@SBR249 wrote:
To say categorically that cryptocurrency is not backed by anything is not entirely or technically true.
The way that I understand it is that crytocurrency is backed by the processing effort expended on the part of those who originally mined each unit. Now that may sound a bit like nonsense but it does make sense on a certain level. Think of it this way, why is gold so valuable? Its industrial and practical applications account for only a tiny proportion of its value as an asset. The reason is that it's rare. But if you think about it, gold actually isn't rare. Trace amounts of it is common. But what makes gold rare is the fact that to recover or mine gold even from "economically viable" deposits takes an enormous amount of investment and capital and thus while the total amount of gold in nature may be high, the feasibility of obtaining it is low and thus gold is rare. The same principle can be broadly applied to crytocurrency, it is backed by the fact that in order to mine it, a certain amount of processing power is required and that amount increases over time per unit mined. No one can come along and take a shortcut and obtain crytocurrency without someone somewhere expending the requisite processing power. Thus, crytocurrency has a scarcity factor to it that is very similar to precious metals. As for its utility, I would argue that while there may be few tangible applications of cryptocurrency, they (and the technology that underpins them) actually has a lot of potential for many real-world applications. But again, like precious metals, the value of crytocurrency does not lie in its application but rather its scarcity. As long as people think its valuable, it will be. In the same way, as long as people think gold is valuable it is. Otherwise its simply a metal with certain useful but niche applications for which annual production far outstrips demand from those applications.
I will also add that to say that fiat currencies derive their value from legal tender legislation is a very simplistic way of looking at it. Sure, the dollar is backed by the full faith and credit of the US government and $1 is worth $1. But what does that mean? What does $1 get me? The answer is that true value is determined by the market as it does all floating currencies. $1 could get me a loaf of bread one day and a car the next, if the markets say so. So in reality, the value of the dollar is also based on what people assign to it which is based on how people view the health of a nation's economy for instance, or how stable they think the government is.
Gold does have some intrinsic value. But funny you bring it up as the U.S. Government banned private ownership of gold for around 40 years ending in the mid 1970's. They capped the price at 35 dollars during these years. Very possible for the government to ban crypto currencies as well.
Inflation at low levels is a good thing. If the value of currency went up went up all the time there would be no incentive for people to invest in businesses. No reason to lend out money.
