Crypto is not a currency. Stop pretending it is.
Which is heavier, 100kgs of bricks or 100kgs of feathers? We’ve all heard this quick thought exercise. And we all know that they’re equal weight. But think about it a little further. What do we use to determine the weight in that question? It’s not the bricks or the feathers. It’s the 100kg.
When someone talks about the value of their cryptocurrency of choice, how are they expressing it? In every scenario, they’re contrasting it against the value of a stable currency. If you apply that same exercise as above, and say “which is the cheaper way to buy a car-with dollars or with euros?” you’re getting the same answer-you’re paying for the value of the car roughly the same way. So, if you say, “which is the cheaper way to purchase a car-via dollars, euros, or bitcoin?” the question is still going to be fixed at the value of the car.
In comparing the two sets of questions, we realize that bricks and feathers are both measurements of weight and that different amounts of each have to be accumulated to match up to the fixed value(100kg) we already know. Similarly, currencies are different measurements that can be used to reach the same value of the known quantity-in this case, the value of the car. Monetary values are not fixed the way a pound or a kilogram is, but are instead a little more open to interpretation. But they are reasonably the same. For example, a Porsche might cost about double the price of a Volvo, but that double in price would be reflected no matter which currency you’re trying to purchase it with.
But here’s the rub with crypto. If you earn your pay in euro, but you’re saving up to buy a car that’s price is listed in USD, you can be pretty sure how much money you’ll have to save up to make that purchase 2 months from now by comparing it’s USD price against what it’s comparable euro price is. If you want to make that same purchase, but you’re being paid in crypto, you’ll have to check each day to see if you have enough money to make the purchase.
As a better example, ask a bank to lend you money in bitcoin. Go ahead. What do you think the interest rate would be on a 10 year loan? How about a 1 year loan?
Founded in ignorance
The biggest piece of bitcoin’s(and many other cryptos) advantage that adherents defend is that it’s a finite supply, and they will inevitably derisively comment on “fiat currency”. While the notion that there is a finite supply of the coin may be true, that wholly ignores why fiat currency exists. Hint: It’s not because economists are just producing money for themselves-there’s a long and detailed history of why central banks control the supply of currency.
This all derives from libertarian belief, which is tragically poorly informed about how economics work. (Libertarians *REALLY* don’t understand economics). This is primarily driven by misunderstanding two very important economic functions-and you’ll hear them say both when they breathlessly tell you about why crypto is so wonderful-fiat currency and inflation. They’ll explain that inflation is a huge problem and it’s caused by the central banks unilaterally increasing the money supply by fiat. Here’s what wrong with that.
Everyone sees inflation as a problem, because the *basic* premise is that it means you have less purchasing power with your cash. That’s a bad thing. Everyone wants their money to stay similar in value. The first time I ever filled the tank of my first car, it cost $.79 per gallon-and that was merely 25 years ago. Renting an apartment in a downtown metro was 1/5 the cost it is now. You could afford a home, a car, and a family on a single no-high-school-diploma-required income. Nickels used to have bees on them. We get it, gramps. Things used to cost less.
There’s a lot of complicated reasons for the pricing changes on all of the above listed things, but the basics behind it need to be understood in another context. What really is money, anyway?
When you distill it down, currency is really just a measurement. Just like the 100kgs of feathers and bricks we mentioned before. And if we’re talking about $100 in bricks vs $100 in feathers, you’d say they should be about equal, right? I could go to the brickseller with $100 worth of feathers and trade them for $100 in bricks.
Here’s the difference-physical measures (like weight and size) are constant, but measures of value are relative. By this, I mean value changes based on various criteria. If you were opening a store that sells just bricks and feathers, you could probably sell those bricks at much higher price when people need them to build homes, but those feathers are probably going to need to sell at a lower price point-until the pillow building economy heats up.
And that’s an example for comparing two things. The value of a single thing can change quickly too. If you’re in the middle of a dusty festival in the hot sun, and no outside beverages are allowed, you will be much more inclined to spend $5 for a bottle of water than you would if you’re at the grocery store. The value changes based on your perception. In theory, you could buy that bottle of water and resell it when supply dips and the heat rises a couple hour later for $7. But if you wait too long and it starts to rain, the value of that water bottle could plummet to worthlessness.
Who’s afraid of the big, bad inflation?
So, value in this context is subjective and based on perception. That still doesn’t address inflation-or does it?
Well, let’s shrink our global economy to a single fishing village. In this village, all trade is performed through barter. But, after a little while, some villagers assume they are working too hard and others are not putting in their share. To remedy this, they propose a new concept-currency. Because a boatmaker can’t divide their work up into smaller chunks, and because a farmer puts in a lot of work most of the year, but has less work later, we have to start storing the value of their work and production into gold coins.
This works great. The boatmaker sells a boat, including all their labor for 10 coins, a farmer sells a season’s worth of food for a family for say 8 coins. A carpenter does work for another 12 coins. A haberdasher does work for 5 coins. People can pass around value much easier without complicated ledgers and tracking who owes who different things. The currency becomes the ledger of trade. If someone present you a gold coin, it means they’re trading you a gold coin’s worth of labor. Maybe they got it from digging a ditch for the farmer, or chopping wood for the boatmaker. Or maybe they just re-sold a hat at a higher price. But a few funny things happened on the way to modern banking.
Flash forward a generation. The village grew. More people immigrated and were born. Technology improved. In short, productivity (aka the real value of things produced) increased. With the purchase of a new tractor, the farmer makes more crops faster and with less labor. The boatmaker can now churn out twice as many boats. And now a new villager is going out fishing to generate new income on a whole new industry. But, we’ve got the same amount of coins.
Well, we can start splitting the coins up, but at the same time-it’s taking less and less time to produce more and more goods, the old price of 10 coins for a boat doesn’t seem right, especially since everyone who wanted a boat already has one and doesn’t need another. Similarly, more food is being created by the farmer with less work, but it’s not keeping up with how much is demanded, since despite more potential customers there’s now a fishing economy cutting into that customer base. That means the values are changing. Suddenly, things are more complex than what we previously had and values shift. But that’s all harmonious because there’s still a constant exchange of goods and services, so the economics more or less sort themselves out when people figure out what the economy will bear. The fundamental underpinning of Austrian economics is that the market will sort itself out, somehow.
But, the boatmaker now has decided to close up shop. The demand is low, and he’s not making as much as he used to. He sees his accumulated coins and decides that he doesn’t need to work, but of course he’ll still buy food when he needs it. Same for the haberdasher and the carpenter. Most of their services are declining. Now we’ve got a farmer and fisher both working and maybe trading off goods, while the rest of the economy is frozen out and being socked away for a rainy day.
Still with me? The village now has minimal trade, so there’s a surplus of crops and fish, and those prices shrink. The farmer no longer can sell crops at high prices because his customers may buy fish instead. He makes less. Suddenly, the value of his crop output shrinks vs the value of coins. Similarly, if he wants to buy a new hat, there’s nobody producing them, so he can’t just walk up to the haberdasher and get it for as cheap as it used to be. What he used to be able to buy with selling x amount of crop now costs him as much as it takes to produce 2x amount of crop.
That’s a big roundabout, yet simplistic way of saying how currency value can change through minor disruptions to an economy, without even touching on major disruptions(eg, a crop failure, a ship sinking, or money simply being lost).
Now, the chief of this village is a shrewd banker, so he knows that because there are more people and there’s more productivity and somehow less currency actively moving around, the economy is starting to stagnate. You can start dividing coins up into fractions, but when value is lost in the economy through destruction, deprecation, loss, or simply freezing(eg, saving money and not circulating it), the value of money compared to the things you want to purchase deflates, which is great for people who have money saved up, but not so great for people who have to make money by providing labor at a fraction of what those who had to labor before them did. So, the chief produces (yes, through fiat) more money to be put into circulation, offered in the form of loans for new businesses usually with low interest paid back to a central bank. This means there’s more money moving around, which frees up more trade. Instead of deflation, which would greatly punish new value creators at the expense of old value holders, we have inflation that does the opposite.
So, when we see an increase in monetary supply without a comeasurate increase in actual value generated, we are going to see a decrease in value of already existing money. This is correct in the anti-fiat fervor. However, the job of a central bank is to keep a finger on the pulse of value generated and increase money supply at the same rate. This is extremely difficult, given the ever changing nature of value, so economists have to be content to be within a good percentage, generally erring on the positive side of inflation(as opposed to the negative side-aka, deflation).
This overly complex thought exercise is a very basic explanation of what causes inflation. There’s much more to it, because nothing in economics is that simple. Regardless, the takeaway is that libertarian economics simply stops with “printing more money” causes inflation, without exploring why money is printed in the first place and never considers that inflation occurs even without a central bank. There is a prevalent myth in libertarian economics that the gold standard prevented inflation, despite overwhelming evidence to the contrary.
Less for everyone does not mean more for everyone
Ok, so back from that little explanatory detour, the appeal of crypto is supposed to be it’s limited supply as a means to combat inflation. This is positively stupid, because the sum total of global value produced is always going to increase, dwindling the purchasing power of individual units of currency. The notion that putting a hard limit on the supply of currency is somehow a positive idea, is absolutely insane and comes from a simplistic and completely flawed perspective of what money actually is. While it’s not an in depth economic analysis, simply watching the James Bond movie “Goldfinger” should at least give you an idea of why fixed currency limits are a recipe for economic disaster. To put it simply, if you believe the summed value of all labor performed, goods created and service rendered is involatile, you have no business pretending to be a serious thinker.
Ok, so this all explains why fiat currency and inflation are mostly FUD. But let’s get back to the core premise-crypto isn’t really a currency. Nobody actually trades against the value of even the most popular one-Bitcoin. Sure, you may have some vendors who will accept it as payment, but how are they determining the price? As mentioned earlier, things have value, but currency is the unit of measure-not the value.
To start with, let’s remember that all bitcoin transactions are translated into local currency. If for example, you want to buy a gallon of milk at any store that accepts bitcoin, you can either purchase it for $3.50 OR $3.50 worth of bitcoin. It does not go the other way around. There is not a single merchant that says “the price is 0.000060 BTC or it’s equivalent in USD”. The reason for this is simple. The merchant uses the dollar, or the euro, or the yuan, or the peso or any other numerous world currencies that are fixed to each other to do their business. They’re not going to risk buying a gallon of milk at $3.00, then reselling it at anything between $1.50 and $5. That’s an absolutely bonkers way to run a business.
So, if crypto isn’t a currency, then what is it? Well. In layman’s terms, cryptocurrencies are, wait for it-a scam.
Of course, this will be the cue anyone who ignored all of the preceding paragraphs to chime in about it being a currency. But then there will be another group that claims it’s an investment AND a currency. And surely, there is a legitimate market of foreign exchange investment that trades against the values of various currencies globally, right?
To be sure, FOREX is a whole legitimate market for trading against the values of foreign currencies, but the key behind FOREX is that it’s not a daytrader’s market. FOREX is really on a macro scale that the lay person doesn’t need to be involved in, since it pegs the value against currency pairs for large institutional investors. FOREX is used as a hedge, because currency pairs tend to follow each other and the low volatility makes them a safe bet as an asset class. Barring real world events like say a c’oup or a war or a natural disaster, currency values change slowly and there’s definitely money to be made but only by small percentages. It’s certainly more unlikely than say, a bunch of redditors hyping a particular coin.
There’s no reason a new crypto couldn’t be created out of thin air and be a valid currency, but there’s one glaring problem-there’s no money in stability. Lots of places use alternate currencies that are very stable. For example, Ithaca, NY used the HOUR as a local currency for decades, and many college towns have local currencies that concerned parents will load their children up with as a means of ensuring that they only purchase essentials. These currencies often operate at a 1:1 rate to the larger currency-eg, the Bevo Buck at the University of Texas Austin is as valuable as a dollar to any local merchant who accepts them, but when you get out of the UT campus area, they’re virtually worthless.
Still, the ubiquitous Bevo Buck is popular among local merchants who then redeem it with the university for it’s cash value in USD. It always stays fixed to the USD so there’s no fear for the vendor that it will suddenly rise and fall. But you’re not going to see people get amped up to buy Bevo Bucks, because even if you created a market where they became more valuable than $1, it would virtually never be more than a fraction of a percent. That doesn’t satisfy the true guiding principle for the modern crypto craze-greed.
The entire appeal behind investing in cryptocurrency and what drives their price is that the person who puts their money in it wants to see it’s value rise. That’s what everyone wants to see in an investment, of course. But the very point of a currency is that it’s value should remain fixed, else it’s not a viable means of transaction. There is no merchant in the world who would want to sell you something only to know that they later got a worse deal. That’s just not how money or commerce works.
If you take away it’s transactional ability, you have an asset, not a currency. And in the entire history of trade, assets have been defined by their value which can be measured against a real currency or against another asset. The problem with something like crypto is that it pretends to be a currency to obscure the fact that it’s absolutely nothing.
Volatility is what drives the speculation in crypto, and that’s not something that will be ironed out as it gains acceptance-the entire point of it is that it will never gain acceptance, because all these coins refuse to be pegged to a stable currency. The entirety of this boom and the coming bust is that it’s built on people’s intrinsic greed and belief that they should receive an unfair amount of money for themselves without actually providing any real value in return. Unfortunately for a not at all insignificant amount of people, they aren’t the ones running the con, and are instead the marks that will fund it.
Knowing that crypto is a long con, the questions you have to ask yourself if you’re involved in trading it is “am I a part of the con?” and “will I know when it’s time to get out?”. If the answer to either of these is no, you should cut and run before the house of cards collapses on you.