Crypto-currency or Krypto-currency?

Personally, and always demodé, I can observe that there is nothing more ephemeral than fashion: one button, three buttons, maxi-skirt, mini-skirt, strong colours, pastel colours, short or long sleeves, high or low heels and so on. We have nothing to do with this awesome world but as economists, we must recognise the fact that dictating or following these ephemeral trends led to the creation of powerful economic empires.

At the same time substantive research provides support for an important “enclothed” cognition perspective in people: clothes and consequently fashion can have profound and systematic psychological and behavioural consequences for their wearers (Adam.et al., 2012) (1).

The ephemeral store of value in fashion (in shirts, shoes, or pants) do not constitute a serious problem for most people since they can be replaced if fashion changes; people’s savings or money on the other hand are not easily replaceable.

Ephemeral money

A current definition of money describes it as anything that serves as a medium of exchange and consequently, it is widely accepted as a means of payment. The concept of money has also changed over time; two main theories influenced the interpretation of historical and archeological evidence:

– The commodity theory of money (money of exchange) was a consequence of trade; after domestication of cattle and crops cultivation (9000–6000 BC) the commodities’ surplus produced was used for barter and means of exchange.

– On the other hand, the notion of money of account (credit theory of money) comes from law codes (what a wonderful idea for politicians); the Code of Hammurabi 1760 BC for instance formalised the role of money in civil society including interest on debt, fines, and compensation in money for law violation.

The particular conditions of durability, portability and divisibility boosted the use of metals as preferred proto-currencies instead of commodities as cattle, clay tokens, shells, or salt; in Mesopotamia for example silver bars and in ancient Egypt gold bars were used as official standards for payments.

Any currency may have an intrinsic value (commodity money), can be legally exchangeable for something with intrinsic value (representative money), or only have nominal value (fiat money): Unlike these definitions a libertarian point of view may insist that when people use something as a medium of exchange, then it becomes money.

We disagree with this oversimplified definition of money as medium of exchange, it is only one of the three essential functions of any currency; we must assert that there are two other functions no less important than the first mentioned: store of value and unit of account.

While real estate, works of art, gold, stocks, and other commodities may serve either as a store of value and wealth; money differs from these other stores of value by being easily exchangeable for other commodities. If it remains stable and it is not affected by inflation and devaluations, money also serves as a unit of account, which is a consistent means of measuring the value of things (notion of constant value) through time.

It is a consistent integration of these three complementary functions (means of exchange, store of value and unit of account) that constitutes money; the fulfilment of these three functions together leads us to value certain currencies more than others. We must remark that the relative stability of main currencies such as the dollar and the euro, are not backed by gold and silver at their Central Banks’ reserves, but by the wealth that all these countries are annually producing (GDP).

The history of delusions

With some somewhat sensational descriptions, Mackay (1841) (1) presented many stories about “popular delusions” such as the Mississippi Scheme, the South Sea Bubble, and especially Tulip Mania, stating that: “In reading the history of nations… We find that whole communities suddenly fix their minds upon one object and go mad in its pursuit … millions of people become simultaneously impressed with one delusion, and run after it, till their attention is caught by some new folly more captivating than the first.”

The name Tulip Mania refers to a period during the Dutch Golden Age, when contract exchange prices for some bulbs of the recently introduced tulip flower reached extraordinarily high levels, and then dramatically collapsed in February 1637. It is generally considered to have been the first recorded speculative asset bubble in history.

According to Mackay, the population, even to its lowest dregs, embarked in the tulip trade in the newly futures markets. By 1635, a sale of 40 bulbs for 100,000 florins was recorded and by way of comparison, a "tun" (2,050 lbs) of butter had a cost of around 100 florins and a skilled labourer might have earned 150–350 florins a year. Many individuals suddenly became rich and other were ruined, selling possessions to speculate on the tulip market such as an offer of 12 acres (49,000 m2) of land for one or two rare bulbs.

Tulip Mania reached its peak during the winter of 1636–1637 when some bulb contracts were reportedly changing hands 10 times in a day. No deliveries were ever made to fulfil any of these contracts because in February 1637, tulip bulb contract prices collapsed abruptly and the trade of tulips ground to a halt. The collapse began in Haarlem, when, for the first time, buyers apparently refused to show up at a routine bulb auction. This may have been because Haarlem was then suffering from an outbreak of bubonic plague.

Panicked tulip speculators sought help from the government of the Netherlands, which responded by declaring that anyone who had bought contracts to purchase bulbs in the future could void their contract by payment of a 10 percent fee. The mania finally ended, with individuals stuck with the bulbs they held at the end of the crash — no court enforced payment of contracts, since judges regarded the debts as contracted through gambling and thus not enforceable by law.

In contemporary history other irrational economic behaviours and circumstances have been compared to the delusional tulip’s market: the South Sea Bubble of 1720, the 19th-century railways mania, the 1929 Wall Street crash, the dotcom stocks in 1997-2001, and even the Subprime mortgage crisis of 2008-2010.

Crypto-currency or Krypto-currency?

Bitcoin is the most important crypto currency created in 2009 by an unknown person using the alias Satoshi Nakamoto, it is a “mined” register recorded in a public distributed ledger called blockchain within a network of nodes where transactions are somehow verified through cryptography. It is produced by using computers that solve complex algorithms that “mine” 12.5 bitcoins every 10 minutes; the nodes of blockchain consume 121.36 Terawatt-hour (TWh) per year, while a country as Norway normally uses 122 Terawatt-hour (TWh) per year.

This crypto currency does not represent any country wealth or any corporation value creation (as stocks); it is in fact a waste of a valuable resource for energy consumption. Some people use it as a medium of exchange and investment, but it has no intrinsic value (like gold or silver), it is not legally enforceable, nor has a nominal value (fiat money); it is sustained in a mere libertarian perspective of people's preferences.

It is not subject to any supervision, regulation or control by a Central Bank or other legal national or international entity; it has high volatility and important rises and falls of value, and increasingly becomes the anonymous mean used to buy merchandise or services – legal or not – including many traded in black markets and the dark web.

While the hype is preserving value or getting rich by acquiring it as an investment or for trading , it is a fact that many people have lost their savings due to scams and bankruptcies resembling for these people the destructive power of Kryptonite (the fictional material that appears in Superman stories with a poisonous radiation that may kill the Kryptonians).

In a more microscopic scrutiny it resembles a Ponzi scheme, the false belief in the success of a non-existent enterprise that is fostered by the payment of quick returns to the first investors from money invested by later investors. Should we prepare for a new embarrassing market crisis?

(1) Adam, H., & Galinsky, A.D., Enclothed cognition”, Journal of Experimental Social Psychology (2012), doi: 10.1016/ j.jesp.2012.02.008