The basis of money

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Written by
1 year ago

The basis for the existence of money is necessity, not cost. And the necessity is an appropriate money supply/stock.

The above sentence is difficult to understand immediately unless you are an economist.

There was a primitive tribe on an island in the South Pacific. They carve a stone roundly and drill a hole in the middle. That's how their currency is issued. They don't have numbers or letters. Therefore, the face value of the stone is determined by the size of the stone. Because they can't carry a very large stone currency, they put it on the street and shout loudly,

"I made this!"

Inform people that it belongs to the shouter. The same goes when the ownership of the stone currency is changed.

One day a hurricane hit the island. A big wave swept the big stone currency down into the sea. However, even in the sea, the stone would still exist, would not have been destroyed, and it could not be said that it was an accident due to the owner's carelessness, so the stone currency was still recognized as owned by the original owner. The stone currency was used as a means of transaction in the same way as in the past.

This is the essence of money. The islanders have an appropriate amount of total money(stone currency) supply. They also know that stones are worthless. Can't eat. They have as much stone currency as they need for the transaction. If someone is blinded by money and mass-produces stone currencies, the overall value of stone currency will decline. That is, money inflation occurs. As such, the value of the stone has no relation to the cost of stone manufacturing and is only determined by necessity. So did the gold at first. What initially determined the value of gold was its scarcity, not its cost of production. It was a long time later that production costs affected the value of gold.

Bitcoin's value is not due to its production cost. There is not even a "necessity" at the moment, as there is no particular shortage of global currency. It's just a waste of money economically. This is the same for at least all other coins, and frankly, I have to confess that it is the same for the coins I am developing.

But I admit Bitcoin is the only exception. Because its purpose is admirable. Internationally, they tried to prevent the ruthless issuance of dollars that pursue national priority, and domestically, they opposed printing money in the direction of pursuing the interests of vested powers. In other words, Bitcoin has an ideological value. And that value is definitely a necessary value.

Unfortunately, Bitcoin has a fatal limitation even though it has good intentions. That is the fact that the rigidity of prices has not been taken into account. Even if this was considered, there would have been no particularly suitable way.

When the economy develops, the corresponding amount of money supply is required. If the economy is to be operated with only a fixed amount of money without increasing the amount of money supply, the price must fall quickly and appropriately in accordance with the speed of economic development. In other words, Adam Smith's invisible hand must work extremely precisely. But this has already proved impossible. That is the issue of the famous price rigidity. Adam Smith stumbled upon this very obstacle.

Furthermore, even if the invisible hand works extremely sophisticated, it alone cannot achieve an economic paradise. This is because there is a terrifying monster called a monetary exit from the entire economic system. This includes not just the exit of money, but also the escape to all means of value storage. The event that this monster caused was the Great Depression.

What will happen to Bitcoin's future with these limitations? This problem needs to be observed in two aspects. One is its survival aspect and the other is its purposeful aspect.

First of all, in terms of purpose, the economic theoretical limitations to Bitcoin are too big. Therefore, it is unlikely that Bitcoin will become a key currency.But just as gold was not a key currency and could still survive, I agree that Bitcoin survives permanently as digital gold.

Finally, I add one more thing. It is such a shame that Satoshi has set his holdings tremendously. If he had zeroed out his holdings or set them at a very small amount, the ideological value of Bitcoin would have been more than 10 times.

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Avatar for Joyce1
Written by
1 year ago