In the series “The 10 biggest myths about crypto currencies” we would like to take a closer look at the 10 most common claims concerning crypto currencies and their chances and risks. We will daily a new myth vorknöpfen and check this for correctness.
Crypto currencies have no intrinsic value
What determines the value of a currency? To determine this, let us venture a little excursion into the history of money and currency. Since it was first used, money has fulfilled two central functions: that of preserving value and that of exchange. Money thus had a decisive advantage over the previously predominant trade in goods, which it replaced by making values conservable over longer periods of time and transportable over longer distances, properties that goods and services are not (always) capable of providing.
At the beginning of money trading there were natural goods to which a certain value was ascribed. These could be shells, rare stones or weights, depending on regional characteristics. However, they had in common that the exchange value attributed to them exceeded the material value. Over time, gold, silver and, to a lesser extent, other precious metals were able to crystallize out as dominant exchange items. In order to give the whole thing a state verification, governments began to mint official coins and only recognise them as means of payment in their territory.
Coin minting was an important step in the development of money, as it for the first time created trust among citizens in a fixed value of the object of exchange guaranteed by the state. Trust is the key word here, because trust is what gives our money its legitimacy as a means of payment even today. With the advent of paper money and electronic money, money has evolved from an intrinsic value to an object whose value depends solely on trust in its acceptance. We accept money for a service because we believe that for this money at another time a service of comparable value will be returned.
But what about crypto currencies?
Money therefore derives its value from trust, or more precisely from trust in institutions such as the state or the central bank. But what about crypto currencies, which are deliberately decentralised and thus organised beyond any state control? Here, the users’ trust in the institutions as intermediaries is replaced by their trust in the blockchain and its algorithm. The intrinsic value of money in crypto currencies is therefore basically no different from the intrinsic value of money in fiat currencies.
If the question of the value of a currency is decoupled from the factor of trust and only the material component is considered, a completely different picture emerges. Thus, central bank money, at the latest since the abolition of the international gold standard, is covered at most by the value of the paper on which it is printed. The majority of crypto currencies, on the other hand, have a high production value, which results from the mechanism by which these coins are produced. In the proof-of-work algorithm, on which the Bitcoin is based among other things, the miners are rewarded for providing their computer computing power for the network with the distribution of new units of the crypto currency. The manufacturing value of the crypto currency thus corresponds to the computing and hardware power provided. Compared to Fiat money, this is a much more cost-intensive process, especially since monetary expansions such as those possible at a central bank are unthinkable in the Bitcoin ecosystem. Bitcoin is limited to 21 million coins and even the prospecting of the blocks cannot simply be accelerated. These limits keep Bitcoin tight, which in turn has a positive effect on value stability.
This myth can therefore not only be rejected, but in a way also makes a relativization of the term “intrinsic value” necessary. The value of any currency whose exchange value does not correspond exactly to its material value is trust. Only collective trust in the sense of broad acceptance among the population and companies creates lasting and stable values. The process of confidence building and adaptation takes many years and has to struggle with great resistance and setbacks. Nevertheless, crypto currencies seem to be on the right track.