An economy of favors and obligations doesn't work when a large number of strangers try to co-operate. Hence, our ancient forefathers had to come up with something more universally representable than the barter system. They created the idea of money. The concept of money required no brilliant technological revolution neither did it require the creation of a complex formula or a theory. It only required a space in people's shared imagination - the intersubjective reality.
Now money is not a particular coin or a banknote. It is anything that can be used to represent the value of an object or service and which is equipped enough to convert, transport or store the wealth of an individual in the most convenient way possible. Throughout the history of human civilization, we have seen different things used to represent money. From cowry shells to different-metaled coins and now finally to fancy colored notes, we have accepted and used each one of them. But if you see, all of these items do not really have any intrinsic materialistic value. Their worth does not come from their inherent chemical structure or their shape or their color. Why then is a farmer willing to hand over his hard earned harvest which does have an intrinsic value in terms of food in exchange for money or why does a landowner give away a piece of real estate, a tangible and valuable piece of land in exchange for money? Money is not a material reality but it is a psychological construct. But then why does it succeed?
It succeeds because people trust this psychological construct. They trust that this coins or colored notes will allow them to buy food, buy land and buy other things they want by exchanging it with another person. I trust that money will work because my neighbor trusts it and my neighbor trusts it because I trust it. And eventually, the government trusts it and so does the whole nation. Money works because people trust the idea of money in their collective imagination. It is the most efficient system of mutual trust that has ever been created. And from this universal trust, comes its value.
The latest thing that has come to represent money is the idea of a cryptocurrency. Bitcoin, Ethereum, Ripple and so on. I am going to talk about Bitcoin since it's the most prevalent one but the following few paragraphs apply to any form of crypto-currency. that are in use.
Started by an unknown person named Satoshi Nakamoto and a group of enthusiasts, just after the economic disaster of 2008, the idea of developing a crypto-currency was to hope for a future where we never have to face such crises. The story that was being sold was that we can never trust these government-issued currencies because the control is in the hands of few. With the idea of distributed ledgers and transactional integrity through cryptography, we can ensure that no single entity is in control of the money. That is a great thought but there is a problem.
I am not even going to address the various design flaws or the criminal economy angle or even the environmental disaster that it is causing. The problem here is that Bitcoin's value is speculative. It increases because a few people (few with respect to the total number of people on earth) are creating the hype around it. Because of this hype and seeing that few of their friends have made money out of this, more and more people are keen on buying Bitcoins. Hence, the price keeps on increasing and you see again some of your friends getting good money. But because of this, people are now keen on buying bitcoins and storing them in the hope that price will keep on increasing. With the supply already constrained and people now storing it, it ceases to become a currency and becomes a speculative empty asset.
I mentioned earlier that the idea of money exists and succeeds because there is a universal trust amongst people that it will work. This trust arises when I go to a local store and buy my favorite ice-cream in exchange for a bitcoin which the shopkeeper gracefully accepts. There is no such mass based commercial application yet that can be used with Bitcoin as the currency of exchange and hence trust is difficult to build. And talking about bitcoin as a currency for local stores and daily commodities is a distant dream. Without this, all that Bitcoin is used for is just a simple form of trading between parties that are super excited and have great speculative powers.
The future of Bitcoin, in my opinion, depends on how fast it can be accepted in people's shared imagination. Because again, like all forms of money it is only a psychological construct with zero intrinsic value.