“Parking” value may be the near future of the cryptocurrency ecosystem, at least for now

The power of the technology, for now at least, is not bitcoin as a store of value. The power of the technology is in the transport mechanism and the decentralized ledger, which is revolutionizing payments.

I predict that the ecosystem is going to continue to move in the direction of using Bitcoin to transfer value, and then “parking” it, until it needs to be moved again. I say continue, because this is already happening.

In my last entry, I wrote that Bitcoin has a huge hurdle to overcome. This hurdle is a general lack of trust. This is true for two primary reasons (not including fear of the unknown, and fear of regulatory response):

  • first is that bitcoin is currently volatile,
  • second is that bitcoin is not yet trusted as a form of money.

This is not to say that someday it will not be trusted, but it is going to require a what I am calling a trust-bridge.

Lets back up a bit so I can explain why.

Some cryptocurrency advocates argue that money has value because of its utility (cryptocurrency in particular). The argument stems from the idea that money has value because of the system that grows up around it. For example the USD has value because of banks, internet purchasing, stocks, bonds, credit cards, etc. If you compare this reasoning to the arc of history however, it does not stand up under scrutiny. How exactly is utility the reason Rai stones for example have value as money?

rei stones - yap

If you are not familiar with Rai stones (1), they are huge stone wheels weighing up to 4 tons that have been used by the micronesian people of Yap as money. They were quarried as far as Palau and transported back to Yap, over 2600 kilometers away by primitive sailing vessels. This is hardly good utility, in my opinion.

Some cryptocurrency advocates also argue that “hard money guys”, aka “metallists” declare gold has “intrinsic” value. Although I am probably a hard money guy, I dont think gold has any intrinsic value at all (as money). The reality is, gold, and every other thing from seashells to beads to rare feathers or cows, that have been used as money had value because people believed and agreed they had value.

The question is, why would people agree on this? The founder of Xapo Wences Casares touches on the reason when he says, “Look, what would you prefer — free access to information [which they’re getting now with their phones] or a secure place to store the fruits of your labor and to receive and make payment?”(2)

People want their labor to mean something. People toil, day in, and day out to earn a living, and they do not want it to be for nothing. This is the true essence of freedom, of capitalism, the opposite of slavery. Money is closely tied to mans labor, and every human on the planet, deep in their heart, knows it.

 

Some cryptocurrency advocates deny this, and claim that the “labor theory of money has been generally accepted as being false”(3). Generally accepted as false by whom, I would ask? Cryptocurrency speculators who have a financial stake in it being false? Economists espousing the conventional wisdom? The same economists who have pretty much made a mess of the entire global economy? Certainly not accepted as false by me?

 

To anyone who claims that money does not have value because it is linked to labor, I dare you to go to work tomorrow and tell your boss you will be working for the next five years for free. No, indeed, money is tied to labor, and that is in fact why gold has value, and every other form of money known to man for the last 5000 years. The argument that Warren Buffet uses to claim gold is a horrible investment, is the same reason that gold is actually money. It once took the labor of a man digging in the ground for many hours to produce a single ounce of fine gold. Today, it is done by machines hauling tons of rock and ore, but this is still a form of energy expended, and that energy is equivalent to many human hours of labor if there was no such thing as fossil fuels and the internal combustion engine. It is simply a measurement of stored labor, and thus, we instinctively know it has value. What is more valuable, a hand carved piece of furniture or a particle board item from Ikea? An excellent article which goes into the energy value in gold can be found here: http://srsroccoreport.com/major-factor-for-owning-gold-the-collapse-of-golds-eroi/major-factor-for-owning-gold-the-collapse-of-golds-eroi/ . The common denominator of all forms of money that humans have believed have value, is that they require labor to produce.

 

“But the USD is practically free to make, all they have to do is punch some numbers into a keyboard!”, I am imagining some will say. Yes, this is true. But I would suggest that the USD is still a trusted form of money that most people believe has value. The critical question is, why do people believe it has value? If you were to go out into any-city in the USA and ask 1000 people why the USD has value, likely there will be a large number of them that say it has value because it is backed by gold, even if this has not been true since 1971 when Nixon severed gold convertibility to the dollar. My point is, people trust that the USD has value because gold has acted as a trust bridge. The system that grew up around the dollar inherited its trust from gold. Utility, therefore, had little to do with it. The trust of value was already baked into the cake.

If this is not true, then why does every single argument I have seen for bitcoin make comparisons to gold?

Which brings us to the current dilemma. Even if Bitcoin and related technologies are the money of the future, the fact remains that cryptocurrency is not yet widely trusted. It is going to require a bridge. A trust bridge.

I would argue that some of the sharpest start-ups in the space have already caught on to this fact, because they are allowing users to “park” their value in stores of value other than bitcoin.

Examples:

1. Bitreserve

2. Bitgold

3. Vaultoro

4. Coinapult

And many more. By offering the ability to “park” bitcoin into another form of value storage, whether that be Euro, Dollars, gold, or silver, it mitigates volatility and allows users to feel more secure about where their money is. This is not a bad thing. This will fuel adoption, and when enough people are using it, maybe some day the volatility will reduce and people will feel more secure leaving it in bitcoin, or whatever the cryptocurrency is by then. Maybe this process takes 10 years.

In the mean-time, adopters of Bitcoin will be migrating towards using the tech primarily as a freeway to move money from place to place, but once it is done moving it might just get parked in gold until it needs to drive someplace again.

Bitcoin, for now at least, needs a trust bridge. I think gold fits nicely. So any of you huge startups (Xapo?) that wants to provide parking in gold to your customers, please say hi, I am happy to assist you with a superior turn-key institutional gold custody back-end ;).

 

1. http://en.wikipedia.org/wiki/Rai_stones

2. http://uk.businessinsider.com/how-bitcoin-may-have-more-impact-than-the-internet-2015-2?r=US

3. https://en.bitcoin.it/wiki/Myths#The_value_of_bitcoins_are_based_on_how_much_electricity_and_computing_power_it_takes_to_mine_them