Originally posted on lifestylemaniacs.com
The first thing haters say about Bitcoin — and crypto — is that it is a speculative bubble, and it has no intrinsic value, and they are right. However, they are wrong when they say gold, stocks, or cash have intrinsic value.
History of money
In the beginning, we used bartering as a form of transacting value — a medium of exchange. People traded a cow for two sheep, for example. The person who sold a specific service or good gave the value.
The cow produces milk and meat, whereas the sheep provides both, but in smaller quantities. Thus, the buyer and seller may negotiate and agree that a cow is worth two or three sheep. Makes sense?
Over time, people evolved and started using some common currency to have a more stable and standard valuation of goods and services.
It makes sense because a person may say that a cow is more valuable than a horse, while another person may say the exact contrary. People needed a standard value estimation — store of value. Hence, people started minting gold coins.
People chose gold as a store of value because of its nature: it doesn’t oxidate, it can be modeled into weighed coins, and it is scarce. Gold has stood the test of time as the standard value — the gold standard — mostly because people agreed upon it.
For sure, there are other earthly elements with similar anti-oxidative properties and scarcity, but people agreed to gold. It is a convention given by people, not by universal laws. I hope it makes sense.
Over time people started putting their gold into safe deposits and received a paper that proved their deposited wealth. People used those papers for transactions instead of physical gold, which was also harder to transport.
The gold deposits were the first banks. Over time, banks started giving papers for the same gold deposit when people wanted to borrow gold because people never withdrew their gold. They relied on the paper proof of gold and not the gold itself.
It is how the case monetary system came into existence. People came into agreement that the number printed on the paper is the actual value.
For decades, the paper money of a country was the equivalent of gold it possessed. All until president Richard Nixon exited from his gold standard in 1978. Since then, governments could print money as much as they wanted.
Note: I tried to describe the history of money as briefly as possible and may have skipped some details. If you want to learn more about the history of money, how banks work, and why our monetary system is broken, please check:
- The History of Money
- Why Has Gold Always Been Valuable?
- How Banks Create Money
- How The Economic Machine Works by Ray Dalio
Why Stocks Are Speculative
As we saw, commodities and cash have no value if people agree they do not. The story with stocks is a bit different. Stocks represent fractional ownership of a public company, according to Investopedia.
You may think a stock price goes up because the company’s profit goes up. We saw during the pandemic that although companies’ profits went down, stocks went up.
The Buffet Indicator confirms that the stock market prices have detached from the current state of the economy.
The stock market — and other markets — went up because people started gambling on RobinHood, eToro, and other online brokerages during the pandemic.
How come people had money to invest during the pandemic? Because they could not travel, could not hang out, and stayed at home. The pandemic prevented people from spending, thus, reorienting them to online investing.
So, why does do markets go up on exchanges? Because people buy. It is the hard truth. When a lot of money goes into a stock, the stock goes up and vice versa. It is what happened with AMC and GameStop as well.
All of this means hype can create the illusion of value. If most people agree Tesla has value and buy its stock, the stock will go up, and it did. It had a P/E ratio (Price relative to Earnings) of almost 1000. Extremely overpriced.
Crypto hype is history repeating
The crypto hype is the new hype of the online and informational revolution. At the beginning of the century — and millennium — we had the internet hype — Dotcom bubble. In 1720, we had the South Sea bubble. Now, we have the Crypto bubble.
Yes, it is a bubble because the market is new, prices spike quickly, and people become very greedy. A new market is easy to manipulate through social media and online news (e.g., pump and dump or fud).
As we saw, Elon Musk tweets Doge and the price goes up 1000 times. Dogecoin — and other meme coins — are a joke (literally). However, if people believe they have value, they will have value.
Now, there are companies and projects with some fundamentals behind the chart.
For instance, if GOOGL’s price goes down, by just knowing and understanding the company’s fundamentals, you can predict the price will come back in the future. Why? Because the company itself has value, not the stock.
However, if everybody decided Google has no value for some reason (e.g., it steals personal information, another company is better), the company will go to hell.
The same logic applies to all markets, including crypto. I choose to invest in Ethereum because of its potential to become (decentralized) Web 3.0. I also choose to invest in Bitcoin because I believe it is a better alternative to gold.
Blockchain technology is the future
There is a book called “The Bitcoin Standard” which describes the current flaws of our monetary system and why Bitcoin, among other things, is a good store of value.
Bitcoin is not and will not be the only crypto out there. Many crypto projects, like Ethereum, Cardano, Polkadot, and Solana, have huge potential.
The name cryptocurrency is not intuitive, in my opinion. Crypto assets or blockchain projects are a better naming because crypto is not just for finance but for other applications in our world.
In whatever asset, be it stock, commodity, or crypto, money goes, the price will follow, as well as money outside the asset. This process makes any publicly traded asset prone to manipulation.
This makes you understand the everything has no value until people believe in it and give it value.
If I ask for my house $100.000, but no one will offer me that price, my price is not worth $100.000. As long as there is a person willing to pay the price, the good or service has that asked price (value), otherwise, it doesn’t.
Despite the fud and misconceptions about crypto, it is here to stay. People will slowly believe crypto has value and will incorporate it into their lives. They first need to understand the potential crypto has and the problems it solves.
I know this article was long and I appreciate you read it to the end. I know it was not easy for you, neither it was for me. If you believe this article has value, it a Like and Share it to help other people become smarter for free as you did. Also, if you want to read more articles like this, Follow me. I do my best to post every weekend.
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Disclaimer: I am not a financial adviser and don’t recommend investing in anything as nothing is guaranteed. Everything I write on the topic is for informational and educational purposes only. Always do your research.