moneyFYI
Financial Freedom Is Merely Organized Common Sense
Why Is A $20-Bill Worth $20.00?
All fiat money has value because someone is willing to trade something of value for it at the rate printed on the bill. (A fiat currency is a currency because the government says it is, and people accept their assessment. It gets some of its value because the government will accept it to settle debts to them. Taxes primarily.
Fiat currency has no reality other than someone will accept it as payment.
Think about it, and you will catch on to that. An ounce of gold is worth about US$ 1,920. Ninety-six $20 bills can be traded for one ounce of gold. The ounce of gold is always the same. In 1972 two $20 bills would have been enough to trade for an ounce. Is the gold different? I don’t think so.
What is different is how much people want one versus the other. In this case, people want gold more than $20 bills.
$20 bills are worth what people think they are.
There is no intrinsic substance.
We have seen how it works with the Russian currency in the last few weeks. Six months ago, one US dollar was worth about 70 Rubles. By the 10th of March this year, it took 133 rubles to buy a dollar. By March 31, it had recovered to 83 rubles per dollar. Why the big swings?
Pretty simple. On the 10th of March, fewer people wanted to exchange US dollars for rubles. With little demand, the price fell. It is the same as how the price of bananas drops if there is a big crop and no additional demand. In Russia’s case, sanctions changed the relative want.
Okay, so why did it recover?
Russia created some demand for their currency. One of the steps was to announce that their natural gas and oil could be paid for only in rubles. Again, oil and gas is the same regardless of the currency but as soon as you make the currency more in demand, its price increase relative to the commodity.
Now think Bitcoin and other cryptocurrencies.
On July 1, 2010, bitcoin was traded for nine US cents. It has since sold for $60,900 US dollars. (1 November 2021) A 2010 bitcoin is not different than a current bitcoin. The difference is how much people want to own a bitcoin versus a US dollar.
A 2010 $20 bill was worth 222 bitcoins. Today at $46,000, a bitcoin is worth 2,300 $20 bills. It seems there has been a very noticeable switch in demand. I suppose it is a good thing the price of bananas has not changed so much. If they had been $1 a pound in 2010, they would be $511,000 per pound now. Filling a tank with gasoline would be shocking.
If you want to guess how much a Bitcoin will be worth in a year, you are not talking about intrinsic value; you are talking about how much one is valued compared to how much you value what you want to buy. So far, we have only seen how it compares to various fiat currencies.
There are some bitcoin and other cryptocurrency exchanges for tangible goods, but we don’t see gas or bananas priced that way.
Yet.
What will happen to dollar bills when crypto is accepted in the stores?
They will likely remain, but their relative value will depend on what demand there is for them. If the government accepts dollars to pay taxes, there will be some value. That would spread through the whole economy. If you sell your goods or services only for crypto, you would eventually have to use some to buy dollars to pay your taxes. The value of a dollar cannot go to zero.
How many cryptocurrencies are there?
Until people hold crypto to transact commerce, there is really no limit to how many there can be, nor is there a limit on what they are worth. Right now, there are around 15,000 coins and tokens. Compare that to about 200 fiat currencies. People own many cryptos solely to sell them to someone else some other day for more than they paid for them.
How many $20 bills do you own today, hoping someone will pay $50 for one of them some other day? Not many, I’ll wager.
Fifteen thousand currencies are unsustainable. My guess about the future is that most will go away.
All those with no limit to how many can be created will go away. Those have the same problem as the fiat currencies. Being able to print more is not an option if you want to hold value steady.
We don’t know how or when some cryptos will go away, though, nor do we know what the characteristics of newly created ones are likely to be.
The bits to take away
Some cryptocurrencies will remain, and some new ones will appear and remain.
Understanding money as a proxy for the value you have previously contributed to society is essential. Think about how you get money. You trade your knowledge, skill, and experience for someone else’s money and then trade that money for goods and services you want.
Money in any form stores your value until you want to trade it for something.
The value of a particular currency relative to any other depends on how demand for it changes.
It’s not as complicated as people make it. I don’t fully understand the blockchain, but I don’t know how they make Canadian currency either. Think about what it is for, how you use it, and not so much what it is.
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I build strategic, fact-based estate and income plans. The plans identify alternate ways to achieve spending and estate distribution goals. In the past, I have been a planner with a large insurance, employee benefits, and investment agency, a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business. I have appeared on more than 100 television shows on financial planning. I have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, and Banks – from CIBC to the Business Development Bank.
Be in touch at 705-927-4770 or by email at don@moneyfyi.com.
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