What is Bitcoin’s intrinsic/underlying value?
A monetary lesson to Dollar and to Euro by Cryptocurrencies like Bitcoin and Ethereum
According to a paradox right under our noses, the most used thing in human history has the most fuzzy definition ever: money is something that is generally accepted in payment for goods and services.
Hey! Generally?
Is the foundation of the economic system based on something that contain the word “generally”? Are we serious?
If you look at a common dictionary, money is:
- something generally accepted as a medium of exchange, a measure of value, or a means of payment: such as
- wealth reckoned in terms of money made her money in the insurance business
- a form or denomination of coin or paper money
Here above you see what ORDINARY PEOPLE are supposed to know about money. The concepts are 1) general acceptance 2) recognition or 3) denomination/unit of accounting.
According to this view, you can see that money is about multiple people sharing the same agreement.
In a more broad analysis, we can add the economist point of view where money is also a store of value. That means that money is both an agreement and a product with its own function.
If you overcome the conflicting definition that money is both an agreement and a product you can look backward to the first person who accepted money: the truth is that for her this wasn’t generally accepted at all!
Think about it: you come back to an ancient time and you are the first person that is offered money in exchange of your food, you have a choice: eating or exchanging with something that nobody else accept.
As a ordinary person,
would you be so insane to accept it or
would you suspect a fraud?
If a definition must be honestly accepted, this must as well be true in every state or condition: both at the beginning of the time and nowadays.
The 2 huge Antinomies of Money
The point is that the foundations of the world economy are based on a huge ANTINOMY.
Antinomy is a philosophical concept that refers to a real or apparent mutual incompatibility of two concepts: you cannot say something and the opposite in the same definition
This is what happens when we define money:
- money is an agreement AND money is a product
2. money is something generally accepted AND money was accepted the first by someone
You can imagine in the modern history of humanity how many debates, theories and suppositions took place to overcome these antinomies inside the concept of money: the point was that nobody could prove any of these just because 99,999% of economists were born in a time where money was GENERALLY accepted!
Something changed in 2009!
Bitcoin teaches the lesson.
In 2009 someone unidentified invented a currency that existed only on internet and people started using it. This was the first and biggest monetary experiment ever because not only nowadays Bitcoin became generally accepted but also a lot of different currencies (cryptocurrencies) were born from zero and none of these were generally accepted at day 0.
Cryptocurrencies proved a revolution in the concept of money as a medium of exchange, unit of account and store of value.
When?
When multiple groups of people started raising funds through an Initial Coin Offering of a new currency.
This new phenomena help you to visualise not only the starting point of a cryptocurrencies but the starting point of every currencies!
In the case of cryptocurrencies , people offer traditional currencies like Euro, Dollar, etc in exchange of a cryptocurrency.
Why people want to buy a currency that has almost zero value?
This has something to do with expectations: people have expectations in the short and in the long term.
The people that have the expectations in the longest time they are the first mover. What they accept? They accept a promise.
Forget for a while the traditional definition of money and take this new definition of money:
MONEY IS A PROMISE: holding/accepting a particular currency means expecting that in a certain future there will be a product you are willing to exchange with.
The first mover in the Bitcoin space were enough confident to find in a future time a desired product that could be exchangeable with Bitcoin.
Against the concept of a group decision to accept money, this promise-based concept brings the focus on a individualistic decision to accept a credible promise:
I exchange my products with Bitcoin because I’m confident I will find something in the future that I would like to exchange with (products or a different currency)
The first mover decides on faith and opportunity, and the late-comer?
Money is a promise as well also for the late comer (the one who has expectations in the short term) because the trust needed in the promise to find a desired thing in the portfolio of products is enormously less than for the first mover.
In a well-functioning monetary system
the promise is almost instantly fulfilled and then you say:
money is generally accepted.
The Promise-based concept of money overcome the problem with Antinomies because in this view money is a Promise in every state: when money was born and nowadays.
The origin of a currency and its acceptance among currencies
In 2017, the year I’m writing, the major cryptocurrencies Bitcoin and Ethereum both represent a promise of a wide range of exchangeable things.
From a monetary experiment perspective point of view is interesting to look at currencies like SiaCoin or Storjcoin. These are currencies that have a portfolio of only 1 exchangeable thing: cloud storage (the space where webpages live).
On internet there is a huge demand of cloud storage. The creators of these coins invented an architecture where individuals can offer their unused storage space in exchange of…. what? In exchange of an invented coin: we will call it for simplicity storage-coin.
- Storage buyers buy storage-coin
- Storage sellers have storage-coin to buy more storage or to sell to Storage Sellers in exchange of something else
Since storage is something that also Non-storage-coin-owners want to buy, here you can find the connection point between other portfolio of exchangeable things
3. Storage-coin-owners can exchange their storage-coin with other-coins in case they trust the Promise of finding something interesting in the other coin-portfolio of exchangeable things.
When you accept money you finance a particular future
According to the Promise-based logic, the first-mover who takes part to an ICO of a storage-coin, she is financing the future, she is financing the building of the storage-product promised by the creators.
Money is financing: because accepting money means
planning an exchange in the future
Creators of storage-product have the time to build the products and they can give place to 2 possible outcomes:
- they deliver the storage-product the First Mover expected, so that First Mover give their storage-coin back to the Creators or to tho the Late-Comer who ask for the delivered product
- they fail to deliver the storage-product and the value of the storage-coin drop to zero because you cannot exchange it with anything. In other terms means that you lost what you gave in exchange for storage-coin.
Challenges of Euro, Dollar and other Legal-Tender-Currencies in a Promise-based view
The currencies we are used to have in our pocket and bank account represent a portfolio of exchangeable things as well, or better they represent the promise that in a certain future you will find something you will exchange with. Yes, an easy promise because everything is almost instantly exchangeable…nowadays.
Considering the currency
as something generally accepted
involves a HUGE RISK
and the risk is that this currency will be generally accepted whatever. And this is not true because the currency is accepted as long as they can keep promises.
Euro is an authority based currency. When the authority print these out they are making a promise that you will find something exchangeable, but the things you will find out in the future do not depend on the same authority.
Actually the monetary authority is making promises with the “scary” hope that people of good-will, such as entrepreneurs, will provide things that will keep the promises as they always did: this is a huge bet since the authority neither don’t really know what nor it knows how to effectively help.
European structural funds/plans works as well as a tool to implement a strategy for the future of Eurozone and to promise what Eurozone will be. If you have Euro, like me :), in your pocket or bank account you are financing this vision, you believed in this promise. What? You don’t know how Europe will look like in the future? Well…. I think you should, if you don’t want to have wasted what you gave in exchange of that Euros.
In this Promise-based view the most important open topics are related to these mega-trends:
- The Dollar looking for its new identity
For a lot of years, billions of people wanted Oil, all the countries wanted Oil and you could exchange Oil only with Dollar. You can imagine now how powerful is the Dollar when is in direct relation with something that all the world ask for.
What can happen in the shift from a Oil based society to a Electricity based society? Dollar can stay as powerful as it is? What USA will invent to keep the Dollar’s leadership? - China overpromised, but also overdelivered
The biggest winner in this promising-delivering mechanism is surely China. This emerging country, with the West Countries in their mind knew where they were leading to, it started overpromising and then succeed in overdelivering! - Europe, where are you heading to?
Europe has the biggest challenge because its free trade agreement created a huge trading space, that is good for delivering but… what is Europe promising? What future are we financing? If ever you can find a vision in the German leadership, it’s hard to find the same in countries like Italy.
Pay attention to the battle of “Rival Currencies”
There was a time when Gold was money, gold was the medium of exchange. According to Gresham’s law the Bad-Money dominate the Good-Money, because people tend to store Good money for themselves and tend to use Bad money. Here below you can find an excerpt:
Gresham’s law states that any circulating currency consisting of both “good” and “bad” money (both forms required to be accepted at equal value under legal tender law) quickly becomes dominated by the “bad” money. This is because people spending money will hand over the “bad” coins rather than the “good” ones, keeping the “good” ones for themselves. Legal tender laws act as a form of price control. In such a case, the artificially overvalued money is preferred in exchange, because people prefer to save rather than exchange the artificially demoted one.
If you actually think about cryptocurrencies as money for nerds and kids, imagine for a while a futuristic landscape where a corporate-cryptocurrency is issued by the 100 biggest corporations in the world.
In a promise-based logic, what if they are better than sovereign countries on keeping promises?
And what is like when a currency do NOT keep a promise?
The currency is NOT accepted and people tend to give it away as soon as possible, giving more than asked to obtain exchangeable things as soon as possible.
In example, Zimbawe in the ’90 had a relative strong currency and most of the trades about agricultural products, when it experienced a sharp drop in food production, they missed the promises, the currency lost value and they got hyperinflation.
Feel free to contact me here: https://www.linkedin.com/in/maurostam/
