CRYPTO CURRENCY
Currency is money when in actual use as a medium of exchange, as for example
banknotes and coins. Crypto Currency is a digital type of representative money (opposed to commodity money), i.e., a kind of fiat money. One important feature is that it is not
controlled by any Central Bank, Reserve Bank or Monetary Authority, which usually manages a State´s currency and money supply. It is not controlled by any Commercial Banking System. Due to its growing acceptance, Crypto
Currency gained status of legal tender,
but some claim that Crypto Currency is not a hard currency.
If
you are familiar with all expressions in italic
in the paragraph above, then the definition is enough to make you
completely aware of what is Crypto Currency.
You could read just the pros and cons we found in Crypto Currency, in Characteristics of Crypto Currency.
For
those not familiar with these expressions, we will define, below, each one of
them.
If
you want additional pieces of information about these concepts, check our Sources.
Contents
Money
is any item or verifiable record that is generally accepted as payment for
goods and services and repayment of debts.
The
expressions “money” and “currency” are sometimes used interchangeably.
This
is correct if you are using “currency” in the sense of “anything that is used,
in any circumstances, as a medium of exchange”.
But
a more precise definition of “currency” is “a system to represent money, using
monetary units, which is in common use, especially in a nation”.
Currency
is part of the money supply of a Nation.
In economics, the money supply or money stock is the total amount of
monetary assets available in an economy at a specific time. Money supply data are recorded and published,
usually by the government or the central bank of the country. Public and
private sector analysts have long monitored changes in money supply because of
its effects on the price level, inflation, the exchange rate and the business
cycle.
There
are several theories or approaches to Money Supply Management. “Orthodox” and “heterodox” economists diverge,
proposing different ways to deal with the money supply in order to achieve
economic growth and control inflation.
We
think that the real issue about Money Supply Management is that we –United
States and all developed nations - are using fiat money. The issues are inherent to this kind of
money; if we used a kind of commodity money, the problem would
be solved by itself. We will approach
this question, again, later.
“Fiat
money is currency which derives its value from government regulation or law. It
differs from commodity money, which is based on a good, often a precious metal
such as gold or silver, which has uses other than as a medium of exchange. The
term derives from the Latin fiat ("let it be done", "it shall
be")”.
This
is the definition you´ll find at Wikipedia, under “Fiat Money”.
We
do not agree– at least not completely – with the idea that a currency based on
precious metal such gold or silver is commodity money, not fiat money. We will talk about this in Commodity Money, below.
Fiat
money has been used for the first time in Chine, around the year 1000 AD, with
poor outcomes: “The Song Dynasty in China was the first to issue paper money, jiaozi, around the 10th century AD. Although
the notes were valued at a certain exchange rate for gold, silver, or silk,
conversion was never allowed in practice. The notes were initially to be
redeemed after three years' service, to be replaced by new notes for a 3%
service charge, but, as more of them were printed without notes being retired,
inflation became evident. The government made several attempts to support the
paper by demanding taxes partly in currency and making other laws, but the
damage had been done, and the notes fell out of favor.”
Highlighting
what we already said before: fiat money
is what we – United States and all developed nations – are using nowadays.
But
this is not the only possible kind of currency!
Commodity Money
Definition
in Wikipedia is: “Commodity money is money whose value comes from a commodity
of which it is made. Commodity money consists of objects that have value in
themselves as well as value in their use as money. Examples of commodities that have been used
as mediums of exchange include gold, silver, copper, salt, peppercorns, large
stones (such as Rai stones), decorated belts, shells, alcohol, cigarettes,
cannabis, candy, cocoa beans, cowries and barley.”
First
of all, let´s take a look at the list.
It´s
evident that salt, peppercorns, candy, cocoa beans and barley do have value in
themselves. They are food, food spices, useful
for food preserving – they satisfy the most basic necessity, nourishment.
We
could admit that also alcohol, cigarettes and cannabis do have value in
themselves – maybe not the right kind of value, but an intrinsic value anyway.
But
what about gold, silver, copper, large stones, decorated belts, shells,
cowries? Yes, we are putting together
gold and cowries! Because, despite the
“precious metals” do have some industrial value, just a small fraction of them
are industrially used, and its value does not come from its industrial
value. In that sense, a gold necklace´s
value and a large stone´s (“Yap” or “Waqab” money, from Caroline Islands) value
has the same origin – only the value
that people give them!
“Precious”
metals do not have any intrinsic value; they are precious just because there
are people willing to exchange goods and services for them.
Monetary
systems that followed the “gold standard” (or “silver standard”) just granted
that the coins contained a certain amount of precious metal and/or that the
bank notes could be exchanged for a certain amount of metal. This gives some “material base” to the money.
And this gives the system some
“certainty”, since it constrains the amount of bank notes a government can
print and therefore helps to avoid inflation. But, since the metals do not have value in themselves,
there is no intrinsic value anywhere – neither in the bank notes nor in the
metals that supports it! Repeating –
they have only the value that people give them!
In the moment there is nobody willing to accept gold in exchange for
goods or services, a ton of gold is just a pile of shiny metal!
Since
this, a system based on precious metals can be named a “Representative Money”
system, but not actually a “Commodity Money” system. As the Wikipedia says, “Representative money
is any type of money that has face value greater than its value as material
substance. Used in this sense, fiat
money is a type of representative money.”
Let´s
take a look at a kind of commodity money which has actual intrinsic value and
has been used for a long period of time in a great Empire.
The
best example of a commodity based financial system is the Egyptian use of
wheat. For much of their recorded history, the ancient Egyptians used wheat and
credits based on wheat as the blood of their complex banking and financial
system. Because it is a staple food, wheat held high and immediate intrinsic
value. There would always be a ready market for this commodity in any location
and for a broad scale of transactions.
Wheat
was ubiquitous in the economy and transferable enough to make a financial
system work for hundreds and perhaps thousands of years. And there are no
recorded instances of bank failures or currency inflation in this period. With
fiat money, financial crises are a regular occurrence.
Dr.
Gary North, in the article “The Fallacy of Intrinsic Value”, published in “The
Freeman” (http://fee.org/the_freeman/detail/the-fallacy-of-intrinsic-value
) says “Take, for example, the labor theory of value. Classical economics—by
which we mean that body of economic thought which was in vogue from the time of
Adam Smith (1770′s) until the marginalist-subjective schools arose (1870′s)—was
confounded by the problem of value. It proposed a cause-and-effect relationship
between human labor and value: abstract human labor (which itself was an
abstract concept derived more from mechanics than human experience) was
produced by laborers on their jobs; this abstract human labor was in some way
embodied in the products of that labor, and this is the source of all value.”
And
proceeds: “Karl Marx was the last major economist to hold to the labor theory.
In this sense, he was the last of the great classical economists. He wanted to
demonstrate that capitalism, by its own internal contradictions, was doomed to
a final destruction. Unfortunately for Marx’s predictions, what he regarded as
a basic set of contradictions of capitalism was merely a set of contradictions
in the reasoning of the classical economists. He confused a faulty explanation
of the capitalist process with the actual operation of the capitalist system.”
The
truth is the contrary of Marx’s thesis: the value of labor derives from the product
value. And products have value
mostly when – at zero cost – it would not be enough for everyone.
We
think that this is the explanation for the absence – or little significance -
of money in primitive societies which live from abundant natural products –
there is enough for everyone, at zero cost!
Thus,
if the value of the product does not come from labor, value is not something intrinsic to either the labor or the product;
it is imputed by acting men.
But,
according to Dr. North, “Yet we should not be too hasty in ridiculing Marx for
his insistence on viewing value as something intrinsic in an economic good. … … … Conservatives
do not like communism. As a result, they are willing to reject the familiar tenets
of Marx’s economics. … … … Unfortunately, it would seem that they abandon it in
name only, simply because Marx happened to believe it. They have not abandoned
the fundamental approach to economics which Marx employed, namely, the fallacy
of intrinsic value. The most common
application of this erroneous concept, at least in conservative circles, is
the idea that gold and silver possess intrinsic value, while paper money does
not. This error deserves special attention.”
“There
is a basic confusion here. The confusion rests on a mixing up of two very
different propositions: (1) gold and silver are historically valuable; and (2)
gold and silver have intrinsic value. The first proposition is indisputably
correct; in fact, there are few economic or historical statements that could be
said to be more absolute. … … … This
position of gold in history is a self-perpetuating phenomenon: people tend to
accept gold because they and others have in the past; they assume that others
will be willing to accept gold in exchange for goods in the future. This assumption of continuity is basic to
all goods that function as money.”
The “bold” is ours.
Let
us highlight that we understand that what Dr. North refutes is the intrinsic value of labor and the
intrinsic value of precious metals. He
is not denying the intrinsic value
of goods necessary to life – as food, for example. And we are not saying that Dr. North´s
statement that “value is imputed by acting men” is incorrect; we are just
adding that men will always value goods necessary to life.
Since
gold and silver are not “necessary to life”, currency systems based on precious
metals are not actual “commodity money” – they are “fiat money with a
base”.
But,
even if these currency systems are based in nothing of intrinsic value, they
have, as we said before, a “material base” for fiat money, preventing
uncontrolled inflation.
For
a long time, the “gold standard” guided Nation´s currency systems.
The
use of gold as currency has thousands of years.
It is durable, portable, divisible, scarce – all important requirements
for a currency. And the idea of “gold” is so inseparably
linked to “richness” that it is highly valued and people can assume that it
will continue to be valued in the future.
Notice
that, despite all this, currency systems based in gold are not safe from issues. For example, during Spanish plunder of
America in the 1500s, a great decline in gold´s value occurred.
In
modern times, the Gold Standard was stablished in 1821, when Great Britain
created the gold sovereign. In 1873, United States adopted the gold
standard, using the eagle as
unit.
The
gold specie standard ended in the United Kingdom and the rest of the British
Empire at the outbreak of World War I. Treasury notes replaced the circulation
of gold coins.
The
British Gold Standard Act 1925 both introduced the gold bullion standard and
simultaneously repealed the gold specie standard. The new standard ended the
circulation of gold specie coins. Instead, the law compelled the authorities to
sell gold bullion on demand at a fixed price, but only in the form of bars
containing approximately four hundred troy ounces (12 kg) of gold.
Some
economic historians, such as Barry Eichengreen, blame the gold standard of the
1920s for prolonging the economic depression which started in 1929 and lasted
for about a decade. Adherence to the gold standard prevented the Federal
Reserve from expanding the money supply to stimulate the economy, fund
insolvent banks and fund government deficits that could "prime the
pump" for an expansion. Once off the gold standard, it became free to
engage in such money creation. The gold standard limited the flexibility of the
central banks' monetary policy by limiting their ability to expand the money
supply.
The
Bretton Woods system of monetary management established the rules for
commercial and financial relations among the world's major industrial states in
the mid-20th century. The Bretton Woods system was the first example of a fully
negotiated monetary order intended to govern monetary relations among
independent nation-states. Preparing to
rebuild the international economic system while World War II was still raging,
730 delegates from all 44 Allied nations gathered at the Mount Washington Hotel
in Bretton Woods, New Hampshire, United States, for the United Nations Monetary
and Financial Conference, also known as the Bretton Woods Conference. The
delegates deliberated during 1–22 July 1944, and signed the Agreement on its
final day. Setting up a system of rules,
institutions, and procedures to regulate the international monetary system, the
planners at Bretton Woods established the International Monetary Fund (IMF) and
the International Bank for Reconstruction and Development (IBRD), which today
is part of the World Bank Group. These organizations became operational in 1945
after a sufficient number of countries had ratified the agreement. The chief
features of the Bretton Woods system were an obligation for each country to
adopt a monetary policy that maintained the exchange rate by tying its currency
to gold and the ability of the IMF to bridge temporary imbalances of payments.
Also, there was a need to address the lack of cooperation among other countries
and to prevent competitive devaluation of the currencies as well.
The
Nixon Shock was a series of economic measures undertaken by United States
President Richard Nixon in 1971, the most significant of which was the
unilateral cancellation of the direct convertibility of the United States
dollar to gold. Nixon took that measure to fight unemployment
and inflation.
In
1996, liberal economist Paul Krugman (Nobel Prize in Economic Sciences, 2008)
summarized the post-Nixon Shock era as follows:
“The
current world monetary system assigns no special role to gold; indeed, the
Federal Reserve is not obliged to tie the dollar to anything. It can print as
much or as little money as it deems appropriate. There are powerful advantages
to such an unconstrained system. Above all, the Fed is free to respond to
actual or threatened recessions by pumping in money. To take only one example,
that flexibility is the reason the stock market crash of 1987—which started out
every bit as frightening as that of 1929—did not cause a slump in the real
economy.
While
a freely floating national money has advantages, however, it also has risks.
For one thing, it can create uncertainties for international traders and
investors. Over the past five years, the dollar has been worth as much as 120
yen and as little as 80. The costs of this volatility are hard to measure
(partly because sophisticated financial markets allow businesses to hedge much
of that risk), but they must be significant. Furthermore, a system that leaves
monetary managers free to do good also leaves them free to be
irresponsible—and, in some countries, they have been quick to take the
opportunity.”
A
more biased point of view is in the words of a gold dealer,
“In 1971, President Nixon made a decision that changed the fate of the global
economy; he closed the gold window. Instead of learning from the trouble the
world had already experienced with unchecked inflation, and the fact that
systems for global trade had grown up around the US Dollar as the Reserve
Currency of the world, instead of changing it, the world accepted pure fiat
money as the new currency for all transactions. This of course has never
happened throughout history, and marked a departure from thousands of years of
wisdom. We had entered the age of pure fiat currency, with the entire world
trading in currency that is not tied to the discipline of gold or silver.
By
removing the US Dollar from the gold standard and completely separating the
dollars ties to gold, the US has effectively debased the currency to the point
of removing all intrinsic value from it.”
The
plain truth is that after 1971, the global economy switched to plain fiat
money.
We
don´t think it was a radical change. Bank
notes have zero intrinsic value, but gold has very little intrinsic value. Then the change just gave the Central Banks
the power to freely increase the money supply.
The change brought a new way to manage the currency system, but the
system itself did not changed radically – it was, and continued to be, based in
fiat money, currency created by laws and conventions, currency with no
intrinsic value.
The
“capitalism crises” are not mandatory, and are not inherent to capitalism. Several of these “capitalism crises” was just
consequences of the monetary system – of the use of fiat money!
We
are not going to dwell on it. Paul
Krugman´s words (above) are enough!
When
Central Banks fail in managing the currency, it is not because they are not
competent enough, it´s because the whole system is inherently flawed!
That´s
what Crypto Currency is – fiat money, based on nothing, valued just because
there are people willing to exchange it by goods and services.
Weaknesses of a Crypto Currency - Bitcoins
·
Fiat money value is supported by governments. Yes, governments can make mistakes or can be
irresponsible. But Bitcoins have support
of… nobody!
·
Fiat money does not have thousands of years of tradition as gold. Nevertheless, it has been used for 40
years. Bitcoins has been used for half a
dozen years. Who can grant that they
will have value in the future?
Bitcoins Intrinsic Contradictions
Bitcoins
have an unsolvable dilemma.
We
know that if the amount of a fiat money increases (if more money is created),
inflation will be the unavoidable consequence.
The
fact is that Bitcoin transactions are supported by people who are paid in
Bitcoins – new Bitcoins are created to pay these people.
To
avoid inflation, the system makes harder and harder to “mine” (to create)
Bitcoins. In other words – supporting
Bitcoin transactions is resulting in smaller and smaller profits.
That´s
the dilemma: if the system reaches a point where is impossible (or excessively
difficult) to “mine” new Bitcoins, people will stop supporting Bitcoin
transactions – and the whole system will crash.
If,
in order to avoid this, the system makes easier to mine new Bitcoins, inflation
will be the result – and the whole system will crash.
The
concept, as is now, simply can´t work.
Period.
Bitcoins can be used as Legal Tender, but they are not Hard Currency
We
could say that nowadays some kinds of Crypto Currency – as for example Bitcoins
– has a status of legal tender – a
medium of payment recognized as valid for meeting financial obligations. Bitcoins can be used in business, so they
are, if not “legal” tender, at least “de facto tender”.
But
they are not “hard currency”, which is, according with Wikipedia, “Hard
currency, safe-haven currency or strong currency is any globally traded
currency that is expected to serve as a reliable and stable store of value.
Factors contributing to a currency's hard status might include the long-term
stability of its purchasing power, the associated country's political and
fiscal condition and outlook, and the policy posture of the issuing central bank.”
Reliability
and stability can´t be expected from Bitcoins, we already gave the reasons
why. And there is no country to apply
any political and fiscal policies.
Since
this, despite you can opt for using Bitcoins in transactions, they are not, not
at all, convenient as a “money store”, they are not suited to saving or
investing.
Bitcoins Virtues
The
positive points of Bitcoins are the innovative way of having all of the
currency transactions recorded by the public and without a central organizing
agency and it´s capability of be a global medium of exchange with near-zero
friction (i.e. with near zero transaction fees.)
We
think all our readers already understood our point of view – fiat money is not
a good monetary system, it exists in its current form by just 40 years, has
crossed several crises, and we think it will not be used – as is – for a long
period of time. Commodity money makes a
lot more sense!
But
what kind of commodity could we use nowadays?
Not wheat, as the Egyptians did, or seal oil, as the Inuit!
What
if we used as the basic foundation something with great intrinsic value?
More
than intrinsic, great value! Something
useful to cook our meals, to warm and refresh our homes, to propel our
vehicles, even to make the Internet work!
This sounds valuable enough for you?
Add
to all this the facts that this “currency” can be easily stored, transported,
transferred, fractioned and measured.
Energy
is the perfect currency.
It
supports the world nowadays. Energy is
real wealth!
More
than that – it is environmentally realistic, since it measures a real physical
unit.
With
energy, we will have the perfect Commodity Money!
“Energy
currency restores a direct link to real goods on both sides of the transaction
and minimizes abuse as well as eliminating distortions like currency debasement
inflation.
So
with the move to energy based currency we will have come full circle from fully
transparent real good transactions to faith based transactions and back again.
Precious metal based coinage and printed currency accelerated immensely the
pace of commercial development. But fiat currency based monetary systems have
proven highly opaque and unstable with large cumulative delayed distortions and
crisis.
Energy
currency takes us back to fully transparent, stable, real goods exchanges with
unlimited scale and flexibility. The ultimate form of barter with unlimited
scale and complete flexibility.”
In
the future, we can eventually develop technology to store and transfer energy,
not just “currency based on energy”.
This would actually end currency, end any symbol, the actual commodity
itself being used in all transactions.
Energized
cards in our wallets, each ATM a power plant, Internet banking transferring
energy instead of data – and end to all financial crises, to inflation, to
speculation and other evils inherent to monetary systems!
Characteristics of Crypto
Currency
Cryptocurrency
is a digital – or virtual – currency that uses cryptography for security.
A
cryptocurrency shall have strong security features to avoid counterfeit.
It
shall not be issued by any central authority, being immune to government
interference or manipulation.
Transactions
with cryptocurrency are anonymous.
The
widely knows cryptocurrency is Bitcoin.
Some
competitors are Litecoin, Namecoin, PPCoin and Zerocoin.
Bitcoins
presents itself as “an innovative payment network and a new kind of money”.
·
Install a Bitcoin wallet in your computer or mobile phone
·
It will generate your first Bitcoin address. You´ll be able to create more later, and you
shall to do so, because a Bitcoin address should be used only once. You disclose it in order to be paid – or vice-versa
– and then create a new one.
·
The Bitcoin network relies on shared
public ledger. All transactions are
recorded in the block chain. The integrity
and chronological order of the
block chain are enforced with cryptography.
·
A transaction is a transfer between two Bitcoin wallets that gets
included in the block chain. All
transactions are broadcast between users and usually begin to be confirmed by
the network in 10 minutes, through a process called mining.
·
Mining is a distributed system that is used to confirm waiting transactions
by including them in the block chain. It
is a consensus system, i.e., allows different computers to agree on the state
of the system.
·
Secure you wallet – be careful storing your wallet into on-line
services; keep just small amounts for everyday use in your wallet; backup your
wallet; encrypt your wallet. For your
savings, consider using an offline – in a place disconnected from the Internet –
wallet.
·
Bitcoin price is volatile.
Keeping your savings with Bitcoin is not recommended.
·
Bitcoins payments are irreversible, can´t be refunded by the person who
received the payment.
·
Bitcoin IS NOT ANONYMOUS. All
transactions are stored publicly and permanently in the network; anyone can see
the balance and transactions of any Bitcoin address. The identity of the user behind the address
remains anonymous until the information is revealed during a transaction. (That´s why you use an address just once.)
·
Bitcoin is still experimental.
Bitcoin
mining is the process of making computer hardware do mathematical calculations
for the Bitcoin network to confirm transactions and increase security. As a
reward for their services, Bitcoin miners can collect transaction fees for the
transactions they confirm, along with newly created bitcoins. Mining is a
specialized and competitive market where the rewards are divided up according
to how much calculation is done. Not all Bitcoin users do Bitcoin mining, and
it is not an easy way to make money.
·
Bitcoin vulnerable after miner takes 51 percent network share. Researchers from Cornell University say that
on multiple occasions, a single mining pool repeatedly contributed more than 51
percent of Bitcoin's total cryptographic hashing output for spans as long as 12
hours. These so-called 51 percenters,
for instance, have the ability to spend the same coins twice, reject competing
miners' transactions, or extort higher fees from people with large holdings.
Even worse, a malicious player with a majority holding could wage a
denial-of-service attack against the entire Bitcoin network. http://www.fswired.co.uk/news/archive/2014-06/16/bitcoin-security-guarantee-compromised
Sources
·
How does Bitcoin work - https://bitcoin.org/en/how-it-works
