Topic: Understanding Currency (USD) vs Currency Derivatives (BTC) (Read 644 times)

The price of gold is determined on a market that is open to the public for trade. Many people believe that gold is a vehicle for preserving USD when the dollar falls in value against other country's currencies. That part, the relative value of the USD, can be influenced by the central bank.

Gold is in exactly the same asset class as bitcoins; it's a currency derivative because it gets all of its perceived value from its USD price. You buy gold specifically because you believe it is worth a certain amount of USD, same as with bitcoins. Nobody buys a bitcoin or a bar of gold for the sake of owning either - they buy them with the intent of later selling for a greater amount of USD than what they paid to buy.

The blockchain does not establish value because it does not represent productivity. You want me to build you a barn...how many bitcoins will you off me if no other currencies existed and we had no bitcoin-to-whatever exchange? How many bitcoins would you sell me a nice condo in NYC for? Where in the blockchain will you find the answer to determine how many bitcoins is appropriate for either of those transactions?

And do we have Central Bank which is responsible for management of all gold on earth and is telling us that 1 ounce is worth $xx?
No. It is people who decided that gold is worth something for them. And it is the same way with bitcoin - people are deciding how much they want to pay for it.
Bitcoin is backed by people trust in blockchain ledger and strength of Bitcoin network, no central authority is required in our system.
And of course 1 bitcoin is worth more in certain countries and less in others - that is how purchasing power of FIAT works.

No, bitcoins are not useless and I didn't say that they are. Bitcoins are excellent placeholders for a currency, but they themselves are not a currency.

Currency gains its value from the credibility of the authority that issues said currency. Bitcoins are not issued, just like gold and silver are not issued. There is no "authority" behind currency derivatives, and the concept of currency value hinges on a mutual trust that 1 unit of currency has some agreed upon amount of buying power that is guaranteed.

The role that law plays sets the rules that determine what recourse is available to those who hold debt notes - i.e. currency. Do I have the right to sue, if yes, which court has the authority to hear the case and issue a judgment one way or the other? If I want to lend money, what set of laws will govern the terms of the contract? etc. To have this, you need an authority. There is no court of bitcoin, and even if there was, who would recognize their legal authority? I wouldn't, would you?


Right, but that is more about the integrity of bitcoin transactions than it is about the economic concepts.


But you do, without it, how will you know what 1 BTC is "worth" in terms of debt. If bitcoins were not being exchanged for USD, who will determine how much a product or service is worth in terms of bitcoins?

It will be impossible, because the transaction network of bitcoins is not an authority...it's just a vehicle. Yes, it provides a solid method to exchange bitcoins but it offers nothing in the way of establishing a value, because the definition of value can vary widely among people within a country, and especially among people living in different countries.


The term "currency" used casually refers to an item or object exchanged for goods and services. The legal definition, and concept of what a currency actually is falls under a different definition and that's what I'm discussing here.

Your definitions and explanations are inconsistent and confused. In the end, it doesn't matter because your definition of a "currency" is your own and is not used by anyone else.

But it also says that there is 'no such think as a decentralized currency' because there MUST be some central power behind it for monetary system to work. That is simply not true.
It might be true way back in time. And that is simply old way of thinking from the times before blockchain was invented. With blockchain as backbone of a network we don't need central authority.

TBH Bitcoin is backed by Law.
Not exactly same law as the currency but still affected by law and backed up by Mathematics and logic. Everything is backed up by math.
If its backed up by math.. it works.

So you are basically saying that bitcoin and every other cryptocurrency is useless and has no intrinsic value because it is not backed by 'law'?
But bitcoin real value is blockhain and its ability to be the best and the bigger information storing ledger on Earth - that doesn't count?

Economic theory is often full of supposition and seemingly profound ideas that turn out to be wrong, and this is one of the leading reasons that there are so many misconceptions about what a currency is and is not.

Firstly, bitcoins are not a currency. Bitcoins, precious metals and other items with little or no intrinsic value but high prices are currency derivatives. They derive their value from actual currencies, and require a market to price them against said currencies.

Currencies are debt notes which are guaranteed by the issuing country's treasury (as opposed to the person who spent the currency). One US dollar has a value based upon the productivity of the USA and its people, and the assurance that the US treasury will honor the relative buying power that 1 USD represents in the marketplace. This "middleman" guarantor of value, the treasury, is what allows currency to have value, to be spent and for the gears of an economy to turn.

Without the guarantee of the treasury, every single currency transaction would depend upon the spender honoring the debt that they incur when they present the note, and the seller would not be able to liquidate the note with a 3rd party...the seller would be completely at the mercy of the buyer to repay the debt.

There is no exchange that sets the value for USD or other currencies like there is for bitcoins and gold. You might say forex, but forex is simply exchanging currencies at their intrinsic values; the discrepancies in currency values is a function of the country that issued said currency.

Bitcoins are not issued by any entity, neither are precious metals. They have almost no intrinsic value, that is, a value other than monetary. Oil, for example, has a high intrinsic value because it is a fuel as well as a critical chemical for all petroleum products like plastics. If the CBOE vanished, oil would still have a high value without a market price to index against.

Compare that to bitcoins, precious metals or any other currency derivative, all of which require a market to price their value. Without it, every transaction happens in a vacuum. Some guy may sell 1 oz for $1,000 while another may sell the same amount for $400. Neither is right nor wrong, it's entirely arbitrary.

With USD being the "world's currency", most currency derivatives are priced in USD...and here is the thing that people gloss over. If the USD were to collapse due to a catastrophic economic meltdown, any item whose value is indexed against the USD will also become worthless.

If we were to graph this event with gold, currently around $1200 / 1 oz, the market value of gold would sharply rise, almost vertically on the graph, then suddenly plateau and fall to zero. It wouldn't matter if you sold at the peak, because both the currency and the asset that was indexed against the currency are both at or near zero.

It's important to understand that there is no such thing as a decentralized currency, because for a currency to have its own intrinsic value, it needs a credible authority to provide a legal framework - the rule of law - against which standards for commerce are established. There also needs to be mechanisms for enforcement of said laws.