.S. dollar, which they may hold in paper form or digitally in a bank account. For now, that’s true, although every paper currency in the history of the world has failed sooner or later.

It was not long ago that the Venezuelan bolivar was considered money in Venezuela, but today it’s worthless. It was not long ago that the Zimbabwe dollar was considered money in Zimbabwe, but now it’s also worthless.

Critics claim that contemporary forms of money “are not backed by anything.” Actually, all forms of money are backed by the same thing, which is confidence. If you and I have confidence that a particular form of money will hold its value, and you’re willing to accept it from me with confidence that someone else will accept it from you in time, then that form qualifies as money.

The classic definition of money is that it is a store of value, medium of exchange and unit of account. The last part is easy; almost anything can be a unit of account. But the roles of store of value and medium of exchange are more difficult. Those parts are based on confidence.

What about cryptocurrencies? Here the prospects for succeeding as money are not good. This article reports that all cryptocurrencies, led by bitcoin, lost $13 billion in market value in about three hours one day last week. This is all part of a pattern of strong rallies and catastrophic collapses in value that happen all the time in crypto-land.

The value of your cryptocurrency could be cut in half between the time you buy it in the morning and the time you try to spend it at night. These price moves put cryptocurrencies in the realm of fads and collectibles and deprive it of the stability needed to function as money. It’s one more reason for serious investors and savers to keep away.

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