2020 was not the year many were expecting when the clock struck midnight on New Year’s Day. The effects of the COVID-19 pandemic have changed so many things that it almost feels as though many years have passed in the course of a few months. One of the biggest aspects of human life to be affected by these changes has been money.
The Origins of Currency
The value of currency comes from its ability to store value. Objects like salt and seashells were some of the first items to be used as currency (the English word salary comes from the Latin word for salt). The lack of durability in these items led to metal coins being used. They first appeared in China and soon spread to Greece and Persia. Coins held their value well as they were made from materials like gold and silver that depreciated little over time. The natural scarcity of gold and silver gave these two metals great value that persisted over time and was hard to manipulate.
By the 1600s, paper money backed by gold appeared. Originally being receipts that allowed depositors to retrieve their gold, the goldsmiths of London began recognizing the receipts as being payable to the bearer. This allowed the notes to be used as currency in and of itself. Once this custom was established, the goldsmiths could then loan out more notes than they had gold to back them. This sleight of hand allowed goldsmith bankers to earn interest on gold they didn’t have. This allowed bankers to essentially create a larger supply of money. This was a harbinger of things to come.
Where Does the Value of Currency Come From?
Scarcity is a big determining factor of a currency’s value. Fiat currency can be created very easily at the whims of central banks. This is an example of a currency with low scarcity. Cryptocurrency in general and Bitcoin, in particular, have very strict supply limits and schedules. You can predict with almost clockwork accuracy what the supply of Bitcoin will be at any given time. For this reason, it is said that Bitcoin has high scarcity.
Commodities like gold and silver fall somewhere in the middle. Gold and silver must be mined. Oil must be drilled and processed. Work stoppages, depletion of mines or oil rigs, and poor economies can affect the supply of commodities and make it variable. The more scarce a currency is, all other things being equal, the more valuable that currency will be.
Other factors that influence the value of a currency include divisibility, portability and durability. With fiat currency, you have to make change to divide it up. With physical gold, you need special tools. Gold and fiat currency have moderate divisibility. With cryptocurrency, divisibility is not a major issue because everything is bits on a blockchain. Bitcoin is famously divisible, with its smallest unit, known as a satoshi, being one-millionth of a Bitcoin. Fiat currency and cryptocurrency are both easy to carry around, while gold can be heavy. Gold and cryptocurrency are quite durable, while fiat currency is somewhat fragile.
What this all amounts to is that the utility of a currency determines its value. Something may be an excellent store of value, but if it is hard to carry or hard to split up, it diminishes the practicality of that currency and thus its value. Cryptocurrency shines when it comes to all of these currency traits as it is highly portable, highly scarce, highly divisible, and highly durable.
Bitcoin as Safe Haven
Bitcoin’s strict emission control makes it a safe haven in contrast to fiat currencies. Since we know the supply of Bitcoin from now until it hits the 21 million Bitcoin limit, there are no supply surprises in store like there are with gold or fiat currency. The supply of gold can be affected by the state of the global economy, mine depletions and mine discoveries, government regulation and pandemics. The supply of fiat currency isn’t mined, but rather decreed by the central banks around the world through the manipulation of interest rates and quantitative easing.
Some have laughed as the notion of Bitcoin as a safe haven, but the fact that its supply output is predictable in contrast to gold and fiat currency cannot be denied. In times of unpredictable inflation, we know with certainty the supply of Bitcoin will not be manipulated.
If you like this article, you will be glad to read one of our best articles, “Is Bitcoin a Safe Haven in Times of Crisis?” by Aaron Koenig
Money in a Crisis
In a world largely controlled by fiat currency, crises inevitably spur governments to increase the money supply. In response to the coronavirus pandemic, central banks have slashed their interest rates to zero. The threat of subzero interest rates looms and offers the startling vision of customers having to pay banks for the privilege of storing their savings. Imagine how valuable that money is when banks demand you to pay them for keeping it.
Governments have turned on the printing presses, churning out huge amounts of money and sending it out so fast, many recipients are dead or not even married to the spouse in whose bank account the money landed. More government intervention is expected once the economy restarts.
In times like these, where money is being printed in such quantity that its true value can be hard to fathom, it’s nice to know that the supply of Bitcoin and other cryptocurrencies will remain predictable. Cryptocurrencies like Bitcoin can serve as a vital tool for protecting your wealth in this vastly inflationary environment.
The COVID-19 pandemic changed all our lives, including the way we look at money. Ever since the gold standard was first introduced, people have been trying to find ways to compromise that standard. Fiat currency is no longer bound by any standard except the decisions of central banks on what it believes their economies need. As the coronavirus and other crises occur, Bitcoin and other cryptocurrencies will still hold to their strict emission schedule and provide a strong store of value in a rapidly-shifting monetary environment.