what gives money its value

What gives money its value?

Disclaimer: this article is provided for general information and entertainment purposes only and does not constitute financial, investment, tax, legal or accounting advice. Honestly, we keep squirrels up our nose and claim them as dependents on our tax returns.

In the public arena of financiers and investors, a key criticism used to denounce bitcoin is that “it isn’t backed by anything.” In other words, financial naysayers believe that bitcoin doesn’t have any intrinsic value, and is therefore worthless.

Panic! Run around the block with your hair on fire! Cats and dogs living together, etc. etc.

This critique of bitcoin implies a follow-up claim: government-issued money (also known as fiat currency) has intrinsic value regardless of the circumstances behind its creation and distribution.

This notion is held so inviolate it has become economic dogma, a principle that cannot be challenged without shouts of “Heresy!” coming from Warren Buffet’s gold-and-gem encrusted astrology parlour.

Well, we at Bitcoin Well have spent many hours challenging so-called unchallengeable ideas. So let’s take a closer look at the value of fiat currency and see if we can find the reality behind the dogma. Let’s start by busting a few myths about what gives money its value.

Money myth: fiat currency is backed by gold

Nope. Nuh-uh. Not at all.

But it’s surprising how many people still believe the cash printed by our government is backed by a massive stack of gold bars kept in a secret vault deep beneath a giant pysanka.

(We checked. There’s nothing there except a bunch of empty egg dying kits.)

In fact, the Canadian government has pretty much sold all of our gold reserves. And while there are a few governments that still keep gold squirrelled away, not a single nation uses the gold standard to regulate the minting of currency.

This being the case, what exactly is used to back fiat currency? Here’s a great quote that succinctly answers this question:

“In contrast to commodity-based money… fiat money is backed entirely by the full faith and trust in the government that issued it.”

Investopedia

Wow. If anyone else just reeled into an existential crisis, you’re welcome to join us over here in the corner; we’ll be rocking back and forth and muttering about our current level of faith and trust in the government.

Money myth: fiat currency holds its value over time

This isn’t even remotely true. Who writes these things?

Facts: in 1913, a dollar’s purchasing power was the equivalent of over $29 in 2022 fiat currency. By 1950, a dollar’s value had dropped to under $12 in today’s money. In 1990, a dollar was worth $2.20 compared to a 2022 buck.

While the purchasing power of fiat currency may rise and fall over short intervals, it always loses value over the long term. The second you drive a new dollar off the lot, it starts to depreciate.

Money myth: fiat currency is backed by tax revenues

It’s true that the government takes in money through the collection of taxes, fees, fines, and a cut of most of the nation’s legalised gambling activity. Seriously, could we get a few more sports betting ads plastered over the last bare surfaces on the planet? That would be great.

Combined income taxes (personal, corporate, and non-resident) are the top source of government revenue. Throw in the taxes levied on goods, services, and energy, along with all other sources of annual revenue, and you have enough resources to back the nation’s fiat currency.

This notion is horribly wrong for two reasons.

First, just like any household, the government spends the money it makes. And, like many Canadian households, the government commonly spends more than it earns, also known as deficit spending. For the fiscal year 2019-2020, the Canadian government took in $334 billion in revenues, but spent almost $40 billion more than that.

Second, even if you overlook the government’s deficit spending, the amount of money it takes in is nowhere near the total amount of fiat currency in circulation. Again, in the fiscal year 2019-2020, total government revenue was $334 billion. In June 2020, Canada’s M2 money supply was over $2 trillion.

Say that again in a Dr. Evil voice. “Two… trillion dollars!”

2020’s government revenue (which was spent faster than it came through the door) would have covered less than 17% of the nation’s total money supply. And if you were wondering if these numbers could get worse, they already have: the country’s current M2 money supply has grown by $348 billion over the last two years.

Does bitcoin have value?

In contrast to these money myths, here are some bitcoin facts to ponder:

  • Bitcoin is the world’s most popular and well-established digital currency.
  • There is a known, fixed amount of bitcoin. Over 90% of the bitcoin that will ever exist has already been mined. The value of bitcoin cannot be diluted through overproduction.
  • Bitcoin is not under the central control of any country, government, or corporation. It cannot be manipulated or devalued through the actions (or blundering) of a single authority.
  • Bitcoin is a digital currency that can be owned and stored safely and inexpensively, unlike precious metals and other physical assets.
  • Bitcoin can be bought, owned, and used by anyone, without the need for a bank account.

These facts fly in the face of the “bitcoin has no intrinsic value” argument.

There’s room for more than one currency

It’s easy to understand why wealthy men like Bill Gates and Warren Buffett casually dismiss bitcoin and boost fiat currency; they can easily offset the dollar’s innate depreciation by throwing more money at the problem, using high-interest investments and favourable tax laws to keep ahead of the game.

(Note: we don’t have a problem with wealthy people. They throw great parties, many of them support good causes, and hey, somebody has to go to Mars and start building mini-malls or skate parks.)

Perhaps the most telling aspect of the “bitcoin has no value” argument is while bitcoin’s harshest critics tell people that bitcoin is worthless, most bitcoin advocates (including ourselves) aren’t telling people to totally abandon fiat currency, go live in a shed in the woods, do your business in an outhouse, and keep watching the skies.

Unless that’s what you really want to do. Live your best life, man.

Rather, we maintain that there is a need and a purpose for alternative currencies, and that bitcoin fulfils the requirements of a currency with value.

Keep your money valuable

Fiat currency isn’t going away, but it has issues with constant devaluation due to oversupply and greater economic pressures. Owning bitcoin is a viable diversification option that can keep the value in your currency intact over time, while offering potential gains in the future.

Did you know you can now use your Bitcoin Well account to buy bitcoin with an Interac e-Transfer®? It’s true! We’ve rolled out the beta launch of our e-Transfer bitcoin purchase system. Best part is, after the first transaction it gets even quicker and easier to do! Sign in or create a Bitcoin Well account to get started.

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