Investing 102

[sik68]

These recent posts on bitcoin have really guided me to learn more about currencies and so here's a summary based on how I understand it.

A currency falls into 2 categories: an instrument of equity, or an instrument of debt.

A currency that is backed by a tangible asset (like gold) is an instrument of equity. At any time, your notes can be traded in for a ratio quantity of the asset. Of course, it can be argued that the value of gold is arbitrary, but there are a lot of valid reasons why it works. Not rocket science, but I'm stating the obvious to draw the distinction with non-backed currencies.

A currency that is not backed by a tangible asset is only an instrument of debt; an IOU traded among people who agree on its value. It is only backed on faith by those using it.

Again, not rocket science...the concepts are basic but thinking about the difference between an asset based monetary system vs a debt based monetary system and you start to see the world through a different lens.

I know this is not directly Investing 102 material, but I think it applies, because it is important for us as investors to recognize the distinctions between not only speculation vs investing, but also the distinction between real assets and IOUs, aka liabilities.