What gives Crypto value? A letter to potential investors.

Hey, my name is Aggroed. I've been in the crypto space for about a year and a half. I mostly work with the Steem blockchain. I'm a Witness for Steem, which is like being a successful miner for other coins. I'm also a witness for Peerplays and am working on setting up a witness for BTS and EOS (when it's ready). What can I say, I like Dan coins!

I've been working with new members to the Steem blockchain in an extensive and time intensive role for the past four months. I lead a group called the Peace, Abundance, and Liberty Network, which houses the Minnow Support Project, which is the Steemit official new member welcoming group. We have over 6,000 active Steemians who communicate in there and they ask a ton of questions!

I've been answering crypto questions for a while, been studying blockchains intensively, and feel like I have a fairly solid handle on how things work. I also have a PhD in chemistry so some of the complicated formulas and processes aren't entirely lost on me (some still are, but I get the gist).

All that is to say that I have some sense of what's driving value. I've been trying to get my dad to invest in crypto and he's wondering what gives it value. So, here I am to explain for a couple paragraphs what is a currency, what is a stock, and what is a crypto. Then I'll try to talk a little about why single crypto tokens are worth more than single printed dollars. I'm not a financial advisor, but I do like cryptos as a financial investment. Just make sure you do your own research and take ownership of your financial future.

A quick video

Here's a nice video that talks about what gives a standard government issued currency value. It's TED-ED so, it's a pretty mainstream explanation.

The basics is that:

Value of the currency ≈ total amount of goods and services

I like to approximate it like this

The value of the currency ≈ total number of people using the system

That's because I believe that the the total number of people using a system is a good approximation for the total amount of good and services in that system. This isn't entirely true as some groups of people are more productive than others, but I think it's ok when we're looking at global phenomena like government currencies and crypto currencies.

My key point here is that PEOPLE ACCEPTING IT AS VALUE IS WHAT GIVES IT VALUE! How much value we can talk about below, but the real thing to understand when stated as simply as possible is: People are the value!

Why do people even use currency?

Because it's so much easier than barter! Look I'm a chemist by trade. If I have to trade hours of chemistry labor for a certain amount of vegan meatballs it's going to be pretty challenging. I need to find a vegan meatball sales man willing to accept hours of chemistry labor to make the trade happen... Instead we all collectively decide it's better to have currencies we can all use and then trade for the currency as a medium of exchange. This makes life a lot easier!

Who gets to create currencies?

For 100 years or so the only people creating currencies that are adopted on a wide scale are governments (or the private banks they employ). They print money. They get to print the money because they are in charge. You're born under their rule and they print it as they see fit. Sometimes they do good things with it and you experience a nice life. Sometimes they enact horrible plans and you're stuck rioting as your national economy goes through a hyperinflated death spiral. Either way you're not really choosing your currency when you're born. You simply have the local currency and that's your option.

But an interesting thing happened with bitcoin, then it's clones, and then it's alts. Government currencies suddenly had a new competitor. They used to have some of that competition back in the Wild Cat Banking era, when private banks issued currencies all the time. This was actually a pretty good time for people. There were booms and busts in those currencies, but it was generally prosperous because people could invest as they saw fit in good private currencies and some fortunes were made. But the USG consolidated that back in the early 1900s. So, private currencies isn't a new thing. It's just that now there's new technology that allows it and makes it fairly simple to implement globally.

Blockchains and Crytpo Currencies

What's a blockchain? What's crypto? A blockchain is a big ledger. A ledger is basically a data table that keeps track of individual accounts, what's been issued, and who owns what. The blockchain starts pretty simply and over time it adds transactions and new people. The whole block chain is made up of individual blocks. Each block keeps information that was stored in it during that time period. Sally sent Jim 15 tokens. Jim sent Jane 10 Tokens. The platform generated 1 new token would be some of the transactions stored in an individual block. Every X minutes a blockchain will store what happened on the chain in that time period in a new block and add that block to the chain. Each block chain determines how much time is stored in each block.

It would be like saving just the changes to an excel table rather than the whole table every 5 minutes, and storing all those series of changes in lots of little linked files.

The crypto part comes from the fact that people could try to corrupt these data tables to show something like everyone transfers aggroed 10% of their money.' If you're aggroed that's awesome, but if you're everyone that's bad. So, to make that a challenging or practically an impossible task blockchain technologies also incorporate cryptographic techniques through "hashing" that make it extremely difficult bordering on impossible to crack the "crypto safe."

Let's talk about stocks for a second

Another investment type is a stock. Why would you invest in a stock? The simple answer is that you believe the stock can make more money than you can with the money that you have. You inherently believe that a group of a people working on solving a problem or set of problems by offering a product or service to the market can do a better job earning money than you. This is likely true.

You alone aren't a team of people backed by capital working on a project so it's more likely that a company could take your money and invest it into their projects and earn you more money back than you could just by yourself. There are obvious exceptions to this, but if you're not the business type, but happen to have some extra cash companies can put your money to work and so you're happy to buy shares in them. One of the main things determining the value of one stock compared to others is how much money can you expect to earn from owning one share of the company either through price increases or dividends.

Ultimately though you like stocks because they are a store of value, you think they will make more money than simply hoarding cash, and you think that the stock will likely go up in value as people work in the company.

Cryptos are a combination of a stock and a currency

Most of the time you don't trade 15 shares of IBM for your kitchen remodel. There's not really anything stopping you from doing that, but it's really not convenient. That's because stocks aren't much of a currency. Yes they have value, yes they are transferable, but there's really no way to quickly or easily get them from one person to another.

A crypto currency has a neat role of being both a stock and a currency. It's a stock because essentially you own a portion of the blockchain in proportion to the number of shares you have vs everyone else. If you own 10% of the crypto tokens on a block you essentially own 10% of the blockchain. Unlike stocks though if I want to transfer that ownership to you I can do it quite easily. I click a button or type in a command and suddenly @aggroed transfers 100 steem to @minnowsupport. That was easy. It took 3 seconds and I didn't even have to leave my computer, call a broker, or god forbid write a check and schlep my way to the front entry way of my house to mail out the check.

Cryptos vs Government Currencies and deflation vs inflation

Before 1971 every government dollar was backed by a store of gold. You could walk into any bank and say "Hey, um, I don't like this dollar bill, and I'd like to exchange it for gold." They'd give you gold. You do that now and they give you funny looks. That's because the USG took the USD off the gold standard in the 1970s. Without the gold standard to keep printing in check the government decided to print and print and print money. The USG/FED now prints 160M USD a day. It's a lot of money, and it leads to a lot of inflation. Essentially the money in your wallet will be purchase fewer goods and service tomorrow than it will today!

Crypto currencies have a range of answers to this, but generally speaking they have a cap on the number of tokens that can be printed and the currency generation is slow. This makes crypto currencies deflationary relative to government fiat dollars. That means that the amount of money in your crypto wallet today will buy more goods and services tomorrow than it will today. This helps give crypto currencies value because if you have the choice of holding your money in a spot guaranteed to lose value or likely to increase in value it's an easy decision.

Other differences between Government Dollars (fiat) and Cryptos)

There are some key differences between these systems too.

Government Fiat Dollars are generally tracked and your ID logged everywhere. Crypto is psuedoanymous. If I want to buy weed with a credit card it will register everywhere. I might get arrested. If I buy weed with crypto then people might see that @aggroed made the transaction but it woudln't necessarily link to me in a government registry. Some people like crypto because of this layer of protection FROM government.

This is important if your government makes any retroactive laws. What you did that was legal at one point now gets you arrested. You made a political donation to the opposition! Poof! Jail for you... It would have been safer if it was anonymous or psuedo anonymous.

Taxes: Don't just take it from me:

See, on every single purchase I make with fiat dollars I get taxed. Salary is taxed, buying and selling is taxed, my taxes are taxed. I don't remember consenting to 40% of my income being taxed away so I tend to think it's pretty coercive. Luckily cryptos don't have this problem. Yeah, I'll likely pay some capital gains taxes on this stuff, but in the grand scheme of things that's cheap compared to the absurd amount of taxes that I'd otherwise have to throw at normal government dollars.

That's also assuming I'm going to pay taxes. If I'm successfully able to dump crypto for hard cash then I might avoid all taxes forever. That's good for my bankroll and good for the third world people the USG would be likely to bomb with the money I fork over under duress. It could be bad for me though if I'm caught. Some people do go to jail for this as it is generally considered money laundering by the people that want a cut of all your transactions.

Speed- I'm used to Steem and SBD where transactions are processed in 3 seconds. I tear my eyes out waiting the 30 min to several hours waiting for bitcoin and litecoin transactions, I laugh disgustedly at how long it takes to process USD through a bank. IT TAKES DAYS! You know how long that is in internet time? That's like a month of internet life. Ain't nobody got time for that!

Consensus- On the blockchain you get to decide how the blockchain will work. You typically have a say directly proportional to how much of the blockchain tokens you own. Want to change parameters then you and your like minded folks can get changes passed. It's a lot harder to do this with governments especially when they are corrupt and bribed extensively.

Choice- I guess ultimately one of my favorite aspects is my ability to choose the system I like the best. The block chains are different in terms of number of tokens, who runs them, current price, level of anonymity, reputation of the coin, and a million other things. I like being able to choose which ones I want to own and which communities I want to support or engage with financially.

The long term

One day I'm going to walk into Edward Jones and my financial adviser is going to talk to me about a range of investment options including stocks, bonds, annuities, mutual funds, cryptos, commodities, and properties. We're not quite there yet, but this is the wave of the future. Cryptos do this kind of stuff better and with more transparency than anything that's come before it.

The dot com bubble was $7T in scope and almost entirely a US event. Crypto is global and only sitting at 500B or so. I think we're at the very beginning of this. In fact I think at least 14x more money is going to pour into this place, and that these prices are going to have more 0s in them before long.

For now my friends and family ask me if I'm able to convert between government fiat dollars and crypto. Right this second it's an issue, but doable. I think in the longer term everyone will accept crypto. It makes commerce easier and as more people have them more people will demand merchants accepts them.

Volatility

One thing that's worth considering is that cryptos are incredible volatile. They go up and down in price by pretty wild swings. There's money to be made from that, but especially if you're in need of weekly income from an investment then crypto has significant drawbacks if you can't out wait some of the swings.

More to come

Anyway, I'm still just starting to build the case for why crypto. So, I'll add some more points to this over the coming weeks in new installments.