Some thoughts on the value of money

It starts with an idea

I was inspired by this article from Brett Scott. It's a long read for most readers, but puts forward a few essential stuff about money. Basically, the author shines a light on the concept of money and clearly identifies to the reader that what the average man sees as 'money' is nothing more than a belief. A belief that money he receives in exchange for a service or product, will be accepted by others as well in exchange for their services or products. Of course, this 'belief' can be supported by government actions through rules and acceptance for payment of taxes. This may be the case, but that does not change the very basic argument that it is 'belief' that makes people accept intrinsically worthless tokens as money.

In my head, when reading about this stuff the question popped up why Devcoin (still) has value although millions of Devcoins are made continuously without limits. It seems like a remarkable thing going on that begs for exploration.

How did Satoshi do it?

In respect of giving money value, the designer of Bitcoin , Satoshi, did not have the benefits the State has in this particular matter. Satoshi made good efforts to combine a few elements, probably hoping to get the right mixture. It seems he did it right. Let's run through three possible thoughts of Satoshi and see whether we can apply the outcome of those thoughts to the broader concept of what gives money value.

Some thoughts on Bitcoin's dispersion mechanism

First, he could not disperse all 21 million Bitcoins at once to all people in the world, so he had to think of a scheme. Giving all coins to a small and special group of people would not work. Why would party A exchange something of value with Party B in exchange for a 'Bitcoin' that party B acquired for nothing as member of that special group? It would be something for nothing from the perspective of party A. So, no hand outs of coins from the start but a gradual release of coins during Bitcoin's lifetime.

Second, handing the coins out to people using the wallet or other type of distribution on a 'something for nothing' would not fly either. People have a very ingrained feeling of honesty and fairness. If someone has a remote feeling that the counterparty receives something for nothing, he will most likely not make the deal.

Third, he needed a mechanism to secure the payment protocol. Without computers doing the hard work of verifying all payments, Bitcoin could never exist the way it does today. Satoshi used a very simple principle: award work. Miners that secure Bitcoin's payment protocol, receive a bounty. It was very clever to combine the concept of a bounty for miners to the problem of dispersing all Bitcoins. Given Satoshi's challenge, an elegant solution to get Bitcoins outs out in the world without giving anyone a free ride.

These three thoughts may give us some insight in Satoshi's reasons to devise the Bitcoin software as it nowadays still largely is. However, that leaves the question on the table why people started attaching value to Bitcoin?

The 'belief' in value

We started out with the general idea that money has value to people because they belief so. When looking at Bitcoin, it has all elements that could make it money (e.g, (1) a medium of exchange, (2) a unit of account (2) a store of value). Bitcoin is basically Internet's Gold with its fixed total number of coins, highly suitable for the online world we live in. No one controls Bitcoin and it enables payments 24/7 all around the globe for essentially nothing. Therefore, it is not hard to imagine that someone would accept a Bitcoin as payment if he 'beliefs' it will be accepted again by the next person as payment. That is still a big 'if' and we may want to explore that some further.

There is no way to tell what did make people belief that Bitcoins will conquer the world. But it started at some point with a few people mining Bitcoins on their computer. Of course, at that time it must have felt as an experiment and I am sure a lot of Bitcoins were deleted when people deleted their Bitcoin software after a week of running their PC red hot. But nevertheless, there was an effort involved. Giving Bitcoins away was not a big thing, if only just to test making payments electronically to your friend. But in time, as more and more people jumped on Bitcoin's awesome potential, a market for Bitcoin started to exist. Miners make efforts to generate Bitcoins (also securing the payment protocol). These efforts, helped by Bitcoin's potential, induced miners to increase the ask price for Bitcoins. A price for Bitcoin was born.

With that price, a belief started to develop. A belief of persons that a Bitcoin would be accepted by the next person as something with value. This belief may initially have been based on the fact that the miners had to make efforts to generate his Bitcoins and, thus, does not want to give it away for free. I think that this belief was soon overtaken by the prospect of Bitcoin's potential. Belief in Bitcoin's potential can also serve as a belief that the next person (also seeing the potential) will accept Bitcoins. In the next phase when Bitcoins can be used to pay for regular services and products, the belief will be more and more ingrained in people's heads. It will become natural just like acceptance of fiat money.

So what about Devcoin?

So what about Devcoin ? It does not have a fixed total number, as one of many altcoins it's potential is not perceived the same way as with Bitcoin (although similar in concept) and its given away by a central club of people to people of their choice. But it still has value. I find that intriguing.

When looking back at the reasons why Bitcoin has value or, better said, people 'belief' it has value, it seems as if the efforts in obtaining them give the holder thereof some authority or claim of value. If the aspect of speculation is eliminated from this train of thought, I think of this argument as follows: Devcoins were not obtained for free. This is a known thing for the holder of Devcoins, but it is not hard to imagine that the receiver of Devcoins has a similar perception. He cannot just get Devcoins for free and thus recognizes that it took the holder of Devcoins efforts to obtain them.

A powerful thought

If this perception is true, it basically proofs a much more powerful insight about money. Money does not only have value because we believe it has value. Money has value because we 'give' it value. And when looking at the numerous altcoins in existence that are thriving together with Bitcoin, I am very anxious to find out what positive things society can do with this reinforced notion of our joint power.

So let's get that creativity working and continue to bring that value to Devcoins!

Bitcoin | Cryptocurrency | E-currency

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