Currencies and commodities refer to two different things. Each has its own purpose and its own source. However, there can be an overlap between the two, which can make things confusing. Below is a guide to the difference between currencies and commodities to help clear things up.
Currencies vs Commodities: What’s The Difference?
What is a currency?
A currency is a unit of value that is used to buy products and services. Currencies are regulated by a central authority (such as a nation’s government or a central bank) and used within specific countries. This central authority determines exactly how much of a currency is in distribution. For example, The Bank Of England controls the supply of British Pounds in circulation.
What is a commodity?
Commodities traditionally refer to physical goods like wheat, natural gas and coffee that are traded using currencies. Their amount is not dictated by any government as they are naturally occurring materials that are either mined or farmed. In recent years, the definition of a commodity has expanded to involve non-physical assets. This is where things can get confusing: any instruments that are used for investment purposes and purchased with a currency can technically count as a commodity.
Currency or commodity?
To better understand what counts as a currency and what counts as a commodity, it’s worth looking at a few examples.
Oil
Oil is a pure example of a commodity. The supply of oil is not controlled by a government or central bank. And while it’s possible to trade oil like a currency (such as trading a barrel of crude oil for a bicycle), it primarily has other purposes as a fuel or investment asset.
Gold
Historically, people would trade gold coins for goods. So is gold considered a currency? It’s a subject of debate, but generally speaking gold is no longer used to buy products or services in most parts of the world. Therefore, gold is more of a commodity. Besides, there are many other uses for gold – it’s commonly used to make jewellery and in some cases still used to make dental fillings.
Bitcoin
Bitcoin is a ‘cryptocurrency’. You could therefore argue that the very term crypto-currency makes it a ‘currency’. And you can indeed buy products and services using Bitcoin from many websites. However, financial experts still class Bitcoin as a commodity. Why? Because it’s not controlled by a central bank or government, and instead ‘mined’ by everyday people. It’s also not purely used as a currency. Some people buy Bitcoin simply as an investment asset a bit like oil or gold. And ultimately, you still need to use real currencies to buy cryptocurrencies in the first place.
Euros
Most people would consider the Euro to be a currency. In most situations, it is purely a unit of value for buying products and services. Its distribution is controlled by The European Central Bank. However, you could make an argument that Euros can be classed as a commodity in one particular instance – forex trading. In this situation, Euros are bought purely as an investment asset and not as a unit for buying products or services. This is why some people refer to foreign currencies as commodities in the case of forex trading – because they’re being bought in a similar fashion to gold or oil.
Conclusion
There is clearly a grey area as to what is considered a commodity and what is considered a currency. However, the true definition comes down to the purpose. Are you using it to buy other products or services? If so, it’s a currency. Are you using it for other purposes – such as a material or an investment asset? If so, it’s a commodity.
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