Cryptocurrencies and virtual economy

The article presents several considerations that have arisen in my at different times and for different reasons. Put together these considerations will help shape the reader some perspective on the phenomenon of cryptocurrency.

I will discuss the following topics:

What is money as such, and why the emergence of cryptocurrency was inevitable
Are cryptocurrencies another financial bubble
Who are the "rich" and "poor" in terms of mathematics
Who can you become in the field of cryptocurrency

An important concept for an article is virtuality — an object or state that does not exist in reality (reality), but can arise under certain conditions. In the context of information technology, these conditions are software and algorithms.

Thus, we can talk about virtual money and virtual economy . I will begin with a discussion about the virtual nature of money.

Cryptocurrencies - the natural development of money

People die for metal
Mephistopheles' couplets from the opera "Faust"

There was always money . This is true, if you do not take into account the immemorial times, about which we have very vague ideas, and the periods when the monetary system failed, and people had to resort to direct exchange. Basically, the person used to exchange the means of intermediary, that is, he was always with money.

The advantages of exchange through money, compared with direct exchange:

You can exchange part of the eight hours spent in the office for lunch. That is, money allows you to compare things directly incomparable
Hours spent in the office can be exchanged for a summer vacation (pending exchange)
Money significantly increases the efficiency of exchange at a distance, from which all trade has grown

From a mathematical point of view, such a function of money as a universal measure of value or price is of primary interest. You can imagine money as an imaginary line that we put on goods and services and get a certain number. For example, for a box of matches 1, for a glass of coffee 100, for a machine 1,000,000. These numbers allow us to make a reasonable exchange, acceptable for both parties.

Initially, the money used items that could be directly consumed: salt, honey, skins, pearls. There were also complex measures. For example, in samurai Japan, a measure of koku rice was used - the amount of rice needed to feed a samurai for a year. However, over time, metal money made of copper, silver and, of course, gold became the most popular.

The main comparison operation for metal money was weighting. The number-measure of the price was uniquely determined by the weight of the metal, generally accepted as money. To make an exchange, it was necessary to establish the amount (weight) of gold corresponding to one object and another. Gold has become the dominant metal used as money for several reasons:

Gold is resistant to chemical attack - over a long time does not lose its characteristic luster
Gold is a soft metal that can be easily divided to match products of different value.
Gold mining was difficult and relatively rare in nature - limited private issue of money
Gold was not good for anything else, except for decoration (direct consumption of gold is very limited)

In the course of history there was an amazing substitution. Gold, selected as a material (carrier of a price) for money according to technological and operational characteristics, itself became a measure of price. From the idea that gold is convenient to use as money, a person came to the idea that only gold could be used as money. Silver and copper were used as a bargaining metal, but gold was still the standard. Technological and operational properties of the carrier of money dragged on themselves the original mathematical goal of the measuring equivalent of the ruler.

Humanity has fallen into the trap. It turned out that the management of the amount of money supply (money in circulation) and the economy of a particular state became directly dependent on the amount of gold available. The loss of gold, for example, as a result of transportation by sea, led to a reduction in money in circulation. On the other hand, an increase in the amount of money in circulation in case of need (population growth and production, an increase in commodity turnover) required intensive search and gold mining, even if through wars and the bloody exploitation of gold miners. You can read more, for example, Niall Ferguson .

The so-called gold standard pursued people even in the 20th century. Despite the fact that the amount of money needed by the global economy could no longer fit into the boundaries of gold reserves, states continued to make attempts to peg currency rates to gold. This was done by fixing the gold rate, as well as conditional guarantees of the free exchange of paper money for gold at this fixed rate. Conditional in the sense that, naturally, most people will not go to change money for gold, but rather buy their own food and clothing. Finally, the binding to gold was abandoned only in the 1970s. Since then, the Jamaican currency system has dominated the world, giving rise to the phenomenon of Forex, the currency market with free exchange rates.

In ancient times, the measure of price was simply the weight of gold. But, with the invention of the coins, the weighing operation (weight measurement ) was gradually replaced by the counting operation, due to which exchange operations became much simpler. It became possible to express the price in the number of coins (in the amount of gold ).

The coin has two sides, and each side has its own specific meaning:

obverse (obverse): it depicts the face of a ruler who issues a coin
reverse side: contains the value of a coin

That is, the coin, on the one hand, contains information about exactly what price value it means, and, on the other hand, it contains confirmation of this information. For the first coins, the denomination was only confirmation of the weight of the metal contained in the coin. But over time, coins began to appear without a match between weight and denomination. Although up to the beginning of the 20th century there were coins in the course of which they tried to reproduce this peg. Now gold coins began to serve only for collection and gift purposes .

With the growth of the economy, the inconvenience of coins in the exchange of expensive goods was manifested. To buy or sell such items, it was necessary either to make huge coins, or to take along a bag of coins. The problem was solved with the help of paper money (credit cards, bank notes, banknotes ). On a small piece of paper denoted denomination - as many as you want a large number. In a small suitcase could fit a fortune. There was only a problem, so that on the mentioned sheet of paper the correct number was indicated. Indeed, what prevents me from drawing an extra zero and thereby increasing the denomination of the bill by an order of magnitude? The guarantor of the correctness of the money was the state.

The development of information technology has led to the emergence of electronic money (the second half of the 20th century). A bank card (VISA, MasterCard, etc.) no longer contains information about the amount of money. In fact, it is only a key to access the account - a certain amount of money. Today, a bank card is the main attribute of having a person’s money.

But technology has already taken the next step. In 2014, the Apple Pay mobile payment system appears. Now even bank cards are not needed to pay for services. Enough to have a mobile phone. Money has become just an application in a mobile phone, without any specific material attributes, that is, a completely virtual entity, which is implemented using a special program at the time of purchase.

We have identified two main characteristics of money - a certain value of the measure of the price of the goods and some confirmation of the correctness of this measure. Recent advances in information technology and the decoupling of money from a particular carrier (gold) show that this is quite enough. Based on the foregoing, I propose the following definition:

Money is reliable information about their number.

Cryptocurrency is the expected embodiment of this definition. Fully virtual money, which has a mechanism for confirming their denomination and authenticity. Their appearance was historically inevitable, and we can expect the emergence of an increasing number of cryptocurrencies and their improvement. And there is much to improve. The pioneer bitcoin has the same drawbacks as gold: the amount is limited and mining is difficult. Also, bitcoin has an inconvenient dimension for everyday needs: it is necessary to operate with millionths and similar parts of a digital coin. At the air, we can observe an attempt to overcome some of the problems of Bitcoin. However, the ubiquitous transition to cryptocurrency is still a matter of tomorrow.

Pyramids, bubbles and cryptocurrencies

Something immaterial is the most honest commodity. It costs exactly what they pay for it.
Robert Heinlein. The man who sold the moon

Cryptocurrencies have not changed the usual rubles and dollars, the rapid growth of Bitcoin already makes it attractive for investment and speculation. So far, bitcoin shows rapid growth and overtakes bank deposits, but for how long?

Opponents of cryptocurrency compare bitcoin with financial pyramids. Let's see if this is so. The financial pyramid named after Ponzi , Meiddoff or Mavrodi implies the payment of the promised income at the expense of investments of new participants.

The “attractiveness” of a pyramidal asset for an investor is that a very high yield is offered. The pioneer of the pyramid business, Charles Ponzi, it reached 100% per quarter (1,500% per annum with quarterly reinvestment). However, our income will depend on and only on how many more people will become participants in the pyramid. Ponzi lasted less than a year, since the flow of clients could not compensate for the exorbitant rates of return he offered. The balanced pyramid implies that the profitability is still higher than that of all other assets offered on the market, but at the same time it is not so high that new customers do not have time to compensate for the cash shortage for current payments. Bernard Madoff offered a slightly higher yield than the market, and his pyramid worked, according to some estimates, from the 1970s until the crisis of 2008.

Does all this apply to bitcoin and other cryptocurrencies? Only in part. On the one hand, as for the pyramids, the more people want to buy cryptocurrency, the more there is a chance of rising prices for them. Naturally, if this does not increase the offer, what is already happening (cryptocurrency becomes larger). On the other hand, bitcoin as an asset, unlike the pyramid, at the time of purchase does not have any promised income with a given yield. It all depends on whether you find another person who agrees to buy it from you at least for some price. The seller who sold you bitcoin does not have any more financial obligations associated with bitcoin.

Now look at the cryptocurrency (bitcoin) in terms of the concept of financial bubbles. By definition, a financial bubble is a trade in a certain item at a price that greatly exceeds the so-called fair price . As a result, when there is no longer willing to pay an inflated price for this item, the market price returns to fair. The main symptom of a bubble is a sharp and unexpected drop in prices on a subject of a financial bubble (for example, tulipmania or dot-coms ). Unexpectedly, because all market participants expect further price growth.

What is the fair price of bitcoin or any other cryptocurrency? What is the real price of the confirmed quantity price? In my opinion, outside the framework of the current exchange system, this price is zero. In other words, if no one agrees to measure his goods or services with the help of this “line”, then its value will drop to zero.

A common problem of both financial pyramids and financial bubbles is the limited demand for these products. In the case of the pyramid, there are no longer those willing to invest on the proposed terms, and the organizers lose the ability to fulfill their obligations, since they have no other source of revenue. In the case of a bubble, there are also no more willing to pay a higher price in order to acquire the offered products, and the owners are forced to lower the price in order to get rid of the overpriced product.

I think that cryptocurrency will develop along with the development of the virtual economy . Virtual economy is an economy that is made possible by software: the distribution of TV shows via the Internet, computer games, augmented and virtual reality. In this economy, virtual currencies (play money, for example) already exist. Cryptocurrencies will become a universal tool that will allow the exchange between different areas of the virtual economy.

It seems to me that the virtual economy has a really endless potential for growth. This is because the so-called law of diminishing marginal utility is overcome in the virtual economy. For example, if you have nothing to sit at home on, you will buy a chair. Perhaps a few chairs so as not to drag a single chair from the room to the kitchen and back. You may get a set of chairs in case of the arrival of guests. Each new chair will have less and less utility for you. That is, you buy a very limited number of chairs and stop there. A business model built on the constant sale of a large number of chairs will crash.

Quite another thing is with virtual goods. If you liked the first episode of the series, then you will want to watch the second one - the utility of the second series will not decrease, as in the second chair. Then you will watch the third series, second season, etc. When the series ends, you will start watching a new one. Virtual goods of the same category, you can sell in unlimited quantities. The thing is only in the correct drama , the correct development of the plot and the selection of characters:

The human psyche - a market with endless demand

If we compare modern mining with gold rush (who read in the childhood of Jack London, has some idea about it), then it clearly lacks drama. Past miners risked their lives and health for a few grains of gold (in modern terms, a few satoshi ). And now there is no competition between miners (they even join in pools ), we don’t hear about equipment failures, power outages, lost states, invested in cryptocurrencies, etc. If all these plots are reproduced in the virtual economy, virtual reality, with suitable dramaturgy, then this can fuel interest in bitcoin and analogs (the first sign is the “StartUp” series ).

Cryptocurrencies and people: "rich" and "poor"

Fitzgerald once wrote a story that began: "The rich are not like you and me." And someone said Fitzgerald: "That's right, they have more money"
Ernest Hemingway. Kilimanjaro Snow

Cryptocurrencies (Bitcoin) were conceived as a kind of revolutionary tool that is designed to change the financial world (for example, here or here ). However, as I have already shown, the creators of Bitcoin stepped on the rake of the gold standard, and the revolution did not happen. Let us see what wealth is from a mathematical point of view, and how much cryptocurrency can change the balance in its existing distribution.

The dividing line does not go by the amount of money. In this case, we would have to draw borders quite arbitrarily. Indeed, 1 million, expressed in some currency, is it already wealth or not? And 10 million? And we are talking about the market value of all property or the ability to simultaneously spend such an amount? Or do you need to focus on the car that a person drives? And if he goes on foot at all? , .

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