Over the years people used a lot of different things as a currency – gold, cowry shells, beads, livestock, or even some large rocks. Some people want to return to some of those standards or create a new one with Bitcoin or other technologies. However, we should be cautious when making that decision as it may have a broader impact than is initially obvious.
A currency can either be created artificially scarce by a monopoly (national banknotes and coins), or manufactured in one form or another by anyone (gold, beads, livestock). If a cost to create a new unit of currency is smaller than the actual cost of the currency, you have an easy business model of manufacturing the currency (for example, mining gold). While rational at first, if the currency becomes more and more valuable, the cycle becomes self-sustaining and people start creating the currency for the currency’s sake. This becomes more and more absurd the longer you think about it. Instead of creating things people need (consumer products, services), we create things that are only used as liquidity, not the final product. Let me give you some examples…
The gold business
Gold has been used as a currency for a long while and to this day still remains a valuable commodity. As such, there is a constant demand to produce more and more gold to satisfy the market.
At the moment it costs about $600-$960 to mine and produce an ounce of gold (with that ounce selling for about $1200). At the same time, producing something like a gold wedding ring creates about 20 tonnes of waste. Looking back at “Redefining currency” post, practical uses of gold are dwarfed by its use in investment and jewellery (which is likely due to gold being expensive in the first place, ie if gold wasn’t expensive people wouldn’t make jewellery out of it).
As such, gold appears to have long gone into the self-fuelling cycle. If the supply stored in Fort Knox was released to the market and used for building electronic circuits instead of speculating, we wouldn’t see numerous gold mines digging up the last specks of gold from the ground.
The Bitcoin business
We can see a similar parallel in the Bitcoin world with the progression of mining technology. We have people making big warehouses and creating the latest microchips just to mine some Bitcoin before their machines are made obsolete in a few weeks. Similar to gold, Bitcoin fuels its miners with the newly minted coins in each block.
One positive about Bitcoin is that all the mining power is at least used for securing the network, giving it more meaning than gold mining…
This phenomenon is not unique to gold or Bitcoin. It’s a natural progression for pretty much every currency backed by anything. If we had a global economy using cowry shells as a currency, we would see large cowry snail farms taking up huge plots of land. We would have entire industry focused on producing the most cowry shells the fastest, cheapest and so on. If we had an economy based on Rai stones, we wouldn’t be using limestone to make buildings or pyramids, we would cut every piece of it into round discs with holes in them and try to figure out where to put all of them.
Money is the motivator
Whatever we decide to use as a currency, we should keep in mind that it will motivate people to go to extremes to create more of it and store it in bulk. So while our current model of debt-based money might be bad, I’m glad we don’t have something based on the basic things people need to survive like air or water, or we would see entire governments draining the oceans and bottling the air just to make sure they have the most of it while they die of dehydration and suffocate in the thin atmosphere…