Cryptocurrency collapse teaches us a…

Cryptocurrencies are not real money. (Photo: Jernej Furman via Flickr, CC BY 2.0)


The recent collapse of the cryptocurrency market is yet another example of the frantic intemperance of an economy that puts profit before wealth. That FTX cryptocurrency exchange went bankrupt as panicked investors tried to withdraw $8 billion from their accounts. A classic bank run that followed pushed the underfunded stock market into bankruptcy.

The world’s first billionaire?

The FTX Crypto fiasco proves that not all that glitters is gold. For a long time, crypto was full of glamor and hype. FTX CEO Sam Bankman-Fried was the poster child of the crypto market. He exuded confidence and optimism about the coin’s bright future as he hosted high-profile events and gave generously to political and other causes. He even talked about becoming the world’s first billionaire. Earlier this year, he bailed out several fraudulent crypto companies caught in the crossfire of a collapse in which crypto investors lost around $2 trillion.

Collapse reveals the true nature of money

A haunted Mr. Bankman-Fried now admits he committed a lapse in judgment. Risky investments and takeovers brought the stock market down. He could not live up to the speculative nature of the market, which promised high returns. Some also blame the Fed’s collapse for keeping interest rates so low and encouraging excessive risk-taking. Regardless of who is to blame, the fact is that cryptocurrency is in trouble. The recent collapse calls into question the wisdom of such investments. Instead, it reveals the true nature of money, currency and wealth.

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No value meter

Some people call cryptocurrency the money of the future. That blockchain
the accounting system makes it attractive to investors who value privacy and transaction speed. Libertarians like the independence of government and banks and see it as a parallel system that will eventually replace modern money. These digital assets are created using cryptographic techniques that allow people to buy, sell or trade them securely. Most create virtual characters or tokens are used as units in these transactions. This tISLANDkens
however, can be very volatile.

No money

Cryptocurrencies are therefore not money. It cannot fulfill the three main functions of money: a stable unit of measure, a medium of exchange and a store of wealth. It can mimic these functions but not work stably. Money should be like a yardstick that measures things in inches and feet. Crypto’s volatility in value keeps it from being a measure of value. This is why people think of crypto in terms of dollar or euro value, not the constantly changing crypto unit.

Not really a medium of exchange

Most cryptocurrencies are not currencies either. By definition, currencies are anything (such as coins, treasury bills, or even digital instruments) that circulate as a medium of exchange. The lack of acceptance of FTX units as a means of payment significantly limits their use as a medium of exchange. Its digital nature also limits its general use.

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Cryptos are also not sustainable

Money and currencies need stable and official sources to transport them across generations. They also require a universal demand for them, which can be found when a government declares a unit legal tender and acceptable as payment for taxes. The state has therefore always reserved the right to mint money in order to safeguard the public interest in the long term.

A digital good

A more accurate description of crypto would be: a digital asset. It stores wealth supported by volatile demand and confidence in its markets. In many cases, it has no intrinsic value beyond its ability to hold investor dollars. Bitcoin’s value lies in its scarcity, as it is difficult and expensive to crunch numbers and mine energy.

Money is not the same as wealth

However, it cannot store wealth because it is not actually wealth. Wealth consists of all assets and property of monetary value or economic utility owned by a person, entity or nation. The great mistake of modern economics is that money is confused with wealth. Money may represent the value of wealth, but it is not the wealth itself.

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The value of things without things

The concept of wealth must be connected to the real world. Wealth is found in natural resources, raw materials and products, land and houses. It is in livestock, crops and eggs. Wealth consists of all the miracles by which the human mind uses material and immaterial things to glorify God. Money represents a claim on this wealth. The more specific the requirement, the more stable the money. Economist Georg Simmel once defined money as “the value of things without the things”. For an economy to flourish, there must be things.

Crypto mainly hides its own superficiality

The prefix crypto means hidden. Investors insist that crypto protects transactions from an intrusive government. As the FTX meltdown shows, it also hides the shallowness of its own worth.

This article originally appeared on tfp.org.

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