Source: Coinstaker, originally published on .
Currency, no matter its form has shaped the world. As has happened throughout history, the promise of getting rich, or even simply becoming financially stable, has lured people by the millions. People have relocated, totally changed their lives and risked it all for the chance to live a better life. Today, the chance for this happening has presented itself in the form of cryptocurrency.
To fully understand currency, you would have to go to school, earn a PHD in Economy, spend 30 years working in the financial sector and have Albert Einstein’s IQ. Even then, it is doubtful that you would have a truly, full understanding of currency. Since most of us cannot even dream of obtaining 1 of those three requirements, we can at least try and grasp the basics.
Definition of Money
Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts in a particular country or socio-economic context. Throughout history, money has undergone several different changes, both in where it derives its value and how it is exchanged. When talking about money, we are talking about paper money and coins. The things that you can give to someone else and receive a needed good or service in exchange for it.
Money can take many different forms, as we all know. From credit to cash and everything in between. It is how you wish to use it and how comfortable you are with the form of money that determines whether or not it is a viable option for you.
Understanding Supply and Demand
In order to accomplish a transaction, a seller must be willing to sell something that a buyer is willing to buy. The amount that is exchanged is based upon the seller setting a price on a good or service and the buyer agreeing to that price. Sellers, to be competitive, set their prices at the lowest price possible, while still being able to meet their costs and show a profit. The price a seller decides to set is usually based upon a supply and demand situation.
An example of this would be best given by making some general assumptions, that are unrealistic, but more easily explain things. So, while the following scenario is filled with things that probably have no possibility of actually happening, imagine that everything that follows is true.
Orange Island Supply and Demand Scenario
On a small island that has no contact, at all, with the rest of the world, people love oranges. They drink orange juice, eat the oranges and even use the orange peels for hygiene and cosmetic purposes. The island itself has hundreds of acres of orange groves to support the islander’s desire for their oranges. Life is good. Every harvest averages a ratio of 500 oranges per resident on the island. This is much more than the people of the island could ever possibly use and several thousand oranges end up getting thrown away because they go bad. Even with this loss, no one ever goes without their desired amount of oranges.
The island uses American Dollars as its currency. (How the American money got there is not important.) Each orange costs 1 single penny. People go directly to the orange grove and pay the farmer for the number of oranges they would like. Year after year, for many years, this has been the price and the process. Everyone on the island was happy.
Orange Supply takes a Substantial Hit
Then, one year, a terrible hurricane came barreling towards the island. The residents got ready, took shelter and weathered the storm. When it was over, the damage to the orange groves was immense. The remaining orange trees, that were not destroyed, only produced 1/5th of their normal amounts. This means that the ratio of 500:1 was now only 100:1. The total number of available oranges had gone down drastically, yet the Islander’s desire for oranges remained unchanged.
The farmers reported the situation and the islanders, naturally, wanted to get as many oranges as they could get before they were gone. They were accustomed to having too many oranges and were now faced with having a significant amount less than they wanted. All of a sudden, the orange groves had lines of people, all trying to get the oranges that were available. All of them knowing there were far too few oranges. What does the farmer do?
Using Supply and Demand to Recover from Losses
The farmer figures he has three options:
Option 1 is to sell the oranges at a penny, as he has always done. However, if he does this, he knows the oranges will be totally gone after the first few people in line are done placing their order. They will simply buy all of the oranges that they can afford. At a penny each, the first few people would be able to buy him out.
Option 2 is to ration out the remaining oranges. Divide the total number of oranges by the total number of people and make this the limit that they can buy. This ensures everyone gets some oranges, at least. However, there is still another issue. The farmer has to be able to recoup, not only, the normal overhead for the oranges he is selling, but also for the total oranges he had planted and expected to harvest. The storm wiped out his orange groves, but not the cost of them. His overhead is still the same, either way. On top of that, he will incur costs to repair All the damage, as well.
Going with option 1 would satisfy some of the people and the farmer would end up going out of business. Option 2 would satisfy all of the people a little bit, but the farmer goes out of business. That leaves option 3.
Supply and Demand Affects Price of Oranges
Option 3 is that the seller raises the price of the oranges to an amount that will help to limit the number of oranges a single person buys, helps him to make the money back for a normal, full harvest amount of oranges and also to be able to over his repairs. (In the real world, this would be done a lot more carefully than this, but it is the idea, not the exact figures that are important here, so please forgive the figures used.)
The farmer announces that the oranges are for sale, but the price is now $1.00 and orange. Even though this is a price increase of 100 times, the people still line up and he sells out of oranges within a couple of hours. The number of oranges bought was directly related to each buyer’s desire for the oranges and the amount of money they had on hand. This allowed more people access to the oranges and also ensures the farmer that he will be able to remain in business.
Supply and Demand in Real-World use
When the supply of an item is low, but the demand for it is high, it causes a price increase. However, when the supply of an item is sufficient enough to meet the demand, the price lowers. An easy way to think of it quickly is to think of it like this: No matter how much is available, the seller needs to make the same amount of money as usual, plus any additional costs that may occur. If a seller needs to make $1,000 and has 1,000 items, they are $1.00 each. If the seller only gets 500 items to sell, then the item will cost $2.00, so that the seller can still make $1,000.
The one thing to consider is that if there is no demand for an item, then the price would need to decline, in order to sell the item. While supply and demand helps to keep seller’s profits intact, it can also have the reverse and cause substantial losses.
In either case, the item is what is being valued. The money being used to pay for the items remains the same and you either need to use more or less of it, respectively.
Types of Money Throughout History
The use of money dates back to 3000 BC. The Mesopotamians relied on the mass of approximately 160 grains of barley for the shekel. It would be 2400 years before stamped coins were introduced. During this early period of monetary exchange, the money used was always pegged to a physical item, such as barley, gold or silver. This system of money is called Commodity Money.
Commodity money is money whose value comes from a commodity of which it is made. Commodity money consists of objects that have value in themselves as well as value in their use as money.
Representative money refers to money that consists of a token or certificate that can be exchanged for a fixed quantity of a commodity such as gold, silver or potentially water, oil or food. This is to be distinguished from commodity money which is actually made of that real physical commodity.
Since representative money wholly depends on a fixed amount of a commodity, it is often called commodity-backed money. Representative money derived from convenience. Any time someone deposited a commodity with a bank, warehouse or other holdings firm, they were issued a receipt that declared their claim to an amount of the commodity. This ensured that they could return and get their commodities back again.
This practice of depositing commodities and receiving a receipt for those commodities has been practiced since ancient Egypt. The receipt represented the amount of the commodity you were entitled to. We still see examples of representative money used today. Gold or Silver certificates are representative money since they are basically a receipt that denotes how much gold or silver you are entitled to.
Representative Money Becomes Exchangeable Money
The practice of exchanging representative money to other people to pay for goods and services or settle debt didn’t become a common practice until the 17th century. With the large amounts of gold and silver from mining, Gold and Silver became the most popular commodity. The gold standard as adopted in Europe. Minting coins from gold and silver worked, and had been in practice for almost 2 centuries, but with more wide-spread usage, the true pitfalls were soon discovered. First, coins in circulation could easily be shaved, chipped or otherwise have their weight slightly reduced, effectively making the coin worth less. However, unless you had a scale handy, there was no way to be sure.
Secondly, larger amounts of especially gold, are very heavy. This made transporting it very cumbersome during that time. Given the lack of adequate scales and modes to transport heavy metal, people began to simply use their receipts from the bank, showing they had the gold or silver as currency. By giving someone else the receipt, it gave them ownership of the amount of gold or silver that the receipt declared.
As the practice rapidly grew, so did the need for denominations of the total stored commodities. It changed into a situation where people would have the bank teller take the total amount of gold or silver that was deposited and then request receipts in different, smaller amounts. This made it easier to conduct transactions at a smaller scale. By the beginning of the 20th century almost all countries had adopted the gold standard, backing their legal tender notes with fixed amounts of gold.
Representative Currency Evolves into Something Else
After World War II, there was a wide-spread global move that saw many nations declare that their currencies were valued based on the American Dollar, which, itself was backed by a fixed amount of gold that it held. While this did not immediately change money, the countries that followed this new method, effectively created Fiat money. There was still the gold, held by America, which determined the price of the American Dollar, and then the value of the fiat currency in question. This allowed it to be still considered representative money, just in a new way.
Fiat money is a currency without intrinsic value that has been established as money, often by government regulation. Fiat money does not have use value, and has value only because a government maintains its value, or because parties engaging in exchange agree on its value.
In 1971, it changed for good. President Richard Nixon suspended the convertibility of the US Dollar to gold. This caused most of the world’s government to de-peg their currencies from the US dollar, leaving them backed by absolutely nothing. Instead of becoming worthless immediately, however, because the value of those currencies had been established and in practice for some time, the majority of people agreed upon tis value, and it continued to hold that value simply based on this fact.
Since 1971, Fiat currencies have become the standard currency of every nation. While representative money, such as Gold or Silver certificates are still very much alive and in use, they are rarely used when you compare it to the amount of fiat currency in use.
Evolution is an Endless Process
Thinking that we have reached the pinnacle in how we handle currency is foolish. 50 years ago, the practices in place were considered good, then they changed, as they had for hundreds of years before. This goes for every aspect of life, not only money. Evolution is always happening, albeit slowly, but moving nonetheless. So where does money go from here? Enter Cryptocurrencies.
If you look back to the definition of Fiat Money, you will find that cryptocurrency would technically fall under this category. Why only technically, is because a lot of the cryptocurrencies available today are not authorized by a government. However, the value is agreed upon by a group of people who trade it. So, it meets half of the definition. Even though there is no physical form of cryptocurrency, it still holds the value that it does. This is where many people either get confused or take a negative view of cryptocurrency. They cannot understand how something that has no physical entity can have value.
Gold or silver is considered an acceptable currency, whether in its physical form or represented by a certificate or promissory note. Why is gold or silver accepted as currency and so valuable? To put it simply, because of supply and demand. Not that there is a demand for gold or silver directly. It is the fact that the process of mining metal is difficult, making it inaccessible to most people. Add that to the rarity of gold and silver, and you have a situation that cause their prices to be higher. The costs of mining have to be covered, profit for the miners has to be made and there is not enough gold to go around to everyone if you compare it to iron. Therefore, if you want to get gold for yourself, it costs more.
Fiat money, both paper and coins, are backed by the government’s assurance that the money has value. It is also universally accepted by everyone in a society, therefore it has a valuable purpose if you need to buy something.
In cryptocurrency, however, there are several arguments as to why it is not a currency. Using bitcoin as our example, most of the people who refuse to acknowledge bitcoin as a viable currency have the same arguments:
- It is not backed by the government.
- It is not universally accepted to pay for goods and services.
- It has no physical form, so there is nothing to give value to.
Each of these arguments seems feasible at face value. However, once you understand currency and how it works, these excuses seem hypocritical at best.
Cryptocurrencies Are No Different from Other Currencies
Focusing on the three arguments above, let’s take a look at why those who are against the cryptocurrency movement have no real basis for their arguments. The arguments they make are being made, out of ignorance towards currency, in general. As stated in the very opening of this article, understanding money fully is not something that is easily done, even by those who are considered to be experts usually fall short of the mark.
Maybe it is just human nature to ignore the details or specifics of things because they are so common. Or it could possibly be a psychological thing. The exact reason is unknown to me, but that is a topic for another day. The point is that the arguments against cryptocurrency have no basis to be made by people who practice the very things that they are rallying against.
Absurdities of Arguments Against Cryptocurrencies
Did you ever stop to really consider how a transaction works? Let us take the following scenario:
Jim sees an advertisement for the new iPhone X and really would like to have one. However, Jim is only working part-time, has other bills and must be frugal with his budgeting. So, going to the Apple store and handing over $1,200 is not an option. So, he does what most other people would do; he searches websites like Craigslist in the hopes of finding a better deal on a used iPhone X. Sure enough, Jim finds several and sends out some emails. Each reply he gets him the opportunity to negotiate a lower price with the seller.
Finally, a seller agrees to sell Jim an iPhone X for $700.00. They meet, the phoned is satisfactory to Jim. The seller hands Jim the box which contains an iPhone X, Charging Cable and user manual. What does Jim hand the seller? A few pieces of paper. The deal is done. The seller is happy. Jim walked away with a new device that is considered to be top of the line, cutting-edge technology. The seller has 7 identical looking pieces of paper, each about 6 inches long by 3 inches wide and colored in different shades of green and gray. The paper features the artistic image of Benjamin Franklin on one side and an image of Philadelphia’s Independence Hall on the other.
Paper Money is Always Welcomed
Why would the seller be happy with this? They are only 7 pieces of paper with some art drawn on them. They are not rare, antique or otherwise sought after for sentimental reasons. Why do these 7 pieces of paper, along with the 11.5 billion of their exact duplicates hold so much value with everyone?
In reality, paper money and modern coins are essentially worthless. In fact, it actually costs more to print paper money and mint modern coins than the value proclaimed on the face of each, respectively. Paper money is made, well, out of paper. Paper is made from trees. Modern coins are made out of a combination of copper, nickel and steel.
Trees, copper, nickel and steel are not considered valuable or rare. Money is no longer backed by gold or silver. So, essentially, those pieces of paper are just that; pieces of paper. However, because the government of the United States says that they hold the value denoted by the number printed on them and that everyone in the United States agrees with and accepts that value, those pieces of paper are valued as such.
So, let’s take argument 1 made by cryptocurrency naysayers. To refresh your memory, the first argument is that It is not backed by the government. Using bitcoin still, as the example, this is actually true. However, if you really think of government as what it really is, and couple it with the definition of money itself, Bitcoin is a currency without question.
If you look in the Oxford English Dictionary, which is widely accepted as the most complete and accurate dictionary that exists, Government is defined as a noun, which means:
The group of people with the authority to govern a country or state; a particular ministry in office.
The system by which a state or community is governed.
The action or manner of controlling or regulating a state, organization, or people.
Three different definitions are given, all relatively meaning the same basic thing for the purpose of this article. While Bitcoin was not authorized by the government of any sovereign nation, it was authorized by the Bitcoin community and it is also accepted as currency by the Bitcoin community. Bitcoin is governed by the whole community, but to even get a little more focused, the core developers of Bitcoin and even the Bitcoin miners, all perform services that help to maintain the state of the network, so they could really be considered the governing body of bitcoin.
So, Bitcoin is authorized by a governing body and it is accepted by the members of the community. Therefore, the argument that it is not a currency because it is not authorized by a government is simply not true.
The second argument, that Bitcoin is not universally accepted to pay for goods and services is also a weak excuse. This can be summed up in one word really: Discover. The discover card is not accepted everywhere, yet it is viable, is it not? Let’s not even go into the fact that credit is something totally different and actually doesn’t even exist. We will save that for a later time.
The later time to discuss credit has finally arrived. Sorry for the long wait. The third argument, that Bitcoin has no physical form is the biggest joke of the arguments. These same people, who claim this, are the same people who pull their credit, debit cards out to pay for meals. Credit is not even a thing. It not only has no physical form, it does not even have a digital form. It is nothing more than an IOU. Which, by the way, has been a form of currency, with no physical form for about 2 centuries, so not sure about the argument here.
In this day and age, you hardly ever see cash anymore, yet because bitcoin has no physical form, it is not valid as a currency? These people do realize that the only thing that piece of paper, which has the likenesses of dead men on them are not actually worth the number they have printed on them, right? I hope? If not, this would surely explain a whole hell of a lot of things that have gone wrong in this world.
Past Examples of Currency Hype
This is not the first time in history that there has been hype over money. While people relocating, en masse, for better opportunities is nothing new or surprising, it is not exactly what we mean here. Here, we mean when people move specifically to get money, which really has only occurred on a large scale for one type of event: Gold Rushes.
Gold rushes have occurred throughout history and on every continent in the world, except Antarctica. Recorded Gold rushes can be found back as far as the 16th century and as recent as 10 years ago. Of course, they are much less common now and usually do not create the hype that they once did.
If you go back 40 to 50 years, Gold was still the number one way that all money was valued, making gold, itself, the actual currency being used. Gold rushes all start the exact same way;
Someone finds gold by chance, usually while performing some kind of upgrade or construction to land. During the work, they spot gold. The owner of the property then begins to dig deeper and finds more gold. Word gets out and people in the immediate area start digging as lose as they can get to the original place where the gold was found. They find gold and more people from a bit further away come and it continues to grow. Eventually people pick up and move, sometimes distances of over 3,000 miles to have a chance at finding some gold for themselves.
Simply the chance, not even a promise, of getting money for free has motivated millions of people to partake in these gold rushes.
California Gold Rush of 1849 vs Bitcoin Hype of 2009
The California Gold Rush experienced the same types of issues, 169 years ago, as Bitcoin and other cryptocurrencies face today. When news first spread to the eastern United States about the amount of gold that was being mined in San Francisco, nobody believed it. It was not until a year after the initial discovery that people started believing the reports. It took a statement from President james Polk, in his 1849 Inaugural Address to legitimatize the claims. In his address, Polk stated,
“The accounts of abundance of gold are of such an extraordinary character as would scarcely command belief were they not corroborated by the authentic reports of officers in the public service.”
Looking at Bitcoin, in 2009, nobody knew about it. It took a couple of years before it was even recognized by anyone that could lend it legitimacy, let alone the president of the United States. We are closing in on 10 years since Bitcoin was launched, and only now is it receiving the kinds of endorsement as to the validity of it that will help it to become something to take seriously.
169 years ago, people that were far away from California wanted confirmation before they took the risk to go west. Today, people are seeking the same sort of thig before taking the risk with Bitcoin. It shows that while the date my change and technology may get better, people still have the same general cautions throughout time.
I am sure that there was some guy, in 1849, who arrived in California that year because he did not believe the hype about gold until he heard it from the president. I am sure that guy said at one point, at the very least, “Imagine how much I would have if I had just come out west right away!”
Today is no different, you can find countless people who ask themselves the same thing. “How much could I have had, if I would have bought Bitcoin 5 years ago when I first heard about it?”
These are not new questions. People have had concerns about missing out on opportunities for as long as people have been on earth. The fear of Missing Out, while risky in certain situations, is also what has allowed our world to grow at the rate it has. It is he risk takers that pave the way for the rest of the world to follow suit.
Historical Scams vs Cryptocurrency Scams Are Oddly familiar!
When Bitcoin retractors cite the reasons that they think bitcoin is not legit or just a fad, they love to jump on the bandwagon and talk about how Bitcoin can be used for illicit activities, and to scam people. Sure, Bitcoin can be used to buy drugs, illegal porn, hire hitmen and scam others. Nobody is denying it. Off course it can, but let us again look at some facts:
According to the White House, $100,000 Billion Dollars is spent on illegal drugs every year. That is US Dollars, not Bitcoin. In fact, the Huffington Post reported that between the year 2000 and 2010, before anyone was buying anything with Bitcoin, Americans spent a trillion dollars on illicit drugs. That matches with the 100, billion a year figures reported during the Obama Administration.
We all know that I can continue down this road, and probably write a novel length report on all of the other things that people spend money on that far exceed the amount of Bitcoin spent on those same, immoral, illicit or otherwise unsavory items that Bitcoin’s opponents love to throw up, however, I will leave it here.
The point is that just because bitcoin can be spent on things that are illegal does not make it invalid as a currency. Plain and simple. If this were the case, kiss goodbye every other currency on the planet today.
Scams Around Currencies Are Nothing New
As long as there has been money, there have been people who want to get that money, no matter what it takes, as long as they do not have to work for it. The other option to these people is to take it from those who have it readily available. The majority of people in society are not violent, so they try to get it by deceit. Below are examples of the different Currency related scams that are more notable.
1857 The Gold-O-Meter
“The Gold-o-meter consists of a rod, three feet long, with a ball at one end, twined around with silken thread,” wrote the Miners’ and Business Men’s Directory of 1857, published in Tuolumne County. The rod was made of steel, cane or some other elastic substance. Fletcher said his instrument would not act in other (people’s) hands, as it depended upon the peculiar electrical condition of his system. Still he would not let anyone examine it. Taking the lower end of the rod in both of his hands, the rod being in a perpendicular position, Fletcher would walk over the ground. If there was gold in the vicinity, the rod would bend or bow towards that particular location.
When there were two or more deposits in the area, the Gold-o-meter would gyrate wildly in semi-circles. Operating on the theory that gold washers were basically gullible people, Fletcher collected monthly royalties from naive miners for slightly over a year, mainly around the diggings of Sonora, Murphy’s and Carson Creek.
Gold Mine Salting
Gold Mine Salting is a scam that has someone actually adding gold into the ground, then selling the land s a claim that is rich with gold. There are tons of examples of this scam and it is something that is still practiced today. The best-known example, in recent times, happened in the 1990’s and involved Bre-x, a Canadian Company. What was reported was that they had just uncovered the largest Gold mine in the world. Stock prices were affected, the leader of Indonesia was involved, business deals were struck and in the end, it was determined that there was actually no gold whatsoever and the land had been salted, false reports submitted. You can read the full story for more details.
Less known, and more antiquated cases, can be found in Australia, America and China. A story about salt mining in California is especially good, only because the person who got scammed ended up gtting back at the original scammer. In 1855, a man salts his claim in the san Andreas region of California. The land was worthless for gold mining, there was simply no gold to be found. So, he grabs his shot gun, loads up 3 shells with gold dust and blasts the ground. He offers the claim up for sale and after seeing the gold flakes, the buyer jumps on the claim. It does not take the buyer long to realize his folly, however. Instead of simply walking away and cutting his losses, he spends a few more days there. He comes back into town with Gold. (Where he got the gold from, I am not sure, most likely he bought it or had an additional claim somewhere.) he sells the gold, tells his tale of finding a large lode and of course, he did it so the seller who sold it to him would know. By the end of that night, the original seller, feeling like an idiot, buys the claim back from the guy for almost three times what he originally sold it for when he thought it was a dry claim.
There is a great example of someone who got scammed, getting back at the scammer. However, gold mining scams are abundant in nature. But, they are not the only currency scams we can find.
Fiat Currency Scams
With any type of tradable asset, it is easy to take advantage of people and dupe them out of their money. This is especially so with currency traders. The Fear of Missing Out, or FOMO, will cause people to jump into an opportunity, less they miss the chance to make a lot of money in a short time.
This happens all the time. Take the Iraqi Dinar or Egyptian Pound as two great examples of currency scams that play on a person’s FOMO to accomplish the scam.
The set-up is simple, since the scam-artist does not do anything. All you need is a country that s in financial turmoil. Take Iraq after the second gulf war finally ended, Saddam Hussein was out and America was helping to rebuild. The scammer simply offers to sell either dinar, or securities that are backed by dinar and provides all kinds of information that seems very real, even though it is not true. Claiming that the Iraqi government would soon be revaluing the currency at a much higher rate, and then using small market up-trends, that were nothing more than market static helped this scam. The sorry part is, even though this scam has been going on for over 10 years now, it still continues to dupe people out of their money.
The same type of thig happened with the Egyptian pound. With currencies, and the way that their prices are valued, change and simple movements that can be expected, untrained investors, looking to make a bundle in the stock market are prone to fall for it every time. The scammer is someone well versed in financial investing and a great salesman.
Now It Is Cryptocurrency’s Turn
Enter a new era of money. Is cryptocurrency recognized as money? In most places, no. However, we are seeing a shift by most governments. Slowly, but surely, cryptocurrencies are getting recognized for currency. No one said the process would occur overnight. Just looking at history, the one thing we see is that when it comes to money, people tend to be sticklers about anything they are not sure about, fully and completely.
As the people of the world become more secure in their knowledge of cryptocurrency and more people take to the digital cash realm, the speed at adoption will increase more and more. Just like the gold rush in California 169 years ago, people will leave all else behind to have a chance to get their hands-on money.