Gresham’s Law, Gold and Cryptocurrency (2 of 2)

So, how does Gresham’s Law and gold apply to cryptocurrencies?

Well, let’s start at the beginning. Cryptocurrency has a few characteristics that are very favorable and resolve some of the problems that have plagued money over our history. 

Firstly, it’s production is not monopolized by a centralized government or by a central bank. Taking it out of the hands of these entities eliminates any capricious activities that would alter its value over time.

Like gold, it is difficult to come by and its base value is determined both by the “Labor Theory of Value” as well as the “Subjective Theory of Value”. That is to say, whereas the energy that goes into producing gold comes from human labor and other mechanical means in its mining, processing, smelting, weighing and minting, cryptocurrencies require a minimum of human labor, but require massive amounts of electricity, very fast computer processors, complex communication infrastructures and data processing to be produced. In addition, although a gold nugget may be the same weight and purity as a gold coin, people would value the coin more than the nugget for ease of use and for aesthetic reasons. The value they would place on it then becomes “subjective” rather than “objective”. The same may be said for cryptocurrencies with regard to convertibility.

Also, like gold, cryptocurrencies cannot be counterfeited.

Unlike gold, and similarly to fiat currency, cryptocurrencies have no real intrinsic value for use in industry and have no weight nor purity to be measured. It is as non-existent as the promise of a promissory note.

Some Thoughts on Convertibility

As I have noted in the previous post, the purchasing power of the U.S. Dollar was in a very slow, gradual decline from 1933 until the Nixon Shock of 1971. After that, when it became “unhitched” from gold, its debasement has advanced exponentially to where it is today. The dollar is now just another monetary unit on a free-floating exchange which is also subject to the inflationary practices of the Federal Reserve System and the Federal Government.

Herein lies the problem.

As it stands now, if I were to convert Steem to dollars, I would first have to convert it to Bitcoin and then to dollars. It appears that Bitcoin is taking the place of gold in the middle of the transaction. Since Steem has a “floating” value compared to Bitcoin and the dollar’s value is floating, we are dealing with uncertain values which fluctuate at both ends of the transaction. I would suspect that the fluctuations in the Bitcoin to dollars exchange would be more likely to occur on the dollar side of the equation, since Bitcoins, by their nature, are not subject to inflation, though subjective consumer confidence may play a role on the Bitcoin side.

Now, suppose I wanted to convert Steem to gold. The transaction would be Steem to Bitcoin to dollars to gold. Here, we have two “fixed” values and two “floating” values within the same equation. The questions I would raise are these:

If our goal with cryptocurrencies is to escape from centralization, why should it still be necessary to include an instrument (any fiat currency), whose origin is from a central bank, in the equation at all? Why would we not want to set the convertibility directly to gold, instead of some paper fiat?

The benefit of this would be a relatively complete isolation from inflation on the pre-converted side. No matter what happens with the fiat currency in the marketplace, the “purchasing power” of the crypto would remain as stable as that of gold. The procedure to convert Steem to dollars would then be: Steem to Bitcoin to gold to dollars. 

Gold, then, returns as the standard, intrinsic commodity of exchange.

How does Gresham’s Law Apply?

Remember, “bad money drives good money out of circulation”.  The “good” money in this case becomes Steem, Bitcoin and gold. This money will go out of circulation and into savings, investments and retirement funds. It would become the basis of pensions, where its value will remain stable. There will be no need for “adjustments” for inflation of the fiat to keep up with increased pricing on goods and services in the market.

I believe this should be something to explore. I also believe that, in having direct convertibility to gold, there would be no doubt that consumer confidence and the acceptance, and autonomy, of cryptos would be assured.

I’d like to hear your opinions on this topic.