Crypto no intrinsic value
Both are limited in quantity and have select use cases. Precious metals like gold are used in industrial applications, while Bitcoin's underlying technology, the blockchain , has some applications across the financial services industries. Bitcoin's digital provenance means that it might even serve as a medium for retail transactions one day. Key Takeaways Currencies have value because they can function as a store of value and a unit of exchange.
They also demonstrate six key attributes to enable their use in an economy. The definition of value in a currency has changed over centuries from physical attributes to the velocity of its use in an economy. Bitcoin demonstrates some attributes for a currency, but its main source of value lies in its restricted supply and increasing demand. These qualities allow a currency to find widespread use in an economy. They also limit monetary inflation and ensure that the currencies are secure and safe to use.
Currency is useful if it works as a store of value or, to put it differently, if it can reliably maintain its relative value over time. Throughout history, many societies used commodities or precious metals as methods of payment because they were considered to have a relatively stable value. Rather than carry around cumbersome quantities of cocoa beans, gold, or other early forms of money, societies eventually turned to minted currency as an alternative.
The first such currencies used metals like gold, silver, and bronze, which had long shelf lives and little risk of depreciation. Assigning value to currencies is a matter of debate. Initially, their value came from intrinsic physical properties. For example, gold's value comes from the costs of extraction and certain qualitative factors, such as luster and purity content. In the modern age, government-issued currencies often take the form of paper money, which does not have the same intrinsic scarcity as precious metals.
For a long time, the value of paper money was determined by the amount of gold backing it. Even today, some currencies are " representative ," meaning that each coin or note can be directly exchanged for a specified amount of a commodity. The idea of a currency's value began changing in the 17th century. Prominent Scottish economist John Law wrote that money—currency issued by a government or monarch—"is not the value for which goods are exchanged, but the value by which they are exchanged.
This thinking hews closely to the modern credit theory for monetary systems. In this theory, commercial banks create money and value for currencies by lending to borrowers, who use the money to purchase goods and cause currency to circulate in an economy.
After countries abandoned the gold standard in an effort to curb concerns about gold supplies, many global currencies are now classified as fiat. Fiat currency is issued by a government and not backed by any commodity, but rather by the faith that individuals and governments have that others will accept that currency. Today, most major global currencies are fiat. Many governments and societies have found that fiat currency is the most durable and least susceptible to loss of value over time.
The value of fiat currencies is a function of their demand and supply. The U. The Value of Digital Currencies Any discussion about the value of Bitcoin must address the nature of currency. Gold was useful as currency due to its inherent physical attributes, but it was also cumbersome. Paper money was an improvement, but it requires manufacturing and storage and lacks the mobility of digital currencies. The digital evolution of money has moved away from physical attributes, and towards more functional characteristics.
Here's an example. During the financial crisis, Ben Bernanke, who was then the governor of the Federal Reserve, appeared on CBS' 60 Minutes and explained how the agency "rescued" insurance giant American International Group AIG and other financial institutions from bankruptcy by lending money to them. Puzzled, the interviewer asked whether the Fed had manufactured billions of dollars. That wasn't quite the case. In other words, the Fed "manufactured" U. This ability to "mark up" an account exemplifies the nature of currencies in their digital form.
It has implications for the velocity and use of currencies because it simplifies and streamlines transactions involving them. Why Does Bitcoin Have Value? Bitcoin does not have the backing of government authorities, nor does it have a system of intermediary banks to propagate its use. A decentralized network consisting of independent nodes is responsible for approving consensus-based transactions in the Bitcoin network.
There is no fiat authority in the form of a government or other monetary authority to act as a counterparty to risk and make lenders whole, so to speak, if a transaction goes awry. The cryptocurrency does display some attributes of a fiat currency system, however. It is scarce, and it cannot be counterfeited. The only way that one would be able to create a counterfeit bitcoin would be by executing what is known as a double-spend.
This refers to a situation in which a user "spends" or transfers the same bitcoin in two or more separate settings, effectively creating a duplicate record. By controlling a majority of all network power, this group could dominate the remainder of the network to falsify records. However, such an attack on Bitcoin would require an overwhelming amount of effort, money, and computing power, thereby rendering the possibility extremely unlikely. But Bitcoin often fails the utility test because people rarely use it for retail transactions.
The main source of value for Bitcoin is its scarcity. The argument for Bitcoin's value is similar to that of gold—a commodity that shares characteristics with the cryptocurrency. The cryptocurrency is limited to a quantity of 21 million. Bitcoin is much more divisible than fiat currencies. Electronic Markets, 30 2 , — Motivation and personality pp. Mauldin, J. Monk, R. How to read Wittgenstein. Granta Books. Moore, G. Principia ethica 1st ed. Cambridge University Press.
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