fxsurfer
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June 20, 2018, 10:31:20 AM |
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Bitcoin is not a Ponzi scheme but a digital version of children’s play paper money. This is true for all cryptos. Here is why. In order for people to be able to exchange or transfer ownership of things, be it: land, cars, gold, stocks, money, patents, copyrights, etc., they must name these things and specify their properties and quantities. For that purpose, alphanumeric characters are used that are written on some paper or digital medium. These instances then constitute the representation of things, and they exist in the form of an invoice, a gold or a stock certificate, a banknote, or a record of patent or copyright. Now, it is pretty obvious that representations we just mentioned cannot exist if it were not for actual things. For e.g., an invoice cannot be issued if no item has been sold, an individual cannot get a stock certificate without the ownership in a corporation, numbers in a bank account cannot be created without some borrower becoming obligated to repay the loan, a gold certificate cannot be put in circulation if no gold was stored, etc. Thus, representations in the form of characters written on a medium, are just means to identify and quantify actual things. As such, they are abstract entities without value on their own. What has value are the things represented with them – delivered goods and services; an entitlement to a set amount of gold; an ownership in a corporation; a legal claim derived from borrowers’ obligation; an exclusive right granted by a government to an inventor; or a legal right that grants the creator of an original work exclusive rights for its use and distribution.
The crypto world is build on the negation of this fundamental duality between the thing and its representation and in it, a quasi representation in the form of digital characters exists without the thing the characters are supposed to represent. To better understand the absurdity of this world let us explain the concept of fiat money and what actual thing is represented with characters like USD, EUR or GBP and their numeric quantifiers written on banknotes or bank accounts.
In today’s world, fiat money is the most misunderstood thing, even among economists, and thus, the core reason why so many people falsely believe that this money is without intrinsic value. This misunderstanding made many to throw away their dollars, euros or pounds and join the crypto world. So, what exactly is fiat money? Well, we are all familiar with the fact that in a fiat monetary system, all money comes from debt. What that means is that, all dollars, euros or pounds in circulation, either paper or digital, must ultimately be paid back to banks. Paid back by whom? Well, by borrowers. By those individuals and companies that received the loans, spent these loans, and in that way received land, cars, houses and other valuable things from people. So fiat money is essentially legally enforceable obligation of the borrowers. Now, if one has an obligation then the other has a claim. Given the fact that a claim is property in the fullest sense of that term and it may be sold, transferred, mortgaged, and inherited, it follows that dollars, euros or pounds are actual marketable things with intrinsic value. Their beneficiaries are both, the bank and their owners, which is formally recorded in the balance sheets of the banks. Specifically, when a bank grants a loan, the loan contract is shown both, as an increase in bank’s assets because the bank now has an additional claim on borrowers, and as a positive entry on the liability side of the balance sheet, because fiat money owners now have an additional claim on the bank. What that means in practice is that borrowers have two options: either they will sell their valuable things to fiat money owners directly on the marketplace to get money for their loan payments, or the bank will take possession of their land, cars, homes and will sell their valuable things to the owners of fiat currencies indirectly, via foreclosure. So one way or another, legal enforceability of fiat money ensures that its owners will come back into the possession of valuable things similar to those they handed out to borrowers or other people in the money circulation chain. And that’s the beauty of fiat money. Since it comes from debt, and debt is a legally enforceable liability that must be settled, the demand for fiat money will exist as long as fiat money does. In other words, even if people completely abandon dollars, euros or pounds as means of exchange, the borrowers are still forced to use them until all their debt is paid off, since non-acceptance of fiat money won’t make borrowers’ liabilities go away. That means that ultimately, fiat money will provide its owners with actual things in the form of goods, services or property of borrowers, just like the gold certificates provided their owners with actual gold. To put it another way, in the past, fiat money was backed by gold, today, it is backed by the assets of the banks and by land, cars, homes and other property of the borrowers.
Now that we now that fiat money is a claim, or in other words, an actual property and marketable thing with an intrinsic value, while characters like USD, EUR or GBP and their numeric quantifiers written on banknotes or bank accounts are just its representation, we can finally expose cryptos for what they are. In the crypto world, the same as in the world of fiat money, we have characters written on a medium (100 BTC for e.g.). But the crucial question that now needs to be asked is: what actual thing is represented on this medium and with these characters? What actual property, asset or possession is behind them? Since characters are just linguistic objects used to represent actual things, there must be something beyond them. So, what is beyond characters like “100 BTC”? Well, by now you have probably figured out that the answer is: nothing. The actual marketable thing, whose name and quantity would have to have been represented with characters, is nonexistent. Meaning, in the crypto world, the representation is the thing and the thing is the representation. Earlier we explained the dual relationship where representations (an invoice, a gold or a stock certificate, a banknote) would not exist if it were not for actual things (goods, services, stored gold, ownership in a corporation, borrower’s obligations). The crypto world has naively copied the representative part of this relationship – which manifests in the form of characters written on a medium, and started to treat characters as if they are the actual marketable things. This is essentially the way children play when they imitate buying and trading through the usage of play paper money. Children know that real money is a sheet of paper with some numbers written or printed on it. So when they want to imitate economic relations of adults, they will simply take paper and put some numbers on it. But of course, no actual thing (borrower’s obligations) is represented with this play money. Cryptos are essentially version of such child’s play, the only difference being that the medium is not paper but computer memory. Cryptos are created through a process where numbers are put into computer memory, but this numbers didn’t came into existence as means to represent or quantify goods, services, claims or obligations, like numbers on the banking accounts or in an invoice. Instead, crypto numbers came into existence as separate, independent, abstract objects just like numbers in children’s play paper money. The consequences of such fictional world can be seen in the “prices” of cryptos.
Every item that is exchanged in legitimate economic relations, had its ‘starting price’ that reflects its initial intrinsic value. This price than served as pivot for market price fluctuations. For e.g., fiat money is created from debt and debt is secured by some form of collateral (land, car, home or borrower’s income). Since a collateral has an intrinsic value, if a bank issues a $200,000 loan and secures it with a house, then we know exactly how many units of newly created money corresponds to this particular house, or in other words, the starting price of dollars is established – we can say that the price of 1 dollar, or the exchange rate of ‘USD/HOUSE’, is 0.000005 (1/200,000). All loans and all collaterals in the US monetary system together, will determine the average starting price of dollars. Such established price then serves as a measure of value and pivot for market price fluctuations, which than further depend on economic indicators like interest rates, balance of payments and unemployment rate. Thus, since fiat money is legally tied to actual property through collateral, i.e. it exists as an actual thing with intrinsic value, we can determine the starting price of one unit of such money and use it for price evaluation and determining whether the market price is cheap or expensive. However, in the case of cryptos, something like that is impossible. Since no legal connection to actual property or collateral exists, and since cryptos are not representations of actual things, like for e.g. gold or stock certificates are, their value is nonexistent, it is oxymoronic, and it is impossible in principle to establish their starting price or to determine whether their market price is cheap or expensive. That is why the prices of cryptos are so volatile, unstable and can jump from zero to several thousand dollars in a matter of weeks.
How is it even possible for something like this to exist? Well, since the general public is not familiar with the process of creation, representation and quantification of money in the fiat monetary systems, people are ‘tricked’ into the illusion that characters stored in the online virtual crypto wallets are just like characters stored in banking accounts, the only difference being that virtual wallets are outside the reach of ‘evil banksters’. But, as we have seen earlier, nothing could be further from the truth. Crypto virtual wallets are actually outside the reach of things like bank reserves, bank liabilities, evaluation of the credit risk, collateral, legally binding contracts, foreclosure, laws, and other legal instances whose purpose is to protect the owners of banking accounts and ensure that legal claims stored in these accounts are enforced for the benefit of these owners. When people exchanged numerical characters stored in banking accounts for numerical characters stored in virtual crypto wallets they have literally thrown away the actual property, the actual legal claims, and become the owners of worthless characters stored in a public ledger.
With that being said, it becomes obvious why it is so easy to create, transfer and store cryptos, and why there is an enormous number of them available. Since cryptos are mere characters without any connection to actual things, anyone can create their own computer program, use it to generate some characters, send these characters to various internet addresses and store them into some digital ledger. Now, there is nothing wrong with generating, sending, receiving, or storing characters – people do that all the time, via email system for e.g. However, these characters are entirely valueless, and as such, they cannot exist as instances of marketable things, let alone have prices at 1,000 or 10,000 dollars. Sooner or later people will realize that by ‘purchasing’ these characters they are abandoning their ownership rights of actual things, that they are throwing away their valuable possessions, and ultimately, the whole crypto world will destroy itself.
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