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An interesting theory emerges when analyzing the cryptocurrency market. Cryptocurrency is the newest financial phenomenon, and the reason for this is the failure of the fiat system. Throughout history, political and economic chaos usually stem from a currency failure. Currency failure leads populations into massive speculation, where a run into an asset that is perceived to be undervalued can lead to a full-fledged bubble. Our current state of affairs shows us that assets of every kind are at peaks only seen a few times in history. Commodities and cryptocurrency are not currently in bubbles, but the speculation in cryptocurrencies will lead to one at some point. The cryptocurrency market capitalization is at around $145 billion, with Bitcoin trading at around $70 billion.

Cryptocurrency supporters view these digital assets as money, and it does have that component. If we look at a theory known as Catallactics, the digital asset may be viewed as something different. Catallactics is a theoretical discipline that investigates the exchange of goods in a free society. Catallactics is the basis of classical economics and the Austrian School of Economics. Government money is not a test of this theory because it forces influence of the state on ordinary people. When exchanging goods for money, both the buyer and seller will subjectively value the goods side of the transaction. When this transaction takes place, there need not be any subjectivity in the value of the money being exchanged. Essentially, the good or service will be subjective, while the value of money will be objective, otherwise the transaction will lead to barter. This is better known as regresses in infinitum, where the value of money is traced back to its subjective value as non-money before it became objective money. In the 19th century, when silver was dropped for gold as money, silver’s price then dropped back to its value as a good.

Money is needed because we divide our labor, with all individuals specializing in their production to maximize output. The only money ever used by the free markets to achieve this is gold and silver. Gold and silver were chosen because they have subjective value in alternative uses. Additionally, gold and silver are the only forms of money that were used in which the buyers and sellers issued the money they were transacting in. When the purchasing power of sound money changes, they view this as a change in the price of the good and not in the money supply, also known as an objective value. This change in the value of goods happens as a price discrepancy is noticed in one market versus another. Money will flow into this market to readjust the price to equilibrium or a more competitive price amongst that good’s overall market. Currently, state money works to provide equilibrium to prices and terms of goods, as they are relatively stable. This is the same logic as gold expressed in fiat or cross rates between fiat currencies.

Bitcoin and other cryptocurrencies have no use case outside of money. They do not have subjective value outside of objective value, and they are way too volatile to be used as money. Although, I say this because only 1.5% of the population has any idea of cryptocurrencies. Sound money has to be stable, durable, and reliable. Sometime in the future, when the populations of the world move more heavily into cryptocurrencies and the market capitalization is in the trillions, we will have a better idea of its store of value. Once the bubble-like frenzy is over, we will see which coins and tokens are left after the 1,000-currency market dwindles down. As Georg Knapp said in his book The State Theory of Labor, ”Money is the creature of law.” Will governments crack down further, or will cryptocurrencies become much more stable in their price swings? Once price swings and market caps are stable, they might be used as money, but as of now, they’re nothing more than speculation. However, they have elements of fiat money and sound money, which make them something of interest. I do believe owning a small fraction in cryptocurrency is a hedge against the dollar.

Cheers,

Colin Bennett

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