WHAT’S WRONG WITH CRYPTO-CURRENCIES — AND HOW TO FIX IT
Most articles on the benefits of Bitcoin (and their ilk) conflate the ideas of ‘commodity’ and ‘money’.
Commodities (like gold) have their own intrinsic value.
Money is simply information.
Contrary to the ideas behind Bitcoin, money works best when the token that represents it has no value itself.
Historically, money was (and remains) a ‘record of debt’, first transcribed on clay tablets and later as an amount (the face value) on metal coins (the tokens), as well as via many other media, including shells, sticks and stones.
The debt (as evidenced by the face value of the token) is owed by society to the holder of the money.
When a person works or invests they are either directly or indirectly adding value to society. The measure of the value that they add is determined in negotiation between the buyer (who gets the value) and the seller (who provides it).
What the seller gets in return is nothing of value. They simply get a bit of metal or paper or an electronic record (that we call ‘money’) which is nothing more than information about the value the seller has provided to a member of society.
The form of the record is determined by the community where it is accepted.
It records the debt that all members of the society then owe to the holder. In effect, we collectively promise to give back real value (in the form or goods and services), equal to the value that the seller has contributed to one of our own — NOT MORE OR LESS.
As a corollary, it represents a right by the seller to claim resources from society. It also gives the seller the means to ‘vote’ for what they want produced to meet their needs. No money, no vote.
For this to work, the token representing the ‘record of value’ (money) should be without value.
If you conflate the value of the token (say gold) with the value of the debt (the face value of the money), it can lead to hoarding (when the value of ‘material’ in the token exceeds its face value).
Worse, conflating the token with its face value completely negates the basic principle of money that you should only be able to take out of society what you put in. It also makes it impossible to account the profit and loss on the sale of goods and services.
A few years ago someone paid 10,000 Bitcoins for a couple of pizzas worth $40 (the real value of the transaction). Today, for doing nothing but holding the record of value (10,000 bitcoins), the seller could take back out of society $20 million of goods and services. This is a preposterous result, due solely to a perceived increase in the value of the token!
If the seller contributed $40 value, they should get to take out $40 value (in real terms) whether they spend it immediately or at any time in the future.
On the other hand, if the ‘value’ of Bitcoin again collapses (as it surely will), those who gave good value for it, will find they cannot get back the same value from society.
Society cannot function on this basis.
Bitcoin and its ilk are a disaster waiting to happen.
This is not to say the current monetary system is without major flaws.
Fortunately, a new crypto-currency is evolving that will act as true money, that will have none of the flaws of the current system or of the existing crypto-currencies.
The value of these new electronic tokens will be zero.
What they will do is act as a stable ‘record of value’ for each transaction, so people can take out of society what they put in (not more or less) — whenever they choose to spend.
It will enable everyone to confidently account the profit and loss on the goods and services they buy and sell, without having to consider the impact of currency trading.
Holders will also be assured that their record cannot be counterfeited, lost, stolen, destroyed, duplicated or negated — making collapse of the payments system impossible. But that’s another story in the making :)