Money —and the fluctuating value of money — is a concept that can be tricky to wrap your head around.
At its most basic and practical level it is a bartering tool. Now we have fiat money. Fiat money is a government-issued currency that isn't backed by a commodity such as gold.
In the days before cash (fiat), we might have traded a dozen eggs for two litres of milk, but now fiat has allowed us to simplify the transaction by assigning value to these objects and trading them in cash instead of products.
An object’s cash value may seem arbitrary, but it mostly comes down to its perceived value combined with supply and demand. Each country has their own fiat, and the value of these currencies fluctuate against each other. Many things can influence the value of the currencies, such as confidence in the related economy, interest rates, and supply and demand.
The Pandemic’s Impact On Fiat and Crypto Currencies
The extent to which a currency increases or decreases value is the extent to which a currency increases in value or decreases in value when it’s measured against another currency.
If confidence in the Canadian economy had fallen due to the COVID-19 pandemic, our currency’s value would decrease as well. However, if confidence in the American economy had fallen MORE than the decrease in confidence in the Canadian market, then (all else being equal), the value of the Canadian currency would be seen as having increased.
During periods of extreme turmoil — like war, a recession, or in this case, a pandemic — there is often a gravitation away from currencies and an increased demand in vouchers that are not tied to a specific country. In the past, we could look to the value of precious metals (gold, silver, and platinum) as a way of judging confidence in currencies.
Now, we have a new unit of measure that’s also independent of national ownership: Bitcoin.
What Is Bitcoin?
Bitcoin is a cryptocurrency (digital currency) that responds almost exclusively to supply and demand and has shown similar behaviour to gold during this pandemic (see charts below). Developed in 2009, Bitcoin is becoming the “bullion” of the millennium for many.
Are you using Bitcoin, cryptocurrency, or precious metals to hedge against a downturn in the economy or falling trust in currencies? Or are you confident that cash will remain king, in spite of the fallout from the pandemic? Let us know in the comments section below.
If you have any questions about exchanging cash assets, make sure to get in touch with us!