Saw this pop up in the meme thread and jmog's comment, figured it might lead to a decent discussion. I'm currently reading a book called The Bitcoin Standard and it's dabbling in the history of money right now.

posted by O-Trap

posted by jmog

To be fair, since he was giving a coin, it does have intrinsic value.  Especially as the idea of 'money' started as a means of commerce, all money was coins of rare metals, so they had value.

 

Now, if we are talking paper money with no gold backing (aka what we have now) then this meme is correct.

To counter jmog, money has not always been coins of rare metals.Though gold coins have certainly made the best money over the course of human history.

The island of Yap used limestone stones, called Rai stones, as money for centuries. Until David O'Keefe found himself shipwrecked near the island and ruined their economy with "easy money" as it were.

https://en.wikipedia.org/wiki/Rai_stones

In Africa, they used glass beads as currency. Glass beads were cheap in Europe, so when Europeans showed up and realized they could come back with easy money, they did. They bought up resources from the locals, slowly flooded the economy with easy money, and it eventually collapsed. Leaving the natives with essentially nothing.

Silver has more productive uses than gold, but both metals have little demand relative to current supply.  Gold is a store of value primarily because people agree on it, not much different from many currencies.

Yes, gold was valued because "Oooh - pretty shiny metal makes nice jewelry".  But the reality is jewelry is a tiny sliver of the gold market.  The vast majority of the gold market is underpinned by gold bars held by countries that sits in vaults doing nothing (a.k.a no real intrinsic value).

I forget what the 3 main criteria for money are....Something like stable store of value, widely used in transactions and liquid, or something along those lines.  Cryptocurrencies pretty much fail all 3 criteria.

Salability over time (holds value over time), salability over scales (divisible), and salability over distance (easy to carry).

And crypto certainly excels at the scales and distance criteria. We'll see about holding value over time.

posted by justincredible

And crypto certainly excels at the scales and distance criteria. We'll see about holding value over time.

I'm pretty sure two of the criteria are stability and widely transacted.  Crypto fails pretty miserably at both.  It trades like a commodity - it's not passing the stability test when it's value fluctuates 10% weekly, even daily.  Merchants could never accept cyrpto when it's value before the end of the day could wipe out their entire profits for most of them.

I believe the three things I listed are the criteria of what makes something a sound money. If it doesn't have those three criteria it cannot be a sound money.

posted by justincredible

I believe the three things I listed are the criteria of what makes something a sound money. If it doesn't have those three criteria it cannot be a sound money.

No, the 3 I learned or was thinking of are the 3 functions of money.  There are probably other criteria but those are the key 3.  Crypto fails 2 of the 3.

1) medium of exchange - if it's not widely used in transactions then it has no intrinsic demand or use  Can't function as money if you can't buy anything directly with it.

2) unit of account - divisible and widely quoted (so everyone agrees on the price/value)

3) store of value (but more directly a STABLE store of value)

Wouldn't our legal tender laws give our fiat currency an unfair advantage in that regard? Is it even technically legal to transact using bitcoin?

It's still very early in my studying of the subject, but I plan to dive deep in the history and theory of money this year. That said, I do like bitcoin as a social movement at the very least.

posted by justincredible

Wouldn't our legal tender laws give our fiat currency an unfair advantage in that regard? Is it even technically legal to transact using bitcoin?

Obviously businesses have transacted in bitcoin.  But they all exchange it instantly, so it's not technically used for transacting.  You can only transact in it so long as someone is willing to trade you dollars for it.

There's some advantage to the USD because the govt collects like $4.5T in taxes.  That's uniquely absent with crypto - to some extent, it's like the 'ol tulip bulb craze where the market could move to another currency almost overnight.  That's a huge risk.  There's absolutely no underlying value or utility to bitcoin - 0's and 1's has absolutely no productive use.

The only reason the USD has any underlying value or utility is because you HAVE to pay your taxes in it. So, demand by government force. 

posted by justincredible

The only reason the USD has any underlying value or utility is because you HAVE to pay your taxes in it. So, demand by government force. 

Ummm, there's a lot of demand created for it as the global reserve currency that has nothing to do with taxes.  They also create a market with their buying and selling of treasuries.

But your point is fair for sovereign currencies in general.  Except fiat currency ticks all the boxes and exists.  There's no particular reason for me to need more than one form of currency to store value and transact.  Not so much that it's a monopoly, although the Euro shows two currencies can co-exist in markets.  But that probably has more to do with nationalism than people's desire to actually hold two types of currency.

posted by justincredible

The only reason the USD has any underlying value or utility is because you HAVE to pay your taxes in it. So, demand by government force. 

Was seeing how far the thread would go until I saw this.  Agree.  Also believe the opposite of a truth is a truth.  The desire to not pay taxes also creates a microeconomy of non-government issued currency.  (that and avoidance of purchase of items that the government deems illegal.)

posted by gut

No, the 3 I learned or was thinking of are the 3 functions of money.  There are probably other criteria but those are the key 3.  Crypto fails 2 of the 3.

1) medium of exchange - if it's not widely used in transactions then it has no intrinsic demand or use  Can't function as money if you can't buy anything directly with it.

2) unit of account - divisible and widely quoted (so everyone agrees on the price/value)

3) store of value (but more directly a STABLE store of value)

Here we go:

Money has traditionally had three facets: medium of exchange, store of value, and unit of account. Sound money, Ammous’s argument goes, also requires salability (“the ease with which a good can be sold on the market whenever its holder desires, with the least loss in its price”) and a high stock-to-flow ratio (the ratio of existing captured supply to what’s added to it over a given time period). Much attention is devoted to the importance of a high stock-to-flow ratio with the conclusion that Bitcoin will soon have the highest stock-to-flow of any money, overtaking gold in the year 2022 and doubling gold’s in 2025.

@craigjaquish/saifedean-ammouss-the-bitcoin-standard-the-new-standard-for-bitcoin-books-173f16e224a7">Link about the bitcoin book I mentioned

Goddamn medium links with the @ symbol.

https://medium.com/craigjaquish/saifedean-ammouss-the-bitcoin-standard-the-new-standard-for-bitcoin-books-173f16e224a7

"Salability" really doesn't add anything to the 3 I mentioned - those 3 pretty well already cover it because to be liquid it would have to be widely quoted and accepted in exchange.  That's practically the definition of liquidity.

He seems to be creating that argument as an end around to prop up bitcoin.  Seems like a shill.  As a commodity, sure, it's a pretty liquid market (although there's been a lot of debate about manipulation and just how much trading there is, before even looking at bid/ask spreads).  But nothing like a currency is liquid.  Many, many commodities are highly liquid, and only silver has offered gold any competition.

And crypto's biggest strength is also is biggest weakness - lack of physical/tangible properties makes it easy to lose or steal.  A gold bar is pretty much immune to a software/electrical/hardware failure.

I'm honestly not trying to argue a case against gold. My case is more or less against the USD.

I wonder if this thread will bring BoatShoes out of the woodwork to talk about MMT?

posted by justincredible

I wonder if this thread will bring BoatShoes out of the woodwork to talk about MMT?

Every time I mention treasuries I wait....

posted by justincredible

I'm honestly not trying to argue a case against gold. My case is more or less against the USD.

I'm more or less of the opinion that currency is kind of like Amazon - the market can only support one huge player, and there's just too many barriers to entry for other entrants.

I don't think crypto will survive in any meaningful form.  I could see the big banks coming out with their own currency/crypto and then you might have something.  But after the financial crisis wiped out 2 of the 7 bulge brackets I'm not sure I'd be converting all my assets to Goldman Sachscoin.

Crypto doesn't make a lot of sense to me.  Bitcoin can fix it's supply which theoretically prevents dilution, but if two more cryptos launch it's effectively the same thing where some Bitcoin is sold and those funds moved to the new cryptos, diluting the value of Bitcoin.  With currencies, interest rates and FX traders prevent such dilution.  There's A LOT more behind the market and demand for fiat currency than just taxes.

I’m certainly not putting my life savings in it, but I’ve got money I can lose to bet on bitcoin being the future. Or at least a becoming a major currency in the world market. Given my philosophy it checks a lot of boxes for me. 

posted by justincredible

I’m certainly not putting my life savings in it, but I’ve got money I can lose to bet on bitcoin being the future. Or at least a becoming a major currency in the world market. Given my philosophy it checks a lot of boxes for me. 

Don't see it happening.  I can't see corporate or sovereign bonds ever being settled in bitcoin in any meaningful way.  You're not going to have interest rate swaps or futures settled with bitcoin.  Nowhere to put bitcoin to collect interest. 

Those are ginormous headwinds.  The big banks COULD make that stuff happen with their own cryptos, along with a very stable exchange value....because of their massive reserves of currencies around the globe with which they can guarantee liquidity and a fixed value.  I can't see a scenario where these "unbacked" crypto's do anything other than die a slow death. 

Time will tell. It is worth the minor bet I'm making regardless of what happens.

Why does it really matter what the form of currency is since the amount of a person's wealth is physical currency is estimated to be 8%?

I am much less than that, I bet I have less than $1000 of actual cash to my person.

https://www.youtube.com/watch?v=XUL4UlInlsM

posted by justincredible

To counter jmog, money has not always been coins of rare metals.Though gold coins have certainly made the best money over the course of human history.

The island of Yap used limestone stones, called Rai stones, as money for centuries. Until David O'Keefe found himself shipwrecked near the island and ruined their economy with "easy money" as it were.

https://en.wikipedia.org/wiki/Rai_stones

In Africa, they used glass beads as currency. Glass beads were cheap in Europe, so when Europeans showed up and realized they could come back with easy money, they did. They bought up resources from the locals, slowly flooded the economy with easy money, and it eventually collapsed. Leaving the natives with essentially nothing.

 

Absolutely, the "intrinsic" value is definitely a "local" thing. I mean look how much Europeans were willing to risk their lives and "pay" for spices from eastern Asia a couple hundred years ago.

If gold/platinum was extremely abundant on some other planet and the aliens showed up with a crap ton of it, it would probably ruin the Earth's economy for awhile as well.