Crypto Isn’t Backed amp That’s Why It Has Value
Crypto Isn’t Backed & That’s Why It Has Value
By Chris Coney
Lately, I’ve been on a quest to encourage investors to take crypto more seriously.
Personally, I feel like many still see crypto as some freaky sideshow when in fact, it’s the main event.
Even though most of the capital may reside in the legacy system right now, investment gains typically come from growth areas. And that most certainly includes crypto.
But there’s another reason why traditional investors often hesitate to take the leap of faith into crypto. Namely, “Bitcoin (BTC, “B+”) [and other cryptos] are not backed by anything.”
Rather than respond with a counterargument, I’m going to show why that entire thought process is flawed.
In fact, the lack of “backing” is precisely what makes BTC and other cryptos so valuable.
You see, when people say “backing,” they’re referring to legacy ideas such as some authority figure — like the government — decreeing value like it were some kind of financial deity.
But in my world, there is no greater authority than the mass of humanity itself.
As I like to say, “As humanity moveth, so doth the world.”
That basically means money and value go where people go.
Now, let’s use a theoretical example to prove that. Imagine if we all moved to Mars.
If that happened, there would be no economic value left on Earth because economic activity is human activity.
Therefore, it’s what we choose to do that gives something value.
By that string of logic, the dollar doesn’t have value because the U.S. government says it does. It’s because the world is currently using it as the main reserve currency and for international trade.
So, here I have already proven my point before even getting to crypto.
The main reason the dollar has so much value isn’t because of what it’s backed by … it’s because humanity is in consensus about it being the best and most useful tool for an important job.
A long time ago, the British pound used to have this job. But then it was replaced by the U.S. dollar.
This is the concept of Metcalfe’s Law applied to finance:
Click here to see full-sized image.
Basically, the more people use a network (like Facebook), the more valuable it is due to the number of other people you can connect with.
Since the U.S. dollar is globally agreed to be a good currency, it’s acceptable as payment pretty much everywhere.
But that’s not inherent to the dollar, since I pointed out a moment ago that the British pound was previously seen this way.
Back then, the world was in consensus that GBP was the best currency to use.
This is the essence of the point: People are free to leave and join these networks at will based on which one offers the most value to them.
So, why does one network win over another?
To make this easy, let’s compare two well-known social media networks as an example.
Remember when MySpace was the “it” website? Well, Facebook took over simply because it provided a better platform.
Thus, all it takes for value to flow out of a global network like the British pound into a network like the U.S. dollar is for a new platform to be perceived as superior.
Now I used the word “perceived” here specifically because the concept that “money has to be backed by something” is a perception.
After all, money existed for thousands of years before any kind of authority figure or government was around to decree that a certain thing had value as money.
Just look at gold. It emerged as a preferred payment method after being selected by the mass of humanity itself, without any need to be told it had value.
People just figured this out intuitively by looking at the special properties of gold.
Today, we are in a situation where the U.S. dollar has the unique property of being in infinite supply since the central bank’s money printer can always create more out of thin air.
And now more and more people are realizing this is the cause of their groceries rocketing in price.
Indeed, we are in a situation where a tiny group of people at the Federal Reserve make decisions about the U.S. dollar that have repercussions for everyone who uses it.
Worse still, all these people don’t have any say or representation at these Fed meetings. Yet, they still have to deal with the consequences.
I have made this point many times before, and it’s time to make it again: Every penny of capital that is in Bitcoin today is there voluntarily.
While I said here that the dollar has value because humanity deems it does, there is an element of involuntary use. After all, the U.S. government forces the U.S. dollar’s use to pay taxes.
At the end of the day, these are attempts to prevent the natural order of things that made money what it was before governments existed.
Namely, the natural process of humans self-selecting the money they want to use based on mass consensus and Metcalfe’s Law.
In my view, Bitcoin’s current and future success is largely due to the simple fact that it mirrors natural law.
Bitcoin brings money back to a time before government decrees by providing a way for the whole world to reach financial consensus.
It was not forced on anyone. It was chosen by everyone based on its merits.
Right now, the biggest barrier Bitcoin faces is the way it is perceived and the distorted perceptions that surround it.
These distortions largely stem from those who are in privileged positions that allow them great influence over the dollar — positions that shouldn’t even exist.
You see, the U.S. dollar is a hierarchical system which gives rise to phenomena such as the Cantillon effect.
This is where those closest to the central bank benefit the most from newly printed money … and those the furthest away from the central bank are harmed the most by newly printed money.
In comparison, Bitcoin and many other cryptos do not have this type of detrimental effect. They are flat, network-based systems where every role is open to anyone without permission.
No old boys club, no revolving doors and no central planning behind closed doors.
So, the very fact that Bitcoin is not backed is precisely why it has value.
It has so much value because humanity has voluntarily come to a consensus that it does.
William P. Eason