One of the first rules of investing is that you need to have a degree of diversity in your assets. That way, if something goes wrong with one asset class, you will have another asset available to pick up the slack. But how does that work if most of your assets are denominated in a specific currency, like that issued under the authority of Bank of Canada?
For some consumers and investors, the idea of an alternative currency independent of a federal government is an attractive one. In fact, over time local currencies have cropped up around the world. Even in Canada there are examples of local alternative currencies. One of the most popular — even though it might not actually be considered a true currency — is Canadian Tire Money. While it makes sense that it’s mostly for use at Canadian Tire locations, there are also other stores that accept it as payment.
But that’s not all. Some places, like the community of Salt Spring Island in British Columbia, issue local currency that can be used in participating establishments. These currencies are often backed by federally issued currency, though.
Another option is to use alternative forms of money, such as gold and silver coins (not federally issued). In the United States, there are some states, like Utah that allow consumers to use gold and silver coins that aren’t normally thought of as legal tender, such as “silver eagle” and “gold buffalo” coins, as legal tender. If a shop is willing to accept the coins as currency, for their value according to weight, then you can use it as currency, even though it’s not federal legal tender.
What About Bitcoin?
For the most part, alternative currencies operate in local areas. You can’t take your Salt Spring currency and use it in Calgary. None of the shops would accept it. One of the alternative currencies working to take the concept of alternative shopping global is bitcoin. Bitcoin is a global digital currency, created from computer processing power. If you have bitcoins, you can exchange them digitally with others for goods and services. In my hometown, there is someone who accepts bitcoins. Since the transactions take place digitally, there are no fees, and you don’t have to carry around a wallet (although you do need to be able to access your digital wallet on a computer device).
Bitcoin has received a lot of attention lately due to the fact that it is possible to use exchanges to turn in your bitcoins for other currencies. At one point, you could exchange one bitcoin for US$1,000. However, unlike other alternative currencies that are backed by more “official” tender, or by their metal content, or by some other means, bitcoin isn’t backed by anything.
And, in the end, no matter what is “backing” a currency, any medium of exchange only works so long as those involved agree that it is “worth” a certain amount in goods and services. Even barter could work as a medium of exchange — as long as you had faith in the value of what someone else is offering.
What do you think of alternative currencies? Would you consider using them?