CWL 1 - Why cryptocurrencies? Are they valuable? What is value, anyway?

A high-signal, low-cognitive load newsletter on crypto, finance, and investing. Positive sum vibes.

Hey everyone! If you’re reading this, it’s because of one of two reasons:

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And nervous. 

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In this edition:

• How value works (What makes something valuable?)

• Problems with storing value

• Ideal properties for something that stores value

• Problems with our current stores of value (and where cryptocurrencies come in)

How Value Works

Something has value for one of two reasons:

• It has some intrinsic value or utility. Furs and salts are examples of things that used to be currency because they had a legible purpose.

• Society decided it has value. Hence, if you have money, people will take it and give you something you value in exchange.

When you traded with furs, you didn’t have to convince anyone that it was valuable.

But, you did have to find someone who specifically needed furs. That takes time and effort. At some point, the value of the furs becomes less than the value of the time and effort to find someone.

Problems with storing value

Let’s say they take your furs knowing that they’re valuable, but don’t need the furs themself. Now they have to spend the time and effort to find someone who does.

This is all extra time and effort nobody wants to spend. Ideally, there would be a universally desired thing. If this thing existed, you could use it to get anything you wanted. No more trying to find the handful of people that need fur at a specific point in time.

Here’s the problem. Nothing is valuable to everyone at once. The value of anything to any two people will always be different. Even the most basic necessities like food, water, and shelter are only valuable to people who need them.

For example, even if you happen to need furs, you only need a specific amount of fur. If you already have enough, the value of more actually becomes negative to you. You incur storage costs. Moving it around is laborious. So, you want to get rid of it - and we’re back to square one.

Value is not universal. If we want to make something universally valuable, we have to all collectively “fake” it. We have to all get together, point to something, and agree that it’s valuable.

Ideal properties of a store of value

So what properties would this fake thing have? A few ideas:

1. We know we want it to be as universal as possible. 

The more people who agree it’s valuable, the less you have to hunt for people to trade it to, the more valuable it legitimately becomes.

2. We want it to be stable.

If it decreases in value, that’s bad for anyone who has it. Their purchasing power decreased by no fault of their own, which would make them pretty angry.

If it increases in value, that’s also bad. It means that people will try to hold onto it because they think it might keep going up. Trading will slow down and everyone will get less of what they want in general.

If it fluctuates, then people won’t trust it.

That’s basically it. If you 

1. have something that you know people accept in exchange for things you value, and 

2. you know its value isn’t going to shift violently beneath your feet, 

then you have a good “universal tradable thing” a.k.a. a currency.

This is what the U.S. dollar accomplishes. How?

1. The U.S. dollar is universal because the government says so. 

The words "this note is legal tender for all debts, public and private" are printed on each bill.

2. The U.S. dollar is… *laughing with sweat emoji* mostly stable.

You know that the value isn’t going to shift violently beneath your feet. It’s hard to create fake bills, so that prevents people from doing it. When the government creates new dollars, it has done so at predictable times. Historically speaking.

Hence, the dollar is a reasonable, stable currency. Even if life is obviously chaotic and the things money can buy become more or less valuable every day.

What’s wrong with USD? Why cryptocurrencies?

So where do Bitcoin and other cryptocurrencies fit into this? If the dollar is doing great, why are they useful?

There are many reasons, but the most popularly cited one is that they lack centralized control. What does that mean?

Metaphorically speaking, the dollar is a dictatorship and cryptocurrencies are democracy. 

A bank can freeze your account. Nobody can stop you from sending or receiving Bitcoin.

A court can wrongfully decide that you owe someone money and have it taken out of your paycheck. Nobody can take your Bitcoin from you without your consent.

A government can become inept (or corrupt) and print more money than it should. Bitcoin is limited in supply.

The dollar’s power comes from centralized monolithic entities controlling everything. You *have* to pay for your taxes, vehicle title, inspection, licenses, etc, with dollars. Bitcoin is entirely consensual.

This raises a lot of questions. How does this all work? Is Bitcoin a good investment? What about the other coins? We will get there. In particular, I’ll be diving deep into how Bitcoin works in the next issue.

I hope you enjoyed it! Hit reply and let me know what you think! Thoughts, questions, comments, etc are incredibly welcome.

Thank you to the Foster members who reviewed this post: David Burt, Sunil Suri, and Tom White.