About Crypto and Money

TL;DR:

• Crypto currencies currently operate more like stocks or stores of value, but do not fulfil all the requirements to be money
• Although DeFi has democratised finance, economy is still a mystical subject
• Crypto bros don’t really get the nuances of money and instead rely on supply and demand to assess value

Whenever I try to come to sense with the foundations of money and how to make the concepts less abstract, I find myself returning to the Verenigde Oostindische Compagnie (VOC), where seventeen (17) Lords sat in a private chamber to discuss the fate of the company. As one of the first publicly traded companies, or rather one of the companies that set the foundation to what we know as a “publicly traded” company, it is also interesting to think that due to corruption and decadence, what was once one of the biggest companies, made a small country such as the Netherlands the global marketplace, and enriched the Dutch crown in a way that still has thousands of tourists per day in awe whenever they visit Amsterdam.

The premise was quite simple, voyages to faraway lands (also known as companies) had specific missions to bring back spices and other exotic goods, which would then be put on the market and the profits were distributed across the shareholders. Someone in the VOC had the bright idea to sell these shares publicly, so that people who were interested in putting their Guilders to use could get a good reward in the end. This also brought about the foundation of insurance companies, which would pay the investors back an amount of their losses in case the voyage was not a success. At this point you’re wondering what does this have to do with crypto?

Stocking up on Money?

At this specific point in time, crypto assets are more like the VOC shares, very profitable but also limited in number. If the VOC needed more funding, they would float more shares, but you couldn’t use these shares to pay someone for their services (not literally at least, shares could be given as a reward to VOC employees or management, but they would still need to cash them in for Florins). The VOC shares had a market, while at the same time other “offerings” were traded, which then led to the Amsterdam Stock Market trading securities in 1602. Before that, it only traded in commodities but thanks to the VOC, it’s successful voyages, and the 21 year liquidation period, the first speculative market was born. It is also interesting to add that the Dutch crown was a major shareholder in the VOC, which gave them some political and economic advantages…

A lot of crypto projects carry less impact and a lot less responsibilities than that of the VOC, as well as less oppression and slavery as a result of the need to satisfy shareholder investment (although rugpulls are more frequent nowadays), but the similarity they have is that they are wildly speculative and are not used as money, but rather a promise of it. As you can recall, money is a medium of exchange, store of value and unit of account. It should be accepted to pay debts as well as to fund goods and services. DeFi has become an analogue to trade these digital shares, democratising the process as you don’t need to have a stockbroker license to trade in an exchange, and with the decentralised part of it, you don’t even need to verify your identity (for now), but the risks are all yours to bear with, so I would suggest you pay attention when you trade. The only places you trade money would be in forex bureaus, but in real life you would need a lot of money to play with currencies, but then the house will want to take it’s cut and international regulation doesn’t allow it, that’s a game that is limited to banks and financial institutions to play.

Money Printer

Back to the comparison of money with crypto, the store of value function is definitely implemented, but when it comes to a unit of account, things get more problematic. Since crypto is a highly speculative asset, it is difficult to price a project in BTC or ETH, as the price will be wildly different from one day to the next. Closer to that, pricing in DAI would be much better, but lo and behold, it’s actually being priced in USD, so stablecoins don’t really, literally, fulfil the requirements, because they are digital fiat, not “pure” cryptocurrencies. Plus, if the peg breaks, all the system comes tumbling down, and although unlikely, it has happened.

It is a good time now to pause and elaborate on how money is “made,” unlike the popular notion that a government mints money, they actually take out loans from Central Banks or international banks like the IMF. These loans add more money into circulation and dilute the value of the currency (inflation), as well as adding more internal/external debt to the company, depending on who’s lending. Those who apply the traditional notion of “saving for a rainy day” are in fact the first to suffer. The amounts they manage to save are diluted and what was once worth 100 ends up being worth 10. Your cinematic bank robber who buries a pile of money to then have a better life once they’re out will be very disappointed to find out this stash isn’t worth the time wasted anymore.

Food for Thought

The solution to this is to invest in the production of goods and services. Prof. Richard Werner proposed the Quantity Theory of Disaggregated Credit which explains how through the increase and allocation of money to productive purposes like industrial production, agriculture, services, etc.

The success of these endeavours would help strengthen the jurisdiction, something colloquially known as “good inflation.” Unfortunately, there is an excess of “bad inflation” because money is allocated in investments like real estate or other high value assets that do not generate any value. Your multi-million mansions and such are actually beautiful and impressive bleeding losses. After the real estate bubble popped, these losses started reflecting in balance sheets, where large loans were taken out (money was printed), but they were either defaulted, or unsuccessful (still being repaid in rates) and effectively contributing to the losses everyone “shares”.

This horror story had the silver lining that through cryptoassets, these traditional problems would be solved thanks to a new and innovative asset, but this is not the case because the degenerate and speculative nature of these assets is perhaps worse than fiat. It is difficult to prevent “bad inflation” in a system where funds are created to hold until their value increases. They say an old dog doesn’t learn new tricks, but how many times can the old trick bring so much pain and suffering before the dog finds the error in its ways?

It would be an amazing sight to watch someone walk into a bank and ask the teller “what is the max supply?”

Disclosure of Interest- The author is a degenerate gambler. This piece is merely an opinion, any and all relations to reality are merely coincidental and should not be used as investment advice, but rather food for thought and debate. The author suggests reading about money production, credit creation, and debt-based economies. Further, the author is not open to value judgments about the veracity of this piece.