Do you know what money is? Surprisingly very people actualy do. A history:

mrees999
By mrees999 on Mon, Mar 7, 2016 - 12:57pm

Do you know what money really is?

If a five year old asks -where does money come from?  How would you answer?  

  • From my bank
  • From my employer
  • From my investments?
  • Credit cards and loans?

Where do they get it?

  • From customers?
  • From rent?
  • Dividends
  • Loans?

And where do they get it? - See question 1.

It's a loop because it isn't taught in school. Even financial planners and many economist don't really know.

Some will say that it comes from the central bank that then loans it to banks. - But where do they get it?

  • How is money created?
  • How did we invent it?  Who and Why?
  • What is the difference between money and currency? Aren't they the same?
  • What is fiat money?
  • What is 'hard money'?
  • What is intrinsic value?
  • How do we destroy money?   Where does it go?
  • Who creates the most money?  What if it's not the central banks \ governments?
  • Who owns the most money?
  • How did they get it?
  • Who controls the total supply?
  • Do we actually know how much money there is?
  • Why can't we have more money?  
  • Who decides the price of things?
  • Is bitcoin considered fiat or hard money?
  • Do digital currencies have intrinsic economic value?
  • Why do people call bitcoin "Gold 2.0"?

Can you answer all of these questions?

I will present answers to all of these questions and links to find out more.  Let's start the discussion because this directly relates to how we determine digital currencies are actually money and if they should have value.    

I chose this forum and website because I suspect this audience already knows the answers to many of these questions. You likely already think outside the box. That gives you an advantage to understanding where we are going and have the correct framework of thinking established.

11 Comments

mrees999's picture
mrees999
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Money defintion part 1

I would like this thread to be interactive so please tell me if I've missed something important, or if you see tings differently. 

Do you know what money really is?

A lot of historians believe that commerce and trade began with strait barter. Recent records indicate that debt favors owed came first. They show that beads and jewelry were added as debts owed and tracked as sometimes favors were forgotten or not repaid. One of the first documents with writing dealt with a futures contract for the next season's harvest to cover the current day favor.

The double coincident of needs prevented much barter from being successfully without a commonly accepted currency to trade between. Several things acted as money including Talley Sticks in medevil Europe, Wampum beads and salt to eventual gold and silver being the go-to money trade.

 

The five common traits listed for good money are:

Divisible

Fungible 

Long Lasting, non perishable

Recognizable

Demanded or wanted

 

Eventually gold and silver metals were pounded into coins for consistent weights and measurable standard weights. 

Eventually the goldsmiths started stamping their marks into the coin - which was followed by governments insisting on putting their faces into the coins in their kingdom.

Goldsmiths used their strong and safe storage for their metals and rented them out to others for safe keeping. These became the first bankers.

Bankers learned soon that they could give receipts \ notes out to people so they could come back and claim it when desired. When they didn't show often and people used the claims to pass back and forth to settle debts - the gold didn't move or trade hands as long as everyone agreed it was there when they needed it. 

The banker then printed more receipts than actual gold on supply knowing that he would likely never see everybody come claim their gold at once.  This started fractional reserve banking. The banks would "owe" back money they had lent to others.

 

At one point the governments allowed big Central Banks to control the money supply and issue notes for gold...eventualy leaving gold out of the equation and issued 'fiat' or command that their citizens would just accept the note as a promise the government would act in their best interest and to have faith in them. 

Now the governments create bonds of debt that they sell to the central banks to get money to run the government. These are often set in terms of 40 year repay back timelines. This has happened so often that the governments have become overburdened with the loans and pay them back drains away increasing portions of the functioning economy. The central banks essentially create money to add to the government supply to pay its debts and they allow the top financial banks to get fresh money first to lend out and keep the economy running.

How is that so far?

 

 

mrees999's picture
mrees999
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Documentary for money and bitcoin

One hour long, very well done. Puts bitcoin into perspective.

 

 

Michael_Rudmin's picture
Michael_Rudmin
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yes, you missed a trait. Store of value.

More specificnlly, you substituted "demanded or wanted" for store of value. So specifically, you find good money to be bubble money.

I don't.

My investment philosophy is better shown by the book "the incredible secret money machine" by Don Lancaster. If you care to read it, google it: you can read it for free in pdf.

Basically, your philosophy of money is useful for war: mobilizing the action of others into your desires.

My view of money is more to the tune of a medium of exchange of goods and services.

Your view of money will result in you flying high, crashing hard. My view of money, if I understand correctly will result in me growing slow, standing long.

One of them has resilience. The other doesn't. One of them will rule the world; the other will guide the world and repair the world.

mrees999's picture
mrees999
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Posts: 431
A bit too early to tell me what my philosophy is.

I suppose I'm the subject matter expert of my own philosophy of money. We haven't even remotely gotten there yet. But I will say I don't pretend to know your own philosophy of anything. Even if you told me, I wouldn't know your point of view because I don't know your history of the reasons you hold the view that you do.

We all see the world not how it really is,  but how we see ourselves in it. Our view of the world will naturally be based on our own experience, history, personal biases, education and so forth. We all have our viewing lens and can't pretend that others will see the world with the same clarity as ourselves because nobody else has shared all of the things that make your view of the world possible.

So in this series of blog posts,  I will appreciate all opinions and tell you and show you I appreciate your viewpoint. I will not tell anybody they are wrong on any subjective meanings. If there are objective proof and I or others misread provable data I would appreciate to learn what I missed and why.  I am a student of life with endless curiosity and my ego is such that I don't pretend to have all the answers. I've been wrong in the past I freely admit I could be wrong now and in the future. 

I agree with you whole heartedly that money must be a store of value. I have no objection to that. You will see that store of value is a quality of GOOD money. Salt, stones, talley sticks were used as money - probably not the best kinds of money - but they were indeed money because they acted as the shared tradable good that two parties accepted in trade as the tool to complete a trade. If they didn't barter, they used some kind of money. Cigarette were money during the war.  Digital currencies probably make a bad money right now because of the volatile speculative value.

They can make an awesome currency, however. I believe that when used frequently by a wide huge assortment of people and become completely liquid - the store of value will stabilize and the flywheel effect will take place with that kind of momentum. We aren't there yet. A lot of things still need to happen - but as banks being to fail and central banks loose control like in Venezuela - the role of a digital cash that lives outside of government control will become more important. The separation of state and money may in the future. We don't know yet. In the history of the world, the relationship of banks and money being in control of governments and fiat money has been relatively short - how much longer will it last?  

Please be respectful by not supposing to guess my philosophy as I've only just begun and you don't have nearly enough information to make that call yet. I'm beginning this series of post so we can all find common ground and to lay the framework of what I will teach. Please feel free to ask me what my philosophy is and I'll tell you. I will show you that same respect.

Thanks!

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Michael_Rudmin
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Absolutely, Mrees.

My mistake:  I said your philosophy, and that indeed was not correct.  It is rather the philosophy that is implicated by money that follows the rules you stated as your first approximation of trying to state what money is.

The thing is, what you stated "wanted..." is indeed part of the philosophy of money as broadcast by the banks, the IRS, our government, and our investment advisors.  And it is incredibly useful for mobilizing war, which is why the worlds' nations use it.  Those that didn't were destroyed or controlled by those that did. 

(My uncle calls this an agricultural-warlike society, and notes that there are many kinds of societies, but almost all modern societies are agricultural-warlike.  Way back when, Egypt was too. So was biblical abrahamic Sodom.)

My apologies for being so disrespectful as to confuse you with the remote implications of your post, which itself advertised that it was just a guess. 

Aside from that, I fear that you may be mistaking my comments on security for Dave's.  Please double check whether your problems with logical fallicies are not actually ones that I had used, rather than Dave.  From what I can tell, in some ways he's a much smarter man than I am, and more rational.

That said, I am thinking about how I would break the bitcoin mining software, now.  I probably won't do it, but I might try to demonstrate to my satisfaction that I can ... or can't.  Sometimes, in trying the impossible, I learn something.

 

mrees999's picture
mrees999
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What is money part 2 - Is a blockchain token money or currency?

The difference between money and currency and where does a blockchain digital token fit?

For the purpose of this article we will consider government and the central banks as one, although technically they are not the same.

Money is supposed to be long term and can be used as a store of value. Money generally is valuable in itself and has worth because of its intrinsic values that are determined by how much people that will offer value in exchange for goods or services. They often calculate this value by knowing the value of money independently of its use as a currency if it has other uses. This can be calculated by the amount of supply and demand of those who which to own it.  Economic intrinsic value is value is often independent of authority. Currency is created by governments who borrow it into existence. It is created from debt, therefore it is a promise to pay eventually by the government over time and is destroyed as loans are paid back.

Money and credit both have value determined by supply and demand.  Currency is required to pay taxes by the issuing authority and by standing as a legal tender requirement in payment for courts. Currency tends to not retain value over the long term because of the nature of its relationship with credit. Currency is created through debt and enters the economy by the government who benefit by being able to use it first to pay for goods and services it needs for what it believes is needed to maintain its authority at any given time.

Credit. acts as currency. It is also created with debt. It must be considered as it can be created instantly by banks or others as loans for purchasing power in the same way as currency. This is essentially currency creation and is figured into calculations of how much buying-power the nation can utilize. Currency and credit are often measured together because the effects to the economy are combined and their nature is the same. Credit most often created by banks. Thus in effect banks create currency to must be counted because of the net effect they both have on the prices of items.

Economist use both currency and credit in calculations for total money supply. This would be more accurately called 'currency supply". Banks, in reality create more currency that governments and therefore have more influence of an economy and prices of goods measured in the currency. Bankers enjoy more power than the governments as they can lend and retract their own supply of credit and they are bound to less rules than the nation's central bank. Their independent decisions of their own bank and how well it is run directly affects the value of currency as they two work hand in hand. 

The net effect the value of currency is not in the control of central banks alone. When banks fail and the amount of available credit shrinks the government must step in and create more currency on their end to fill in the gaps.  Likewise when too much currency and credit are available they must pull currency out of the population and do so  paying back loans used to create it. This can be difficult as currency and loans used to create it are often purchased by other countries who may have their own agenda for their own countries and the competing supply and value in world markets in which they compete.

In the end, all of the complications created in trying to maintain a stable purchasing power and all the levers and strings to maintain a steady purchase power eventually leads to a collapse in currency value. History has proven that all currencies ever created over time tends to collapse in price as the issuers lose control due to the many complications that they cannot control.

Money can be used as a currency, but currency cannot be used as money.  This is important later when we talk about digital currencies. Do they have the qualities of money, or currency?

Let's compare using the digital token of bitcoin.

 Divisible?  Yes, a full bitcoin is a block of 100 million sub units that have their own unique addressable address and value.

Fungible?  Yes, one bitcoin is the same value as any other bitcoin.

Long lasting or non-perishable?  Yes, as it is digital and abstract it isn't perishable. In theory it will be long lasting as it can't be destroyed. However it is a recent object with only a recent history. It requires the internet which is also a recent invention. This requires that the internet does not go away. However the internet is now required in such a dependency now that life in the world has been radically altered in ways unimaginable a generation ago. Billions of jobs would be affected now by the disconnection they've become dependent on it. It is unlikely in the foreseeable future that it will go away. Even with EMP bombs it will live on as it is worldwide and designed to withstand nuclear war. Critical infrastructure is protected with shielding and underground that it will continue to survive although it might need time to establish in certain parts where EMP can be effective for a short time.  It is easily rebuild. The prediction is that bitcoin will be long lasting if people continue to find value in it. Blockchain invention likely means that a digital token which transports value as an intrinsic quality will remain in some form whether or not we call it bitcoin or it transmutes to another digital token doesn't matter as people will simply shift from one to the other.

Recognizable. Yes, as it has a blockchain and will not work on another blockchain of records and is shared by others who also use it. Other digital tokens share this same quality and you can't confuse one for another.

Demanded or wanted? This is increasingly the case as the use continues to rise exponentially as people learn about its unique qualities that are unlike anything we've seen before. Its uses as digital cash fills a gap in the modern world allowing for payment anywhere in the world without using credit or a nation limited currency.

Also we can add 'portability' - it is the most portable kind of money the world has seen as it can travel anywhere the internet exists in real time for almost free. There are ways to use it offline as well within limits.

Let's also add "Scarcity". We can't retain value of something if it is too easily obtained. The scarcity must be combined with the demand for it. For example, my dirty socks are relatively scare, but likely little to no demand for them.

We will also add ' store of value'. This can be inconsistent currently. But it was the best performing money compared to the current world standard - the US dollar. It increased comparison value in 2012 2013 and 2015 outperforming any other money or currency. Due to the fact it is not fiat and value comes from supply and demand - its price reflected that fact in 2014 as there was less demand. It can be shown that 'dollar cost' averaging as an investment for most months and years shows that has been a fairly good store of value given enough time scale.There is a strict limit on supply as generally, the rules in the creation of tokens written into the program  protocol limit its issuance and many times have a hard limit. This is deflationary over time as demand is expected to grow as people find additional use-cases for it. 

Is it a currency?  It can be used as a currency as we decided that money can act as both. However strict currency is created through debt - digital currencies are not.  Currencies are created as fiat which means it was declared valuable by a nation or state as legal payment for good or services and paying taxes. Bitcoin has not and thus is not fiat. Currency has no intrinsic value as there is no use for it besides a substitute for money.

Bitcoin has several uses besides money or currency. It can be used as an immutable record shared by the entire world in real time. It can record ownership of anything and be assigned as a token to represent property ownership. It can be the vehicle and settlement of smart contracts. It can be used in smart property acting as the identity verification in smart locks. It can allow for machine to machine value transfer. It acts as a private record storage mechanism for transportation for distributed storage.  It can replace the SIM card in cell phones. It can act as a decentralized DNS system. There are an exploding number of use-cases where it is not used as money or currency - thus giving it intrinsic value.

 

Thus, digital currencies have the same properties as money more than a only currency.

 

 

 

 

 

 

mrees999's picture
mrees999
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Too complex?

I realize there are typos and some grammatical fixes I need to make in that post above, I ran out of time before I could finish editing it.

But, explaining money and credit seemed too complex I would like to explain it to somebody with a Jr High level of comprehension who doesn't understand the difference between money\currency\credit as well as this audience likely does - how would you explain it simpler?    Comments?

 

 

Edwardelinski's picture
Edwardelinski
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Many are visual learners.

Why not throw in a few graphics? We have a few teachers who visit the site.Maybe they will weigh in.

Jesper.Madsen's picture
Jesper.Madsen
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Bitcoin - not for the masses

The Bitcoin and blockchain idea i great, but the Bitcoin system as we know it today will can only handle 3 transactions per second, whereas for instance VISA can handle 20.000 or more.. That means that when the number of Bitcoin transaction double or tendouble you will face transaction times of up to 15 minutes (to verify if your coffee was paid or not) .. Im afraid Bitcoin is a cold fish :-( to bad the organisation are not able to agree on new standards, Im selling my coins and wait for better alternative 

mrees999's picture
mrees999
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Posts: 431
Yes Jesper - You are right. Bitcoin is not ready - but...

I totally agree with you Jesper. There is too little direction  and because there is no central authority there isn't enough strength right now to correct the ship.  This is how the democracy of money works. I think of it like the early congress deciding on the constitution of the US.  Nobody could figure out what kind of country we were going to be and the states were all in individual revolt.  Some wanted to return to a monarchy and establish George Washington as a king. Read how the founding fathers had to fight to keep the nation together.

Sometimes democracy is messy. But most of the time in companies you don't see it out in the open - and you only hear the results of the power struggles and ugliness that happened behind closed doors.  With  bitcoin you see how the sausage is made. It is growing up quickly and now has reached a growing pain.  I think it will eventually grow out of it, but I don't guaranty it. 

I do know that blockchain technology itself will survive and if bitcoin doesn't make it - it will be a lesson and a new blockchain currency will learn from and go on. 

This may be already happening.  If you are watching closely you are seeing a possible bitcoin replacement 'ethereum' rocket in price. As I write this, the price is over $14.40 per coin almost all of it must be purchased with bitcoin. The means value is 'leaking' out of bitcoin an filling into ethereum. Ethereum does not have the same limits for tps. But there isn't any merchants accepting it for payment yet either. Perhaps it is over exuberance and likely a bubble. We saw this happen in 2013 with bitcoin where the price rose from $12 to $1200 so you don't know how high these bubbles can go. With enough momentum and expectations because we've seen this before, it may not end soon because of the FEMO that is going on (Fear of Missing Out) might drive it much higher. The seduction is powerful.

A lot of people feel like you do about bitcoin not being ready and I sympathize. However, I also believe that market forces will prevail. Watching the competing digital currency will likely give the bitcoin development teams a sense of urgency. Bitcoin looks like it might be evolving taking the Linux approach of the open source model similar to how we see different implementations of Linux including Android. The same data is used for history but different merchants and wallet providers may do different things with the layers of functions on top of the base protocol.

There are several solutions on the table and in testing that will significantly improve the transactions per second. The lighting network in testing will handle many thousands of transactions. Segregated Witness will quadruple the existing bandwidth, and increasing the block size to handle more transactions per block will double that. Add second layer services like those offered by "Blockstream" and side chain implementations and you might quickly realize the limited scope you are providing about the current limitations might be short-sided.

It's good to remember that all of these blockchain technologies are in the very early stages. PeopIe today are speculating and that is the number one use. Speculation on the future with the possible importance on par with the internet. It has risks and I don't think anybody would disagree with that. Absolutely do not invest more than you would lose sleep over if you decide to diversify a bit - I would suggest not overdoing it - but I'm not an advisor, that's just how I approach it.  But I can tell you my one bitcoin investment into the ethereum crowd sale has paid off pretty well. From $400 for 2000 tokens (20 cents each) to now over $14.40 each is a 7,200 % return. If you say that out loud - let it soak in...seven thousand two hundred percent.  The price of ethereum has risen about 40% just since I started the thread four days ago.

Remember the visionaries.  Don't count them out for they are inventing tomorrow.

 

 

CrLaan's picture
CrLaan
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no longer available.

video is no longer available; copyrights

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