Cryptocurrency: a penny for your thoughts

A penny is a British bronze coin and monetary unit equal to one hundredth of a pound (from the decimalization in 1971, since before that year, from 1066, you needed 240 pennies to have a pound). A pound (GBP) is equivalent to one pound weight of silver. While the pound symbol is ￡, the symbol of a penny is d., for denarius, a Roman silver coin, from which it derives the word for money in Italian (denaro), Slovene (denar), Portuguese (dinheiro) and Spanish, dinero.

The phrase in the title of this article, “a penny for your thoughts” is used for “What's on your mind?” or “Tell me what you are thinking,” especially when someone haven't said very much and have been quiet for a while about a specific topic. The expression is at least 400 years old, and it’s believed that it is from a time when the British penny was worth a significant sum.

However, at the time this article is written, the exchange rate for 1 GBP is 1.1645 euros or 1.3807 dollars, which means that 1 penny is 0.011645 euros or 0.013807 dollars, which gives a better perspective of what a penny is worth nowadays. Currently the saying stays although the value of a penny is no longer so significant as it was 400 years ago.

But what does it mean that the same amount of money is worth differently along time? And while we are at it, what does it mean that 1 GBP is worth 1.1645 euros?

Well, both questions may be answered the same: because it is what people is willing to pay for it in a specific time.

And who or what is it that establishes how much a currency is worth another? It is not the same for all countries. The government of some countries set the exchange rate of their currency through the country’s Central or National Bank.

However, in other countries like United Kingdom (UK), the Bank of England does not set the exchange rate for the pound. The exchange rate for the pound is decided by supply and demand. The pound gets stronger when more people want to buy more pounds.

Investors all around the world trade huge sums of foreign currency every day. It’s these trades that determine the exchange rate for the pound. These rates are the basis for the rates you get in banks and foreign exchanges when you change money from one currency to another. Although it is not a totally clean market scenario: the Bank of England influences the exchange rate by changing interest rates or keeping the economy stable.

This leads to the concept of an official ‘exchange rate’, although as close as the beginning of the 20th century (120 years ago), it hadn’t yet been invented. If you wanted to convert dollars to pounds, you would need to buy actual gold in the United States (US) and then transport it to the UK where you could sell it for its worth in pounds. Since there was no official exchange rate, the number of pounds you would get per dollar would depend on the price of gold in the two countries.

This is where the basic principle of the Gold Standard comes from. Governments minted coins or paper money tied to the value of a physical commodity, like gold, which could then be redeemed for a set amount of that commodity. These minted coins or paper money that governments set as standards for repaying debt is known as Legal tender.

In 1971 (50 years ago), the US stopped the free conversion between currency and gold, ending the Gold Standard and establishing the freely-traded currency we know today, thus separating the minted coins and printed paper from the money units. Depending on the people’s faith in the nation’s currency, they would be willing to buy more of it, and the Government can mint more coins or print more paper money, giving birth to Fiat money (money that is based on the relationship between supply and demand, and it is government-backed).

The term for the legal tender of UK is sterling pound and the term for the fiat money of UK is also the sterling pound and fractions in the form of paper money or minted coins, because the United Kingdom government backs this Fiat money.

Fiat money cannot be redeemed, it is not backed by physical commodities, such as gold. Most paper currencies today are fiat currencies. The U.S. dollar for example is both fiat money and legal tender. 

When a country declares “something” as legal tender, the coins or the printed paper (the Fiat money) are the representation and tool for transactions with the legal tender. Governments can issue fiat currency and make it legal tender by setting it as the standard for debt repayment. 

The benefit of fiat money is that it gives central banks greater control over the economy, but governments can print too much money and create hyperinflation.

The reason why you are reading about money and currency in an article about cryptocurrency is that we all need to understand what is the current scenario, and how we do things like we do, in order to understand what is the change that the adoption of cryptocurrency suggests.

Bitcoin, being cryptocurrency, is not technically a currency, but a digital form of token coins or scrip, and the reason is that cryptocurrencies do not comply with the four fundamental functions of money according to economic theory. In Money and the Mechanism of Exchange (1875), William Stanley Jevons analyzed money in terms of four functions: a medium of exchange, a common measure of value (or unit of account), a standard of value (or standard of deferred payment), and a store of value.

For example, if the inhabitants of a small town decided that from now on, they would trade goods and services using their own currency, would they be committing a misdemeanour or felony? Well, the clarification is needed since they could do that with no punishment, but they wouldn’t be able to force anyone to accept their own currency for the payment of private debts.

This also implies that if they wanted to use their own currency to pay for goods or services out of their small town, it would only be possible if both parts agreed to do the exchange in that invented currency. And if it was public debts, public charges, taxes and due, their own currency wouldn’t be accepted since it is not legal tender.

So a new currency may be legal, but not legal tender. An invented currency would be valid for public payments if it is legal tender in the country for which these public debts apply.

Actually it so happens that bitcoin (the most famous and extended cryptocurrency) is legal in a lot of countries where it is not accepted as legal tender.

You can see here a pretty thorough list of countries where bitcoin is legal for transactions. As you can see, there are a lot of greys, since bitcoin is not just legal or not legal: some other countries apply some legal restrictions on usage of bitcoin, other do not prohibit bitcoin directly but it is subject to interpretation of old laws, other have partial prohibitions…

Still, as of today, bitcoin is legal in more than 50 countries, although it is legal tender only in one, El Salvador: https://www.reuters.com/world/americas/el-salvador-approves-first-law-bitcoin-legal-tender-2021-06-09/

When considering what bitcoin is, it is important to understand what you can or can’t do with it nowadays.

But, if bitcoin is not legal tender in virtually no country, why you have heard the exchange rate between bitcoin and euro or dollar? Because the same as the pound (GBP), a bitcoin is worth what people is willing to pay for it. And the reason why anybody would be willing to buy bitcoins using legal tender like euros, pounds or dollars is that they believe in the change of paradigm it puts forward: human exchange of goods and services using a secure, more efficient, transparent, faster and descentralized currency.

Cryptocurrency is derived from the application of Blockchain in the registry of an accounting book, a ledger of transactions of something that people consider valuable. If people trust in the Blockchain technology for the maintenance of a ledger (A owes 1 bitcoin to B on Jun 17th, B paid 1 bitcoin to A on Jun 18th,…), the reliable transaction system gets established.

If people is using something called bitcoin as units (currency) for the transaction exchange, or how much euros or dollars people is willing to pay for 1 bitcoin, being it the currency used in the Blockchain ledger for paying the miners to maintain the Blockchain system for the purpose of having a reliable ledger, both are things derived from the application of the Blockchain technology for a specific purpose.

You can read more about the reason why cryptocurrency provide these features in my previous article: Blockchain: the truth unveiled

Apart from Bitcoin, and based on the Blockchain technology as well, there exist around 4,000 cryptocurrencies. While many of these cryptos have little to no following or trading volume, some enjoy immense popularity among dedicated communities of backers and investors. The 10 most important apart from Bitcoin (BCN) are Ethereum (ETH), Litecoin (LTC), Cardano (ADA), Polkadot (DOT), Bitcoin Cash (BCH), Stellar (XLM), Chainlink (LINK), Binance coin (BNB), Tether (USDT) and Monero (XMR). You can read more about them here: https://www.investopedia.com/tech/most-important-cryptocurrencies-other-than-bitcoin/

The way people is currently betting on this transaction method is mainly by operating in 2 strategies: Hold and Futures.

• Hold: precisely hold or maintain during a long time the cryptocurrency you have and not to sell it quickly. The investor trust in a benefit in the long term.
• Futures: it is a derivative product, a form of contract, a commitment between two parties to either buy or sell an asset on a predetermined date, at a pre-established price. The agreement tracks an underlying; which in the case of crypto future is a Digital Token. Bitcoin futures allow investors to gain exposure to Bitcoin without having to hold the underlying cryptocurrency. This bet on the future has a expiry date which may bring a high profitability at a high risk.

The total maximum supply of bitcoin is 21 million. As of May 2021, there are about 18,715,050 million bitcoins already in circulation, leaving just 2,284,950 million left to be released via mining rewards.

Based on Bitcoin's underlying technology, Blockchain, the block reward given to bitcoin miners for processing transactions is cut in half after every 210,000 blocks mined (bitcoin halving), or roughly every four years. This is bitcoin's way of using a synthetic form of inflation that halves every four years until all bitcoin is released and is in circulation (still some more than 100 years ahead).

From that point on, bitcoin miners will be rewarded with fees for processing transactions that network users will pay. These fees ensure that miners still have the incentive to mine and keep the network going.

As you can see, the numbers are overwhelming in number of cryptocurrencies, number of trades, operations, market trends and Big Data that needs a distance for digestion and perspective.

Predicting market behaviour is so much a desire as the time stock markets exist, however, when looking backwards to the evolution of data, one is tempted to recognise patterns, and correlate the cryptocurrency data with all kind of world events and news, which provide a better knowledge for, at least, deciding how much risk there is in a particular investment.

This is where data visualization projects provide the Dedalus point of view to cryptocurrency (see my article Industry 4.0: What Daedalus did for an insight about how data visualization helps making decisions based on large amount of data).

Cryptocurrency dashboards may provide a complete overview of all the financial accounts and assets you’ve added to it in order to monitor their changing value and allowing you to manage both your cryptocurrency assets and thus your related financial plans.

Predicting markets shouldn't be the ultimate goal for a Cryptocurrency Dashboard, but by having all the related information in one place, getting reports and forecasts, you can see how each asset and account is impacting your overall financial health.