What is a currency worth? Cigarettes, wampum, shells, playing cards, gold... most anything can be used as a currency. The value people place on a good or service is revealed as price. Price is the original information economy. In a barter economy, price is concealed by the practically infinite factorial expansion of possible ratios of goods and services with respect to one another. A currency reveals social value in the form of easily comparable prices, making commerce more efficient and society more productive. The information known as price is created and publicized by a free market economy. Said another way, price information is the output of a free market process. Currency has no intrinsic value, it is just an idea that lubricates the wheels of commerce with information. Currency has the ultimate positive network externality. It is worth something because we agree to use it. And the more people agree on a particular currency (by using it), the more valuable it becomes. Unfortunately, the more valuable it becomes, the more likely it is to be subverted, undermined, counterfeited or inflated. People can be their own worst enemies.
Unlike fiat, gold has an intrinsic value rooted in the original conception of currency. The classic acknowledgement of the value of a fine tailored suit expressed in gold is relatively unchanged over many centuries. The gold value example shows currency destruction via inflation as the well understood achilles heel of fiat money, because fiat is tied to the nationstate. All other forms of currency devaluation are easily understood as criminal and can generally be limited by expensive technological and police effort. Inflation is the curse of empire since it is legal, commonplace, and taken to extremes it distorts and destroys the free market economy that established the value of the currency. What goes around comes around and nationstate empire karma is fatal and final. So what is a currency worth?
The scottish free banking system and other free market currency regimes give an idea of the penalty paid by nationstate fiat systems. Think of it as 17th century bitcoin. Their weakness was that the banks had no legal defense against empire. Fiat is backed by an army. The free market bankers had no army to defend themselves, and their customers had no recourse when the power structure changed. The military and the bureaucrats always eat first. The expansion of commerce and wealth creation during these periods of stable currency is remarkable. If only we could perform an experiment, say the british empire under a free banking system and compare that to the british empire under fiat currency. This suggests an idea of what a currency, any currency, is worth via the productivity gains it creates.
Currency is a social tool to enhance wealth generation in commerce via information generation and transmission. Tools are measured by their inputs and outputs. A perfect currency would be infinitely divisible, frictionless, no fees, no cost to create, impervious to counterfeiting, and avoid the inflationary temptations of empire. Societies with better tools should generate wealth at a faster rate. Perhaps this rate can be studied and historically determined or at least estimated.
We live in an age of nationstate fiat money. The performance of a currency in today's geopolitical context is directly related to the economic performance of that nationstate... including the economic impairment of that currency by the local elites. Studying net worth, value generation, and income by country reveals economic performance, but political impairment is only qualitatively expressed. In the US, Mercatus, Heritage, and many others compare the states legal, employment, housing, taxes, and expenses to one another and US averages, capturing the differences using one currency and a common rating system. How do you compare a blockchain derived non-state, non-fiat currency like bitcoin or ripple where there is no D or N in the GDP/GNP? The productivity and efficiency gains would not show up in any particular currency or location.
Cost sets a floor value for currency. No one spends $4000/oz mining gold at a sale price of $1300/oz. Mining stops. Bitcoin's proof-of-work necessarily requires a certain amount of hardware, software, and electrical power that effectively establishes a floor price for continued bitcoin mining. Proof-of-stake currencies have a different structure than proof-of-work, but still have definable costs.Blockchain currency costs depend on the specific algorithms compute cost. I know of no digital seignorage comparable to fiat, though I understand that China is aggressively eliminating cash and replacing it with digital renminbi which would be 100% seignorage. Canada stopped minting small denomination coins when the cost of the metal exceeded the stated coin value (negative seignorage). The US chose to outlaw coin salvage for metal and to redesign coins as cheaply as possible (proving that empires and lawyers trump rational thought). Blockchain currency values are set in a worldwide market, in the absence of central bankers to protect or manipulate the currency.
Market acceptance and demand sets the standard. If no one wants it, it isn't worth anything i.e. community acceptance constitutes proof. FOREX activity, total capitalization, total debt denominated internal or external to the currency, these could be measured for all currencies, blockchain or fiat. With respect to these kind of metrics, I think fiat and blockchain derived currencies can be compared.
Utility is changing from labor to compute. Digital currencies compete much more favorably in this environment. Fiat cash was designed for human commerce inside the nationstate not for algorithms in a stateless internet. This new medium will have a new currency.
Store of value. Gold, bonds, shares of stock, commodity futures, art work... there are an infinite range of valuable things I would rather have than digital currency for long term storage. I suspect Bitcoin may eventually go obsolete in random power failures, lost computers, hard drive failures, fires, etc. Unlike fiat, there is no recourse, compensation, or replacement for catastrophe or loss in the Bitcoin algorithm. It just disappears forever. Without a replacement function in the algorithm, and without an inflationary function in the algorithm, Bitcoin and similar algorithms will be lost due to ordinary human frailty. US citizens interested in a store of value account should consider either the Utah or the Texas Gold Deposit Banks.
Anonymity. Cash not blockchain. Bitcoin may be cryptic and obscure, but blockchains are public for a reason, trust. Nixon paid for Watergate in cash. Reagan traded guns for drugs for hostages with cash. Congress trained Osama and paid him in cash. The alphabet soup of nationstate agencies pay cash for their dirty deeds. Following Portugal's lead in legalizing everything would take a big bite out of the world's cash transactions. Digital currencies can offer value to the world, but they aren't a panacea. This should not be a surprise. Governments and criminals tend to be incompatible with trust.
The key difference between blockchain-derived non-state currency and fiat currency is answered by "Qui Bono?"... Who benefits? or more in the current vernacular, "follow the money". Nationstate Fiat Money Beneficiaries: Central Banks, Currency controllers, federal banks, state banks, interest rate controls, loan controls, FannieMae, FreddieMac, .....
Blockchain derived distributed currency beneficiaries: Miners, Users.
Taken to its logical extreme, blockchain currency could ruin the market for the marble facade of nationstate banking, free up a lot of expensive real estate in major cities planet wide, put millions of financial grifters out of work, and give all the savings to the users. Forever. All for the price of a few computers and electricity. And there is nothing to stop or prevent users from using alternative currencies like MPesa or Bitcoin. This train is coming inside the digital commerce world, and eventually crossing over to mainstream human interactions.
So what is my ballpark valuation? Calculate how much of the finance sector is directly related to transactions. Not assets, payments. Roughly zero that out. Now give that to the users of the currency. Not the owners, the users. Convert all the world's commodity, land ownership, and asset trading markets to blockchain. Fire all the clerks and close the offices. Traders and their firms remain standing, but all the transaction related activity disappears into the cloud. ETF's and mutual funds will winnow the herd of individual traders and firms down to a handful, mostly involved with setting up new markets or converting existing markets to blockchain. The value saved will go to the users, and to the firms that create and maintain the markets.
Previous financial revolutions accrued power to the politically connected elites at the center of the empire. They own the printing press, they control the interest rates. Blockchain takes power from the 1% and returns it to the rightful owners. As a more precise conveyor of economic information, the productivity gains from blockchains will accrue to everyone. The direct employment and influence of the finance sector will eventually subside, just like automated farming and robotic manufacturing.
The benefits of a successful replacement to our closed financial ecosystem, via bitcoin or otherwise, can be estimated. The network accrues the value to the users. The currency itself is a placeholder.
