The original idea of "backing" a currency is that whatever backs it, HAS INTRINSIC VALUE. That is to say, it has a finite market price because people want to use it, and the market value doesn't derive from the fact that people think that they can sell it to someone else (in an infinite succession)
You seem to be making several reasonable observations here but then get them all tangled up and arrive at a slightly weird conclusion
Probably because - again - they're all notional, philosophical observations rather than analytical ones.
Intrinsic Value ?Firstly, "
Instrinsic value" is a slightly meaningless term since
A: it means different things to different people and
B: it implies that the "value" is a property of the monetary medium whereas if you spent 5 seconds studying a market depth chart you can see that it isn't - it's a projected property of its consumers and traders who all value the asset differently.
In fact, what I wanted to say is exactly what you say next:
A more useful way to look at it is to split all things into one of 2 types of value:
1. utility value (things that are acquired to be retained)
2. monetary value (things that are acquired to be exchanged)
The reason that’s useful is because it’s reasonably easy to delineate utility (product) markets from monetary ones, notwithstanding that there is sometimes an overlap as with precious metals.
You are right that instead of "intrinsic value" I should have used the words "utility value" ; that's what I meant with "intrinsic value".
The monetary premium - as you rightly point out - is the value that’s added to an item in excess of its utility value when it gets used as money. (
See this example where I had a go at quantifying it using funfair tokens for how huge it is). But what do you notice about this principle ? It is that a monetary medium is most efficient (most “perfect| if you like) when it has zero utility value.
Indeed, that's right too: because otherwise, you perturb the original "utility" market of the asset. ("salting your potatoes becomes an expensive affair").
Thats because if it has any utility value at all then a finite amount of it will continuously go out of circulation. This concept is slightly counter-intuitive because many people see the utility value of precious metals for example as adding to their monetary value.
No, that's not the reason. In fact, most assets with an utility value that also acquire monetary value, have MUCH LARGER monetary value than utility value, rendering their utility useless, because too expensive.
It also illustrates that the hopes of "backing" monetary value with "utility value" (which is what backing is all about) is a hopeless affair, because the extra monetary value (which is usually MUCH larger) is in any case not backed.
The exact example of this is gold. Gold has a small utility value, and a huge monetary value. The monetary value of gold is hence NOT backed by its "utility value". Gold's monetary value is just as well "made out of thin air" as is the monetary value of a dollar bill, and that "thin air" is nothing else but the belief system I talked about earlier.
So a cryptocurrency is near-perfect money in that respect. But lets look at this in the context of your conclusion:
We agree, because a crypto currency (just as well as fiat in a bank account) is not backed by anything but the thin air of the belief system, and is NOT destroying the utility of some or other asset like salt, a metal or whatever that is going to become too expensive to be useful.
ALL of these are backed money (derivatives) that follow a chain of exchangeability or trust of the type I cited earlier and NONE of them involve trades which would have to interact with a blockchain even if that blockchain’s tokens formed the denomination for the trade.
Debt-backed assets are ALSO monetary assets, and it is true that as long as there is a provable 1-1 link with full possibility to redeem them, they have the same value as the debt they represent. But not all monetary assets are debt certificates with a 1-1 redeemable link. I would even say, that this kind of stuff is often just a bootstrap for a monetary asset to get started with the belief system, only to go to fractional banking and later, to release the redeeming all together.
That's exactly what happened to fiat money: first of all, it was just a redeemable 1-1 debt certificate for gold or silver ; later there was the joke of fractional banking, and in the end it was entirely released.
But not all monetary assets need to be "bootstrapped" by such a debt certificate. Gold for instance, isn't. Gold is not redeemable against something else. Bitcoins either. They are not a debt certificate. So the "tracing back to exactly what debt it was" doesn't matter for this kind of monetary asset.
Notice that your account balance is denominated in blockchain tokens (say, BTC) and you can trade all day long without even touching the blockchain. But they are meaningless without the backing asset which gives them value.
What you are talking about here is the value of exchange IOU tokens, which you erroneously take for BTC, in the same way as you take bank account money erroneously for FED dollars, and in the same way as people took erroneously dollar bills for "amount of silver" and later "amount of gold".
That's what I talked about earlier: these are NEW monetary assets, which can be linked 1-1 to some other asset (monetary or not) ; then one can do fractional banking, and in the end, one can even release the link.
Maybe one day, "coinbase BTC" will have their existence entirely decoupled from the block chain bitcoins, and lead their life of their own. They will be IOU tokens on coinbase which have nothing to do any more with bitcoin. Like dollar bills are not redeemable any more against gold.
As long as you BELIEVE that coinbase tokens stand for 1-1 bitcoins, and as long as you believe that they are redeemable against real bitcoins on the block chain, coinbase tokens will be traded like bitcoins.
But this is because coinbase tokens don't have their own "belief system" and are not independent monetary assets, they are a debt-certificate based thing. You think that if you have a coinbase token, that you hold a debt of coinbase to owe you a bitcoin (on the chain).
Why we need transparent blockchains
A cryptocurrency - being unbacked money - will always form the base tier in a complex, layered, trust based financial network. That network requires maximum transparency from its “base assets”, otherwise it will simply taint the entire coin supply since the bulk of the trading goes on using derivative tokens anyway (see exchanges, eCommerce systems, POS, you name it).
There are no "base assets" in a crypto currency. The crypto coins themselves are the monetary asset, and they sustain their own recursive belief system. The only reason you believe in the value of bitcoin is because you think that other people are willing to give value for bitcoin (and they do so because they also believe that). They don't believe in anything they can redeem their bitcoins against (like you believe with your coinbase tokens). So there is no "base asset" to refer to. The coins are the base themselves.
The only thing people need to believe, is that the coins are created according to an accepted rule, and that transactions conserve the AMOUNT of coins (no double spending). Which coin came from where doesn't matter here to sustain the belief system ; only the ability to verify the coin creation according to the accepted rule in the system, and the ability to verify the conservation of coins in transactions.
You don't need to know where what piece of gold was dug up to accept its monetary gold value. You only need to know that it is genuine gold, and you know the laws of physics which tell you that one cannot "copy" gold and double-spend it ; and you accept that digging up gold is a fair way of putting it in circulation.
