We are seeing many lessons coming to the forefront in this economic situation we are facing. Some of these are directly applicable to cryptocurrency.
There is a great deal of misunderstanding as to what gives a currency, fiat or otherwise, value. Many believe fiat is worthless because it can be printed whenever it is desired. At the same time, they believe that simply because a cryptocurrency has a set inflation rate, as per code, that it is more valuable.
We saw an enormous amount of wealth erased from the global markets in just a few weeks. Unemployment filings around the world are at historic rates. The global economy is collapsing; the extent we are not even able to determine thus far.
What we are witnessing is the epitome of a black swan scenario. There is little in the economic (and social) world that is not being touched by this.
In the face of what was taking place, where did global investors go? They all ran to the US Dollar. It was not gold, nor real estate, nor bonds. Most of the heavy hitters went to cash.
Why did they do this?
Here is the lesson about currency.
For a currency to be successful, people need confidence. We are in a confidence crisis right now. When push comes to shove, the USD is preferred over any other currency out there. At this moment, it is also preferred over other investment options, including Bitcoin. The King of Cryptocurrency also got a haircut when the crisis hit.
Warren Buffett talked about Bitcoin not having any intrinsic value. That is both true and false.
No currency has intrinsic value in the sense it is backed by anything tangible. Fiat currency certainly is not back by anything of physical value. However, as the USD is showing, it does have value because people have confidence in it.
There is another factor in this that is really vital. A currency is backed by the productivity of the people utilizing it.
Thus, the dollar has the "backing" of the productivity of the United States economy and the future prospects of it. People fled to the dollar because they know that, as bad as the U.S. could be hit, everyone else will be worse off.
Once again, confidence.
How does this relate to cryptocurrency?
The idea that cryptocurrency is better simply because it cannot be inflated is misguided. There are many cryptocurrencies that are backed by code yet are completely worthless. There is no confidence in them since there is nothing taking place.
Yet, here is where things get interesting.
It is very easy to see what is going to generate success for cryptocurrencies. In the end, it will come down to utility. That is what is going to drive the value of any particular currency, just like it always has.
What can actually be done with the currency and how many people are using it? Obviously, the more people utilizing it (network effect), the more confidence there is in it.
In my mind, this is why I think a token like HIVE has so much potential. As the number of offerings on the blockchain expand, this increases the utility. When that is growing, there is an opportunity for more people to use it. The net result of all this will be an economy forming that is based around the currency.
Through all this, the value of the currency is driven by the efforts of the people who are part of the HIVE economy. We are the producers that are backing the token. Of course, value is different than price. Often then will correlate but not always.
This will take some very interesting turns. As we progress further, confidence will comes from the belief in a particular game. Or individuals will be confident about the ability of a project team. Whatever the source, the value of the token will be driven by the value of the utility created. Erecting a full-blown commerce system where goods and service can be traded will greatly enhance this endeavor.
Remember, all this is nothing more than a medium to replace the barter system. Instead of me exchange the chair I made for the apples you grew, a currency provides a way to facilitate those transactions without having to involve other people (for example, the blacksmith's horseshoes).
The importance here is to offer an alternative to the present system. Right now, the utility is lacking in cryptocurrency. As more is built out, people will find their way here. This will start to put some dents in the armor of the existing structure.
This includes their currencies.
It is only a matter of time.
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Posted via Steemleo
