Professional Documents
Culture Documents
org -
1. Prologue
2. Bitcoins overview
3. Barter system
1. #1: Double coincidence of wants
2. #2: Division of Labour
3. #3: Divisibility of Value
4. #4: Fungibility
4. Bitcoin and Fungibility
5. Mock Questions
Prologue
Original plan was to write on Bitcoins. But for Bitcoin related MCQs, group discussion (GD) and interview
questions, one must know the basics of money itself. Only then you can see how Bitcoin is better or worse than
the money we use today- rupees, dollars or Euros. Hence a long series of articles.
1. In the first few of articles (total 3), well see why did people start using traditional money (Rupee, dollar), how
is it better than bartering system. And how is bitcoin better or worse, on those parameters?
2. In the second batch of articles, well see evolution of money system: from commodity money, metallic coins,
fiduciary money, gold backed paper currency, fiat money, bank money etc.-what were their advantages and
limitations. And how is bitcoin better or worse on those parameters.
3. And in the final articles, well see what is bitcoin exactly? from where does it come? How does it operate?
Advantages, limitations, future applications and regulatory issues etc.
Bitcoins overview
Bitcoin is a digital code. (Some) people use it as currency.
Started in 2009 by Satoshi Nakomoto. He could be a man or a woman or a group of people- real identity
unknown.
There are two ways to get Bitcoins:
#1: Mining
#2: Exchange
Barter system
People have been trading with each other even before the advent of money, coin, cash, currency, rupee,
dollar, euro or Yuan.
They simply exchanged goods and services with each other through barter system- 1 kg rice for a 200 gms
tomatoes, 1 kg tomatoes for 50 gm almonds and so on
Bitcoins
#4: Fungibility
Even if items are divisible, their fungibility is a problem under barter system.
Fungible items = those items whose individual units have same uniform value and mutually exchangeable, interchangeable. For example:
1. The value of first five pages of harry potter book= Not same as the value of last five pages of the same
book. Because in the last pages you get the climax so theyre more precious= not fungible.
2. Value of one diamond of 100 carat = not equal to ten smaller diamonds of 10 carat each. In this case, bigger
the size, more precious. Even those 10 carat diamonds are not mutually interchangeable because their
individual value may vary depending on cut,color and clarity.= not fungible.
3. If Picassos painting was cut into nine equal square parts, then Central Square will be more precious than
others. So you cannot interchange them. And if you glue these torn parts together= its total value will be far
less than the original painting=not fungible.
4. Exception: Precious metal. Value of 1 kilo gold bar= Value of 100 gold coins of 10 grams each. You can
melt to reunite them, you can melt again to divide them. And those 100 gold coins will be interchangeable
because their individual value will be same.= fungible.
But by and large, goods are not fungible and this creates obstacle in barter trade, when two commodities are not
available in their standard weight/size. For example, Suppose the ongoing barter rate is 5 kilo salt = one live hen
weighing 500gms.
A poultry farm owner wants to buy 2.5 kilo salt. He gives the whole live hen to shopkeeper.
Common sense suggest that shopkeeper should give 2.5 kilo salt and cut half of the hen and return it.
But which half? In non-veg cooking, the legs of chicken are considered more valuable than its head and
neck upper part. = dispute between customer and shopkeeper.
Overall, the customers in a barter-trade will end up buying more than what they really need. (e.g. 5 kilo salt
even if he needs only 2.5 kilo.)= considerable wastage and sub-optimal use of resources.
Money system solves this via fungibility.
Rs.1000 note= can be exchanged for 20 notes of Rs.50 each. And each of those 50 rupee notes have equal
purchasing power. A 50 rupee note in your pocket will buy as many ballpens, as the 50 rupee note in my
pocket. (as long as ballpens are of same brand-model.)
Similarly ten notes of Rs.100 can be exchange for a single note of Rs.1000 and so on.
But there is an exception: Someone might offer 1000 rupees for a single 10 rupee note that has unique serial
number like ABCD-123456789. but ignoring such exception, currency notes are fungible.
So, if you give Rs.100 note to shopkeeper to purchase a ten rupee worth ballpen=> hell give you 10 rupee
pen + one note of 50 Rs. + four notes of 10Rs.
Still Money system too has limitations:
You cannot pay Rs.149.75 through notes and coins because 25 paisa is out of circulation. (Although possible
if you pay via credit card, debit card or internet banking)
Persistent shortage of chillar coins. And if you cut a ten rupee note into ten parts using a scissors, itll not
become ten 1Rs. notes.
Persistent looting by Shopping malls. Items priced @Rs.99, 499 or 999 often, cashier wont give you one
rupee coin back but instead gives a chocolate. (He is making additional profit because for him cost price of 1
chocolate is less than 1 rupee.)
barter
Bitcoin
No
Yes
Hardly
yes
Not
always
Not
always
Yes
Divisible?
Fungible?
In the next article, well see more on Barter vs Money vs Bitcoin, with reference to storing wealth, account keeping,
deferred payment, circular flow of income etc. parameters. click me
Mock Questions
Assertion reasoning instructions: Each of the following questions contain a set of Assertion (A) and Reasoning
(R) statements. Answer codes are as following
A.
B.
C.
D.
Questions:
1. (A) Money brings down the cost of transaction in trade, compared to barter system. (R) Money promotes
division of labour.
2. (A) A trader is free to refuse payment in Bitcoins. (R) Bitcoin is not a fiat currency.
3. (A) A Barter economy is less likely to have to food inflation. (R) In Barter system, trade can happen without
double coincidence of wants.
MCQs
4. Correct Statement(s) about Bitcoins?
a. It is a digital fiat currency without fungibility.
b. It is not a fiat currency but has all the properties of a fiat currency.
c. Both A and B
d. Neither A nor B.
5. Find Incorrect Statement(s)
a. One fiat currency can be exchanged with other fiat currency.
b. Bitcoin cannot exchanged with fiat currency.
c. Both A and B
d. Neither A nor B
6. Correct set of fungible pairs?
a. One i-phone of 64 GB capacity vs Four Nexus phones of 16GB capacity each
b. 1 Bitcoin vs 108 Satoshis
c. 1 Rupee vs 100 cents
d. None of Above
Q7. Which of the following statement(s) is/are incorrect?
1. Bitcoin algorithm is designed to generate 21 million coins every year.
2. There are two types of Bitcoins: mined bitcoins and exchanged bitcoins, theyre not fungible among
themselves.
3. Smallest unit of Bitcoin is called Satoshi.
Choice
A.
B.
C.
D.
Only 1 and 2
Only 2 and 3
Only 1 and 3
All of them.
Q8. Which of the following is/are the benefit(s) of barter system over money system?
1. Trade is possible without double coincidence of wants.
2. It promotes division of labour
3. Bartered commodities are always fungible.
Choice
A.
B.
C.
D.
Only 1 and 2
Only 2 and 3
Only 1 and 3
None of Them.
Q9. If a Barter economy is transformed into Money economy, what will be the consequences?
1. Increased Economic Efficiency
2. Increased Transaction costs
3. Increased specialization among workers
Choice
A. Only 1 and 2
B. Only 2 and 3
C. Only 1 and 3
D. All of them
For more on Economy, visit Mrunal.org/Economy