Crypto this, crypto that. It seems like a new cryptocurrency is introduced every week. But what, exactly, is the cryptocurrency mania about? Essentially, it’s the privatization of currency, yet another fragmenting of society facilitated by digital technology.
The underlying basis of all currencies is faith in its value. In that sense, all currencies are the product of human imagination, the ability to substitute a token of value in exchange for an object. That object can be material or conceptual and based upon temporal parameters. In other words, currency is symbolic.
Its symbolic character aside, currencies like the one-dollar bill were once based upon hard assets. Some of you may be old enough to remember when the words “Silver Certificate” were printed on a dollar bill, an indication that it could be exchanged for its value in precious metal. The “gold standard” used to be the measure of the value of a dollar, but that was set aside during the Presidency of Richard Nixon. Now our printed currency says “Federal Reserve Note,” meaning it’s value is based on the credit-worthiness of the United States as a whole.
The credit worthiness of the United States is yet another subject, one beyond the subject of this short essay. Suffice to say, the value of our currency is based upon a tangible financial calculation of America’s assets and liabilities, and it has been on this basis that all other national currencies were created, that is, until the Euro was introduced.
Unlike the U.S. dollar, the Euro, the common currency of the European Union, is not based upon the financial outlook of any individual nation. Rather, it is based upon, well, nothing but faith. Its introduction was a major departure from standard measures of value. Economies of different countries in the European Union vary dramatically, and the Union as a whole, while having a somewhat unified administrative body, does not have a centralized economy. Accordingly, the financial conditions of Greece and Italy are entirely different that those of France or Germany.
The creation of cryptocurrency is similarly based upon nothing. There are no hard assets supporting its value, no common medium of exchange except the dollar, which itself has a value that floats. So goes the world of human imagination.
It’s always been legal to create a local currency, ie: a token of exchange that’s potentially acceptable in trade for goods or services; upon that basis, cryptocurrency is proliferating. Digital currency “mining” is the use of massive computer arrays to solve highly complex mathematical puzzles; success is rewarded with new digital “coins.” Purchases made using digital “coins” are enabled by Block Chain technology, which maintains a time-stamped record of “coin” transactions from their creation to the present moment. Just as most people never receive an actual stock certificate and accept the electronic record as proof of ownership, so too do holders of cryptocurrency.
If I had the inclination and financial wherewithal to introduce Barnett Buck cryptocurrency, I could do so. As it is, only the wealthiest can introduce a cryptocurrency that others can buy. For example, the Trump Memecoin issued by his World Liberty Financial LLC (which charges a fee on each transaction) is valued today at US$0.005179. That’s right, purchases of Memecoin are made with U.S. dollars.
The entire cryptocurrency world is built on vapor, the vapor of imagination, and “Poof!” – like any vapor, it can disappear in an instant.
You’re right money is based on trust. So I wonder, since trust seems to be pretty strained now, are we headed for trouble. Don’t cyber currencies vary in value so much because confidence varies?
Unfortunately, currency values vary due to financial speculation. That speculation of course subject to confidence in a broad sense, but it is also subject to manipulation and “gaming” the system. The same thing happens in stock and bond trading. In a perfect world, consumer confidence would reign supreme, but our is anything but a perfect world.