As I (sort of) understand it, the money supply of virtually every central banking jurisdiction worldwide is a monetization of government debt. If the supply of available coins, banknotes, and bank deposits isn’t excessive with regard to the size of the economy and the demand for liquidity, then prices will remain stable or, at worst, we’ll have mild inflation.
But how does this work with regard to Bitcoin and other cryptocurrencies? For instance, I’ve heard recently that Facebook has been considering the launch of its own cryptocurrency, but what why would it have any value? Would there be a bucket of FB stock somewhere to give its cryptocurrency value? Or a huge checking account in some bank, somewhere? It’s not like FB can just “invent” a cryptocurrency out of thin air, is it? Or am I wrong?
If you are talking about Bitcoin (not the first nor the last ‘cryptocurrency’ btw), the ‘work’ is merely a means to generate/distribute coins and keep them from being fraudulently manipulated, similar to previous methods of reducing e-mail spam by forcing the sender to burn a small amount of CPU time to submit each message. It does not underpin anything, and in fact the e-coins themselves are not backed by dollars or Euros or anything like that.
But, until the regulators come to shut us down, there is nothing preventing you or me from issuing e-scrip and declaring that we will exchange it for Swiss Francs at 1:1 or even at a premium.
ETA: I presume that Facebook money would only be valid for buying stuff on a Facebook page, not for paying your rent or buying a cup of coffee.
Bitcoin was invented out of thin air, as were other crypto-currencies. There is no basis for the value of any crypto-currency, just the agreed value assigned to the currency by those who wish to buy and sell said currency.
I’m a part of a couple groups on Facebook that buy and sell digital movie codes (those slips of paper inside DVD cases with a code to redeem on some website). There are plenty of people that use Facebook Pay. I don’t see why a landlord couldn’t accept payment the same way.
I think there is an alternative to ‘work’: proof of stake systems.
In addition to possessing a different underpinning than proof of work systems, proof of stake systems also have the advantage of being ‘greener’, i.e. proof of work cryptocurrencies such as Bitcoin consume a huge amount of energy. One cite I came across claimed Bitcoin has an energy footprint the size of the Czech Republic.
I do not see how varying technical details make one sort of coin worth more or less than another kind of coin. Wasting energy is a particular anomaly of Bitcoin (and obviously costs money), but we may as well assume that a newly minted digital cash would use more sophisticated algorithms to keep things secure. So what you would end up with would be Facebook Cash that does not cost Facebook anything to maintain beyond an additional unnoticeable load on their servers. It would be up to them to offer some incentive to use it instead of the established local currency.
Cryptocurrencies are a lovely slap in the face to goldbugs and other non-believers in fiat currency.
In the real world, all currencies are backed by nothing more than confidence. Cryptocurrencies work identically to standard government-issued currencies. If people believe that they have a worth of x, then they have a worth of x. Period.
That’s not the same thing as declaring that they intrinsically are worth x, BTW. The value of a currency is an artifact of multiple individual valuations. Most major western currencies show small variations over time; smaller countries’ show larger variations; and cryptocurrencies can bounce up and down like superballs. Nevertheless, if you can find someone who is willing to take a currency for a value of x, that is its worth as of that second, and that’s true for every type of currency and also gold, art, baseball trading cards, and forever stamps.
In theory, a currency doesn’t need any underpinning. It is a medium of exchange, not a store of value. When your boss pays you A dollars for 40 hours of work, and your grocer charges B dollars for a week’s food, you are trading labor for food. The dollars are simply an accounting tool.
In practice, money gets treated like a commodity, subject to supply and demand. When the government prints more money (or in the modern era, creates more computer entries), an individual dollar becomes worth less (inflation), which is sometimes necessary, but has risks. When the government withdraws paper or coins, or deletes computer entries, you get deflation, which is sometimes necessary, but has risks.
Government debt and money supply are both regulated by the government, but they are separate things. When a government owes a lot of debt, there is a temptation to print more money to pay off those debts. This can cause inflation. If the government lacks discipline in the matter, you can get hyperinflation, which really screws the poor. This is why Federal Reserve officers’ terms of office are staggered to avoid election years. The hope is to shield them from short-term political temptations.
Bitcoin is designed to have an upper limit to the possible supply. This makes it less vulnerable to inflation. There is a risk of deflation, but those of us who lived through the 1970s tend to be far more afraid of inflation.
The hope is, that the supply of bitcoins will be determined by impersonal algorithms, not subject to short-term political temptations.
Landlords and most legitimate traders are pretty conservative (small ‘c’) and are unlikely to accept anything other than local currency. The whole point of money is to make trading easier and to succeed, it has to be widely accepted. If your landlord could pay his taxes or buy groceries with your ‘slips of paper’ he might be willing to accept them, but would probably want a substantial discount for his trouble.
That particular cryptocurrency would be backed by a basket of assets held by the Libra Association:
So if Libra is just another way of trading euros and dollars and yen (oh my!), why bother? Lots of people around the world (1.7 billion adults, according to the Libra Association) don’t have bank accounts, and many of those without bank accounts have Facebook … or would want to get it, my inner cynic tells me.
Is government currency really “backed by the government”? I can only think of two reasons to claim it is - first, within its borders governments often mandate that payments for debts settled with that currency* must *be accepted; and second, that the government - usually - does not want the economic chaos and loss of prestige associated with a loss of confidence in that currency. So it (attempts to) regulate the supply to ensure the value stays fairly constant. But I cannot go to the Treasury and say “I’d like to exchange this for gold” (or pork bellies, or Euros). I have to rely on others with more confidence to accommodate me.
The cost and effort to generate bitcoin ensures the supply does not expand so fast as to create inflation. The trouble with any currency - or any commodity - is counterfeiting. If all I had to do to get rich was buy a printing press (or Xerox), we’d be papering our walls with $20 bills.
So as others have pointed out, the value of bitcoin or any cryptocurrency is confidence. Other people will accept it. Its extended value rests on convenience, and its ability to exist outside the system - not in banks, not traceable or taxable the way typical financial activity is, extremely portable and less detectable. It is quick and simple to do transactions, even more so as more people accept it.
As my previous boss said about salaries when hiring people many years ago - “Money isn’t necessarily a motivator, but it’s a great way to keep score”.
If the landlord could be assured that the alternative currency was in fact exchangeable for the local fiat currency (or local goods and services valued in a fiat currency) at a specific rate, he might. Look at the use of things like Amazon gift cards as rewards for numerous things.
That in particular isn’t necessarily the best example: places that “pay” with such gift cards are almost certainly getting them at a discount, and they are exchangeable only for those goods and services that Amazon can sell; you can’t run down to the local drugstore and pay with your Amazon gift card.
But I agree with you that any such alternative currency would have to have FAR greater acceptance before it became a real usable tool. And of course nobody would accept it if it isn’t already widely accepted, so… it’s its own barrier.
Certain cryptocurrencies are actually used in a business setting. Not the crypto itself, but the calculation results are used to verify transactions. By providing your computing power to help with those hash calculations, you are “paid” in Ethereum. Which may or may not be worth anything to speak of, and because it’s really baseless, I think it would be utterly foolish to “invest” in such currency in any big way. To the best of my knowledge, BTC calculations aren’t used for anything other than the blockchain information that manages BTC itself.
For fun, about 2 years back I got into playing with mining Bitcoin on a low level. There were at the time numerous apps available that purported to mine on your phone, or pay out in BTC for doing things like watching ads. They pretty much all turned out to be scams. There was one legitimate one, actually, but it folded after a bit - it was not helped by the fact that Google Play banned all apps that claimed to mine crypto, even with testimonials that this one truly had paid out. I got a few bucks worth of BTC from that one before they folded. And I’ve got a desktop app running on a little-used desktop computer that generates some, though Microsoft has apparently blocked software that uses local CPUs to mine - so my payout has gone from about 5,000 Satoshi (.000050 BTC) every 2 weeks to a similar amount every 5-6 weeks.
I have no expectation that I’ll ever cash out anything. I mean, I could sell it right now (the account value is, at the moment, worth about 26 dollars) - but there’s no true value underlying it. I was “paid” for my CPU time / ad-watching time, but someone purchasing the BTC from me could not rely on exchanging it for anything.
It’s been amusing watching the prices fluctuate. 2 years ago it was soaring - from something like 1500 at the beginning of the year to over 20,000 (for a single BTC) at the end; it dropped down to close to 3,000 at one point, now it’s hovering at about 8K. My portfolio was worth nearly 40 bucks at one time - woohoo! Luckily, I’m doing it for the entertainment value.
I’m quite sure that with the electricity cost, I have not “made money” on the process, but I chalk it up to entertaimnent.
Currencies have value as long as people believe they have value (and as a result of that belief) are prepared to accept them in exchange for goods, services, other forms of currency etc.
This applies to anything. Gold, even, whilst it has value of a sort as a useful, but scarce material, only has value because people think so.
The disctinction between a currency and a non-currency is tiny.
Take stamps. It used to be common for people to pay for things using stamps. As a kid you could send off for a toy in the back of a comic book and pay with stamps or coins.
Going back 100+ years ago, sometimes “real” currency in certain parts of the US would be scarce so people traded in postage stamps.
But I see here that many people don’t consider stamps to be currency.
Another weird thing: several years ago bottles of Tide laundry detergent became a de facto currency in certain areas. Drug dealers and then later others took it in exchange for drugs. (And this resulted in large scale theft of it from stores.)
In countries with rampant inflation, it was common for people the second they got their pay to go to a store and quickly buy well known products. Then later they would trade with others based on the perceived value of the product to others.
Diamonds are a semi-precious gem. Their “value” is vastly inflated due to market manipulation. Yet people in the wholesale business routinely trade in them at an inflated (wholesale) value. It is only their faith that the supply will remain controlled that keeps all this going. If Russia were to suddenly dump all their stocks onto the market it would all go “poof”.
Bitcoins are like houses. Takes effort to create one. You can buy and sell them. But when Wall Street loses it, the value of your house falls off the cliff.
Currencies aren’t backed by anything. Or, to look at it another way, they’re backed by everything. It doesn’t matter.
When I was a kid, every Halloween, all of the kids in my extended circle of friends (about 20 of us) would converge on the house of the one who lived in the best neighborhood, for Trick-or-Treating. And afterwards, we’d all sit in a big circle in the living room and trade candy. And even though none of us actually liked Good-n-Plenty, we’d all happily trade other things for them, because we knew that we could then trade those Good-n-Plenty to other kids for things we did like. We, effectively, spontaneously turned Good-n-Plenty into a de facto currency.
Why did we settle on something nobody liked, instead of, say, Milky Way, that most of us liked? Or maybe Mounds, that we didn’t like, but our parents did? I don’t know. But however it happened, it worked.
Every time I read about it, I am nudged towards believing that all Facebook has done is reinvented the gift certificate or a Moneygram.
You put money in at one location and someone at another location can spend it. Nothing magical here, just another gift card, but with Facebook’s name on it. I can’t see any difference between this and the VISA backed gift cards, spendable anywhere Visa is accepted.
Good-and-Plenty is durable and transportable (not going to melt, and in a cardboard container), which are two characteristics of a good “money” AmosWEB is Economics: Encyclonomic WEB*pedia . Not being particularly desirable as an immediate consumable may also be useful in a trade good.
The government doesn’t back currency in the sense that if you have a pile of $5 bills, the government won’t exchange it for something of intrinsic value, like bread and milk. Even with the defunct gold standard, gold had minimal intrinsic value; people just like shiny stuff. Gold was just another imaginary construct for value. But with government-backed currency, you have this system that is adopted by everyone under that government. In the U.S. that’s over 300M people plus anybody else who buys U.S. bonds. The cryptocurrency system is likewise backed only by the confidence of the people who participate, but my confidence in a government with over 300M citizens is a lot bigger than my confidence in a few million bitcoin holders who either buy it to invest, to mask their transactions, or to pay ransom to decrypt their computer files. (There are, of course, governments with currency that either suffers hyperinflation like Zimbabwe, or becomes totally worthless, like the Confederacy. The risk is not zero.)