How does currency traditionally work?
Governments print currency based on a floating system meaning that the money is floated in society. There are a few critical central banks, such as
the FED
European central bank
Bank of England
Bank of Japan
Swiss national bank
bank of Canada
RBA and RBNZ, the reserve banks of Australia and New Zealand
The central banks work in step with international governments and monetary policy.
Currency supply is varied and based on national or international economics, with indicators such as inflation rates, dynamic market forces, exchange rates and housing markets being key influencers. Regarding currency quantities and valuations, governments and central banks balance (float) between this supply and demand proposition.
What is currency genuinely worth? The answer is precisely what you get for it. There are several influencing factors on currency value.
What will that currency buy in a foreign market.
Treasury notes/government bonds.
Foreign exchange reserves mean the amount of a country’s capital held by foreign investors.
Import vs export: trade deficits also signal the value of a currency. If a country imports more than it exports, it will have a trade deficit and balance its account.
Political stability and international trade agreements influence the value of a currency. Countries with short-term governments or significant upheavals are less desirable.
Value is either pegged or free market. Pegged means that it is fixed, therefore directly tied to another currency or basket of currencies. Central banks and governments determine what the currency peg is.
The free market is a floating exchange rate whereby the market participants/actors determine the value. It’s self-correcting in nature and accounts for variables such as interest rates, inflation and debt. Free market currency valuation fluctuates with supply and demand, whereas pegged currency valuation does not fluctuate.
Remember, it is in this context that Bitcoin (BTC) and cryptocurrencies are born.
