Bitcoin: Intrinsically Speaking
"Money cannot function as money, i.e., as a medium of exchange, unless it is backed by actual, unconsumed goods."
-- Ayn Rand
To be Intrinsic or not to be intrinsic. Is that the question?
No. That is "noise." It is another attempted "nail" from our friendly coffin maker. The one who wants to copy the "block-chain" and deny your private use thereof.
The reference by Ayn Rand, perhaps one of the greatest thinkers of our time, is rather concise. It deserves to be explored, even in the face of her other definitions of money.
Because it helps us to understand that cryptocurrency can function as money.
Does Cryptocurrency have an "Intrinsic Value?"
Gold in the Rough
Why is it important, in Fintech, to understand "functional money"?
Because many economists imply or otherwise provide tortured explanations about how cryptocurrencies have or retain an intrinsic value.
Actually, they don't have such a value. They cannot. But this is not a problem.
Cryptocurrencies do not require an intrinsic value. They are not gold in the rough.
Should one attempt to prove such a value, one often winds up in a trap of reasoning, logical, but unwinnable arguments or the proverbial blind alley. Frustrated. But the faithful preach the gospel. Bitcoin has intrinsic value, they say.
On the other side of that coin, the intrinsic value thinkers advise that there is only one true money—or maybe several. Gold, silver and perhaps copper.
Gold can be an "unconsumed" good. A hard currency. It can be jewelry and so on. Therefore, it is the only money. But we all know that other items can function as money.
Gold is not "backed" by anything. It is simply a sought-after material for its rarity, properties and uses. The old story that gold has been money for 5000 years rings true.
What does this mean as it relates to all cryptocurrencies? Do cryptocurrencies need to be artificially rare?
No. Their number can be infinite. Again, they have no intrinsic value.
Would cryptocurrencies devalue, if the numbers kept rising?
Not if they were "backed" by "unconsumed goods." This would not be unlike you having an unlimited number of blank checks. So long as the one you write is "backed," the check is good.
Blank checks in your desk at home have no face value. Excessive numbers of cryptocurrency "blank checks" are unimportant.
What is important is that the cryptocurrency, like a check, is backed by an "unconsumed good." That at least one or more atomic cryptocurrency unit holds title to the "unconsumed good."
Does this mean that a cryptocurrency cannot hold the title of "functional money?"
Not necessarily. It simply means that any cryptocurrency, is not an "unconsumed good" -- in the physical sense. Given this definition, cryptocurrency, with few exceptions, is not functional money, yet. But neither are dollar bills or euros.
Dollars, for example, are backed by nothing.
Trust value is transitory and can dissolve quickly, even if governments make their fiat currencies official money during economic disasters, such as what is occurring in Venezuela, where the money remains dysfunctional. It will act like what it is: paper -- but be worth even less.
Are cryptocurrencies "goods" in any sense of the term?
Again, does it matter?
But they have no substance.
Litecoin, as an example, is for all intents and purposes, software. Yes, the codes that represent Litecoin can be stored on paper, and paper is a commodity, but the ledger or balances are transmitted electronically.
If a cryptocurrency is not a good, then why are they considered intangible assets or goods?
The legal codes describing digitized music, by way of similarity, as an intangible good or asset, do not lend software music any real substance. These types of laws allegedly justify regulations and taxation. These laws should instead seek to clarify copyright.
But the test here is the consumed part. Let us get back to that.
Can any cryptocurrency, be consumed in the same sense that gold is consumed?
If we "use up" an item, we consume it. But, within economics, if we buy an item, we are also consuming. So yes, you can consume a cryptocurrency, in a sense.
But it is not a physical consumption. It is akin to using your eraser. Erase that code from your ledger and someone else puts it on his.
Cryptocurrency as a service?
Some economists will differentiate between goods and services. Digitized music, for example, has no substance and is therefore classified as part service and part good.
Cryptocurrencies do not need to be goods or services. They merely need to function as a medium of exchange. And they do, to a point.
So why did Ayn Rand not simply advise that money had to actually be an "unconsumed good?"
As civilization advances, we no longer need to carry our commodities along with us. This entails risk. Gold coins in a purse attract unwanted attention. So we stored our unconsumed goods at home or in a bank, but again, there are risks involved. Burglary and confiscation, to name a few.
In any event, we used checks (functional money) to transfer title of our goods back and forth. Cryptocurrency can function as money, if it represents, holds title to or is backed by an unconsumed good. Preferably a good like gold, with a stable value.
In other words, things like Bitcoin and Bytecoin are already "voluntary" functional money. This is difficult to deny. Whether they are stable, is another question.
What is the real issue?
The debate, then, is not the lack of intrinsic value of a cryptocurrency. The debate is how to accomplish and establish, voluntarily -- the "backing." Or if that backing is needed at all.
More on this in a moment.
Why can't you simply divide the number of atomic units into the total investment amount to arrive at the value of any particular cryptocurrency?
Like dollars or yen, the temporary, constantly fluctuating value of any currency or good is also a function of supply and demand. In the cryptocurrency sphere, it is rather simple to calculate current base value using this method and then trade when one sees that the formula indicates undervaluation or just the opposite.
But these cryptocurrency values are assumptions. Simply dividing the number of fiat dollars (the capitalization amount) by the number of cryptocoins may not be a reliable method, but it puts you in the alleged ballpark.
Again, unlike real goods, such as apples, Bitcoin can change in "monetary" value very quickly.
In any case, the idea that monetary inflows lend cryptocurrencies intrinsic value is incorrect for a variety of reasons. These include the inherent price instabilities and potential lack of demand when the next best altcoin hits the market.
If you transition into and out of cryptocurrencies quickly, however, their function becomes very clear.
Can a cryptocurrency "back" itself?
Cryptocurrencies have many attributes, but in the scheme of 'money' they are quite new. A young project on the financial stage.
Untraceable or private cryptocurrencies may be best suited for cash-like use, so long as they are as secure as possible. Attributes, such as these, should increase the perceived value of the currency for now. But perception is not the "intrinsic."
Bitcoin, on the other hand, is traceable and could decrease in value for this reason -- even if it is "tweaked" to "repair" these shortcomings.
In any event, to state, at this stage of the game, that a cryptocurrency can somehow obtain an intrinsic value and all the necessary attributes of money, is unknown.
Certainly, if one examines cryptocurrency a service, it has value, but services evolve. Services often become more efficient when a new tool is developed. People then begin to use this new tool. In the software world, that's called an upgrade -- but don't forget the hardware world.
Which Cryptocurrency will Succeed?
Just which cryptocurrency is on the "Bleeding Edge?" Bitcoin, Bitcoin Cash, Litecoin, AEON, Monero, Zcash, Cardano? Will it be those that are currently backed by gold and silver? Will Bitcoin keep its position?
For all the research into Fintech, the ongoing debates about value, the idea of voluntary use and privacy, the search for security through anonymity and trust, we may be witnessing the next best cryptocurrencies to hit the markets since 2009.
But always remember: do your homework. Fintech is a work in progress. You may need to leap to the next best cryptocurrency as you watch this whole thing flower.
Perhaps it's time to think outside of the box and beyond the blockchain. Perhaps, and until we live in a world were cryptocurrencies aren't so heavily regulated as to make it nearly impossible to give them the title of "functional money," we need, in addition to the current technology, something more.
But you have to ask yourself, even if Bitcoin is transparent, does that not make it stronger?
Finally, we must always remember that cryptocurrency, as far as the non-official versions go, should be considered highly speculative. Until cryptocurrency obtains a real world backing, we don't want to fall into to traps set by billionaires to shave the profits from us regular blokes, as we go about our hopeful lives.
Keep that one in the back of your mind as you watch these bubbles reflate and burst, taking your hard earned devaluing cash right along with them.
Who wins when these things "pop?"
Thanks for reading.
This blog/hub is the opinion of the author. Consult your financial advisor and/or economist and/or psychiatrist, prior to using, investing or mining cryptocurrencies and/or using electronic toothbrushes.
© 2016 Jack Shorebird