Cryptocurrency has been taking it in the shorts again, which is kind of what leads me to this essay.
Value is something that is contextual and contingent. Not all things are equally valuable to all people. If you stop, think, and observe, this is obvious. The whole concept of markets and trade is built around the idea that value is contingent and contextual.
Money (currency) acts as a store of value. Its nature makes the value represented by the currency somewhat less contingent—because it is a medium of exchange and a unit of account. It has value because of its flexibility/plasticity. Because it is utilitarian. There are a number of factors that feed into this that I will touch upon.
Money has gone through quite an evolution over time—most rapidly during the 19th century and afterwards. It is a fairly recent invention—when you compare it to how long people have been around.
Initially, money had to be something that had supposed intrinsic value—hard cash in the form of copper, bronze, silver, or gold. One of the factors affecting the use of currency and its value was the purity. Currency could be debased or clipped or otherwise devalued (hence the practice of weighing coins to ascertain their value).
This also served to limit the amount of wealth that could be generated—as there (theoretically) could only be so much money. It made doing business somewhat difficult because of the limits on available currency and the difficulty in moving it around. In a certain sense, money was a zero sum game. There was only so much and if you had it, I could not have it—not easily, anyway.
Paper money was more flexible. Easier to handle and exchange—but not trusted because it had no intrinsic value, itself. The key factor in the early stages is that it could be exchanged for hard currency upon demand (supposedly).
You could create more money than you had hard cash. A lot of people got into trouble because of this over the years (so long as money was tied to a commodity like gold, directly). This is why bank runs used to be deadly to the banks. This was compounded (in the US) by the fact that money was not issued by the governments but by banks (until the Civil War)—and thus the only guarantor of the value was the honesty of the bank and the amount of hard cash it had.
The next step was to divorce money from intrinsic value (what we term fiat currency). It took a while for this to take hold—and there are still a fair number of people who are not happy about this. They come out of the woodwork every now and then, making noises about returning to the gold standard or something similar.
What makes fiat currency work? In short, it is the belief that it has value (it is amazing how many human things boil down to a question of belief). A number of factors help create and sustain this belief:
The currency is issued by a government (rather than a private organization or individual);
The government accepts the currency for fees and taxes;
The government forces individuals to accept the currency as legal tender for all debts public and private;
The government takes steps to make the currency secure (anti-counterfeiting measures and other controls on the supply and flow of money) and to keep the value relatively stable.
Where crypto fails is that it basically has NONE of these things.
It is created through a process that most people do not understand, by apparently nobody in particular;
The government does not accept it in payment;
It is not legal tender;
No one is apparently doing much to control the value (just the opposite, it seems) and, since it has no physical existence, it’s security is merely as good as whatever computer network the currency happens to be stored on (and we have seen, recently, that in some cases that security is not good).
Plus, as an added bonus, transactions using it are actually quite traceable (because the whole point of the block chain is maintaining a record of the chain of transactions). The US government (notably the FBI and Treasury) seems to have figured this out and have been beavering away at it for law enforcement purposes.
Until you can get crypto that meets the requirements listed above, it isn’t ever going to be anything other than a tool for speculation—and a rather poor one at that.
Enjoyed reading about this. Knew about some of the points you covered, but always good to further my understanding about different subjects, especially the 'crypto' and block chain aspect, which strikes me as just plain goofy and stupid...done simply because it could be done, not because there is any practical need to do so.
Reading this brought to mind a question I have regarding the 'portability' of money. I don't know if you had this experience, but at a point during the 1st year of the pandemic a lot of stores and fast-food places where I live started requesting that if you were paying in cash, that you pay with 'exact change' due to a shortage of coin money. Signs all over the place to that effect for a while and saying that they preferred credit / debit card transactions due to the 'shortage'. Have never seen an understandable explanation for this, and was wondering if you might have one??
Enjoyed reading about this. Knew about some of the points you covered, but always good to further my understanding about different subjects, especially the 'crypto' and block chain aspect, which strikes me as just plain goofy and stupid...done simply because it could be done, not because there is any practical need to do so.
Reading this brought to mind a question I have regarding the 'portability' of money. I don't know if you had this experience, but at a point during the 1st year of the pandemic a lot of stores and fast-food places where I live started requesting that if you were paying in cash, that you pay with 'exact change' due to a shortage of coin money. Signs all over the place to that effect for a while and saying that they preferred credit / debit card transactions due to the 'shortage'. Have never seen an understandable explanation for this, and was wondering if you might have one??