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Dynamics of Trust: Coinage to Crypto #6

By Austin Lloyd Inc November 02, 2018 0 comments

"What's your cow to bitcoin conversion rate?" 

Weird question, but if we replace bitcoin with gold coins, we are transported into the early questions posed at the advent of currency in early economic systems.  "How do I know those pieces of shiny metal are worth a cow?"  By putting ourselves in the shoes of the first people to trade with coins and precious metals, the same issues of trust that early coin users faced become apparent.  This leaves us with the central question that accompanies changes and developments in any monetary system, or token economy: what creates the value of coins, tokens and other currencies? 

The usual answers are about scarcity and rarity, or judgments against other things as equalizing agents.  However, there is always another "why?" at the end of each of those concepts of the valuation of a coin or note.  Why is a certain coin worth a pound of potatoes?  This coin cannot be eaten; it will not sustain life.  It will not provide milk, like a cow.  Objectively, the coin seems so unrelated to the elements of a barter-based economic system that early traders must have often found it comical.  Somehow, people had to stop laughing and scoffing and trust that a coin was worth something they needed.  

Trust is the ultimate origin of value determination.  The buyer must trust that by accepting a form of currency - coin, note, or ledger entry - for real goods and services, that they have attained an item of comparable value which may then be used to acquire other goods and services that they need or want.  This creation of trust is a contract between people about their trade, or transaction.  We will do well to remember here the fact that written contracts in early societies had a hard road to taking precedence over the "three-witness" and other interpersonal systems of trust (the same reason notaries exist today).  As trust in coins and money as systems grew, they became layered, just like formal contractual systems.  

Fast forward through the centuries to arrive at the advent of cryptocurrency....  The coin becomes paper money.  Paper money systems become standardized.  Coin scarcity leads to the discipline of numismatics.  Coins are made from cheaper metals, making them fiat, rather than bits of bullion.  Securities appear as trust contracts establishing value.  Banks are legally allowed to create money with numbers in books.  Computing allows rapid calculation and accounting.  Money is numbers in bank servers.  We trust that these numbers are calculated and assigned value with integrity.  

Crypto is the next development in the life of the coin, which has certainly seen stranger moments.  Whereas the NGC and PCGS certify the value of rare coins, the ledgers that verify cryptocurrencies create the trust that is inherent to monetary value.  Of course, many collectors and supporters of our well-respected systems will say "I'll stick with the real stuff."  Someone said that a long time ago when he was offered a coin for a chicken.  That coin has since been traded numerous times, likely to the tune of millions; the chicken and its erstwhile owner surely live on in spirit. 


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