currency
Forex Basics | General

Currency

A currency as defined by Wikipedia is the most specific sense is money in any form when in use or circulation as a medium of exchange, especially circulating banknotes and coins.

Currencies since creation thousands of years back have greatly evolved. An evolution from ordinary symbols used to represent value stored in the form of commodities to coins to paper money. Today, digital currencies that have no governmental backing and are stored and used electronically.

Nowadays, currencies are usually government-backed rather than being pegged to the value of a commodity such as gold or silver. This was seen in earlier times. This type of currency is called “fiat currency.”

US dollars
US dollars

National Currency

A national currency is the legal tender of that particular nation. And while some countries may accept the currency of another country, basically, different countries issue their own currencies.

There are about 180 national currencies in circulation, recognized by the United Nations. Examples of national currencies include the United States Dollar (USD), Japanese yen (JPY), and the Britsh pound sterling (GBP).

The US dollar is accepted as a legal tender in other countries such as Costa Rica and Ecuador. The Euro is another currency legally in use in more than one country as it is accepted in most countries of the Eurozone.

Foreign Exchange and Trading

The rate or price at which a particular currency is substituted for another is called its exchange rate. This rate is constantly affected by both economic and political occurrences.

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Currencies can be substituted for another at a bank or an airport kiosk. Exchange of currencies allows ease of international trade, by removing the barrier the lack of acceptable legal tender would pose.

Built upon this is foreign exchange trading which is done on the foreign exchange market. The foreign exchange market is also known as the forex or FX market. The forex market is where the largest currency exchange transactions occur. People engage in foreign exchange for a host of reasons. Some of these reasons might be travel, business, or even speculation.

Types of Currencies

Based on the presence of a overseeing body, there are two types of currencies. They are centralized and decentralized currencies.

Centralized Currencies: A centralized currency is a currency that is overseen by a body. This body is responsible for regulating its value causing it to be very stable. These currencies are mostly created and backed by governments and regulated by central banks. An example includes the Australian dollar regulated by Reserve Bank of Australia. Another example is the Japanese yen regulated by the Bank of Japan.

Decentralized Currencies: These currencies with no central overseeing body. This means that the currency is secured through blockchain technology present on a peer to peer network. These types of currencies emerged with the advancement in technology. Examples include bitcoin and ethereum. The advantages of a decentralized currency include having no single point of failure, fraud prevention, and no government meddling. Disadvantages include volatility

In conclusion, a currency facilitates the exchange of goods and services, hence, it enhances trade.

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