In what way does crypto “money” differ conceptually from the virtual money in one’s bank account?

647 views
0

The virtual money in this case (an online statement) doesn’t actually exist, it’s just a value system used by the bank to be translated into hard cash if ever you have to make a withdrawal. But that virtual currency isn’t a thing in reality, even if on the backend it might have its own funky way of working in the financial system.

So how does that compare to crypto? Like with any currency, value is determined by 1) how useful it is to us and 2) what we say it’s consequently worth, so what’s the conceptual difference between, say for example, 20 chainlink (for example) “dollars” and 20 virtual dollars in my bank that represent cash?

Are they *actually* different things, and if so, how?

In: Technology

The “value” of the money in your bank account is controlled by the central bank that regulates that currency, be it the dollar or the euro.

The “value” of bitcoin is set be an open market, like any other commodity: gold, oil, … .

While governments sometimes dabble in commodity prices, like the recent oil market, they really can’t “control” them. Through quantitative easing they can directly control the value of fiat currency.

One of them is legal tender and the other is not. Legally, morally, and practically you can exchange goods for goods. This can be crypto currency, baseball cards, sacks of potatoes. You could even use them as a medium of exchange. I’m told that phone cards are used as currency in some places with unstable money.

If your debt is denominated in US dollars, your bank has agreed to take US dollars and can’t refuse to do that. They could refuse crypto currency, which makes it less useful than legal tender unless and until more people agree to accept it.

They’re different in many ways.

For one, your balance in a bank account is literally nothing more than a number on *the bank’s* ledger. Without the bank–its information systems, its infrastructure, its network and its PERMISSION–you can’t spend or withdraw your money. With cryptocurrencies (proper ones, at least) any two parties can exchange tokens/coins/currency at any time without reliance on a centralized authority. Each party keeps his own copy of the ledger* which is cryptographically guaranteed to be accurate.

* In practice, it’s not uncommon for individuals to delegate “keeping your own copy of the ledger” to a service or to the network itself. A crypto wallet on a mobile phone, for instance, doesn’t typically have the resources to maintain a ledger of all transactions that ever occurred, so it may connect to a server somewhere for that function. But in principle cryptocurrencies are designed to be decentralized, meaning you *can* operate a wallet entirely on your own, and doing so actually makes the network more resilient and more secure.

Check out r/Cryptocurrencies and r/BitcoinBeginners if you haven’t already.

Money is broken down into two types, fiat and commodity. Commodity money has some sort of commonly applied purpose, and that common purpose makes the money inherently useful and valuable. The idiom “you aren’t worth your salt” comes from the Roman army. Rome had so many soldiers in so many different areas with so many different local currencies, they wanted to pay their soldiers with one thing that was universally valuable to simplify their payroll, so they chose salt. Salt is lightweight, easy to carry, doesn’t spoil, can be easily divided into specific amounts, and everyone everywhere recognizes it as valuable.

The trouble with commodity money is that state has no way to control how valuable it is. Imagine you’re a Roman soldier who’s been scrimping and saving his salt so he can send a bunch of “money” back home to his family. Right before he does so, someone invents a really cheap way to recover salt from seawater. There’s suddenly many, many times more salt floating around and it becomes much cheaper. This Roman soldier’s savings are now worth significantly less and he’s understandably upset. If the entire Roman economy worked with salt as their form of currency, the whole economy would be thrown wildly off balance.

Fiat money has no inherent value. The only value it has is the faith that people have in it. I have no problem selling my car, an inherently valuable item, in return for a bunch of paper pieces with pretty pictures on it because I have faith that when I want to purchase something from someone else, they’ll be willing to accept US dollars in exchange. While fiat money can be a little scary as you’re essentially putting your trust into a bunch of IOU coupons, the value of fiat money can be controlled by the state as the state can make or destroy fiat currency at will, which allows the state to stabilize prices and keep the economy going more smoothly.

Crypto and dollars are both fiat currencies. The only value they have is the faith people have in being able to exchange their fiat for actually useful goods in the future. The meaningful difference is that one is state-controlled, and thus more stable, while the other is lacks central control and thus is inherently more volatile.

Some folks have explained the technical differences well. There’s a couple of salient points that have been left unsaid:

1) Cryptocurrencies today aren’t really money. There’s very little you can exchange them for. If you’ve got bitcoins and want to buy a TV, first you have to exchange your bitcoins for fiat currency of the nation you’re in.

2) Cryptocurrencies are unlikely to ever be money in countries with reasonably strong central governments. Central governments are not going to give up control of the money supply to a commodity they can’t govern. If more businesses started accepting bitcoins in the US, for instance, the US would pass laws outlawing bitcoin as currency. They haven’t done so because as of yet it’s not a threat.

So Cryptocurrencies aren’t money at all. They’re a commodity with no inherent usefulness except their proscribed scarcity. This is mostly true of gold too (though gold has a few uses) but gold’s mythical value has been built into our consciousness for thousands of years. Cryptocurrencies are much younger than that and there is a very real risk that they go to zero or close to it at some point.