Is There Any Real Value to Cryptocurrencies?
We've talked at length about Bitcoin here on GradMoney, mostly because our viewers requested that it be discussed. There a lot of mixed signals when it comes to the notion of cryptocurrencies, but the most common question of all seems to be: do they have any intrinsic value at all?
The short answer to this question is: "well, it depends."
A piece on Investopedia (with items highlighted below) recently talked about the pros and cons of this argument, especially in light of multiple countries, including China, refusing to recognize cryptocurrencies as forms of legal tender. After months of rising in value, that's starting to break down with many people wondering if there is going to be a bubble bursting in the near future.
According to Investopedia, "in order to predict cryptocurrencies’ future value, we should work to understand how value is derived. Value is a measurement of the ‘goodness’ of a given thing. Some things are instrumental goods, meaning they are goods because they allow us to access some other good. Intrinsic goods are good in and of themselves -- they are the thing we work to attain."
In fact, according to Adam Smith (author of the Wealth of Nations), "money can serve no purpose other than purchasing goods." In other words, in order to be effective, currencies need to have 1) mediums of exchange and 2) act as stores of value. Is this true for cryptocurrencies?
Mediums of Exchange CAN BECOME Stores of Value
Investopedia writes that "If a currency is going to be a store of value, the value of it has to be stable. For a currency to have a stable value, it has to be an effective facilitator of transactions. For a currency to be that, it has to be ubiquitous. The ubiquity of a currency, and the increase of value that comes with it, is referred to as the network effect. The more widely a currency is used, the more flexibility that currency has to facilitate transactions, which stabilizes its value, because simply, the more people accept it as a valid form of payment, the more people will use it as a form of payment. And as a currency’s ubiquity rises, so too does its value.
Think about it: if you and two other people are the only ones to accept seashells as a valid form of payment, this means seashells aren’t a very useful medium of exchange. You can only exchange with those two who also accept seashells. And, if one of you stops accepting seashells, the utility, and thereby the value, of seashells drops significantly, because the flexibility of shells as a facilitator of transactions just dropped.
If the value of a currency is predicated on its flexibility and ubiquity, then that currency’s ability to become viable depends on its users understanding it as a better facilitator of transactions than other mediums of exchange. If a cryptocurrency is going to replace paper money, users have to believe that instruments like Bitcoin and Ether are better at facilitating transactions. So, then, the question is, in what ways does cryptocurrency improve on the technology of paper money?"
A Case for the Cryptocurrency
Ultimately, money is an instrument that helps us achieve our goals.
In his 2011 book, "Debt: The First 5,000 Years," author David Graeber argues that while standard accounts of the history of money and transactions claims that bartering was the initial form of transaction, it’s more likely that this was not the case; credit was. Credit has always been a good medium of exchange when those engaged in the deal considered each other to be "credit-worthy", such as the small tribes in which we initially evolved. As societies grew, barter and cash, and then fiat currencies arose in response to problems of trust and reciprocity.
So, paper money replaced trade and barter because it was a more efficient medium of exchange that also dealt with problems of trust and reciprocity. If a cryptocurrency is going to overtake a paper currency, it will have to be a more efficient medium of exchange than paper money, while continuing to deal with the problems of trust and reciprocity.
Bitcoin is a more effective facilitator of transactions than paper money. It’s more flexible, and it’s flexibility will only increase as the network grows; it’s digital, it can be used for international transactions; there are no conversion fees; and transaction fees are substantially lower. The central technology of all cryptocurrency, the blockchain, deals more effectively with issues of trust and reciprocity than a central bank. Moreover, the distributed nature of the blockchain increases the security of the currency and makes it less susceptible to manipulation or attack than a central bank.
Cryptocurrencies’ major challenge is to overcome prospective users’ suspicion, and become known as a legitimate medium of exchange for legal purposes.
When and how this will come about? Who knows. But knowledge and a deep intellectual understanding of how these currencies work is vital to making sure the public understands the logic behind the currency and how it will be a better choice in the future. Stay tuned.