“Money is human happiness in the abstract: he, then, who is no longer capable of enjoying human happiness in the concrete devotes his heart entirely to money.”
— The World as Will and Representation, Vol. 2, Ch. 26, Section 320
After a spectacular crash in 2018, Bitcoin which is the main cryptocurrencies out there has nearly doubled the value of its lowest crash price of $4,000 recently. I got into Bitcoin and specifically blockchain, which is the underlying algorithms that run all cryptocurrencies, out of curiosity and hobby and even benefited financially from it. This current resurgence (which I think is a minor one) got me to start thinking about it and especially why such things are valued so much, apart from the purely financial one.
There has been an explosion of information related to crytopcurrencies and even more hype around it that past couple years, yet widespread misinformation and confusion both about its use as a financial instrument as well as the technology that runs it prevails. This has lead to the bubble as well as numerous scams that have left many to believe it is a type of pyramid scam. To me the biggest scam is the ignorance of the value it actually represents. And I’m not talking about whether it will make financial transactions more efficient (which has proven doubtful), whether it is a superior store of money, nor if it is a hot investment (even more doubtful).
Instead, I want to go deep into the philosophical value it is supposed to represent or whether there is such a thing as “value” that exist for cryptocurrencies or any currencies for that matter. A great approach to address this topic is to use the philosophical framework of Arthur Schopenhauer, and especially his idea of the “World as Representation”. His view in this regard is what is referred to as transcendental idealism, namely that the world of our lives is not real, but rather, technically speaking, a “representation” generated by the human intellect.
“The objective world as we know it does not belong to the true being of things-in-themselves, but is its mere phenomenon, conditioned by those very forms that lie a priori in the human intellect (i.e., the brain); hence the world cannot contain anything but phenomena.”
— The World as Will and Representation, vol. I, Appendix: “Criticism of the Kantian Philosophy”
The world, according to Schopenhauer, is a product of the activity of one individual as a subject: the intellect analyzes sense data perceived by the body and puts them together within a scheme. Such a scheme is based on the principle of reason and manifests itself through the forms of space, time and causality. It is the intellectual activity, guided by the principle of reason, that considers sense perception as being the effect of a cause existing in space and time. Such a judgement, pronounced by the subject, originates the idea (as well as the knowledge) of the world outside our mind, where objects and events really exist. As far as judgement is knowledge, the subject knows the world through the forms of space, time and causality. Yet the subject cannot know itself, because they postulate the forms of knowledge and then cannot apply them to themselves.
As the world is a representation of the subject, then nothing can assure the correspondence between the subject’s experiences and the true nature of objects. Through the world as representation we acquire no knowledge of the world as it is in-itself, nor that it even exists: representation is only an image drawn by the human intellect processing sense data within a preformed (and assuming normal conditions) cognitive model. Representations are only an image drawn by the human intellect processing sense data within a preformed cognitive model. As Schopenhauer further elaborates on the nature of representation citing ancient Eastern wisdom:
“The work of Maya is stated to be precisely this visible world in which we are, a magic effect called into being, an unstable and inconstant illusion without substance, comparable to the optical illusion and the dream, a veil enveloping human consciousness, a something of which it is equally false and equally true to say that it is and that it is not.”
— The World as Will and Representation, vol. 1, Section 3
I’m going to attempt to pierce this “Veil of Maya” as it relates to cryptocurrencies as well as pierce the scam of its true representational value in these multi-part essays. In this essay, I want to get into the question of what actually constitutes the value inherent in a cryptocurrency. In other words, what is the metaphysical ontology of a cryptocurrency?
Rather than a formal articulation, I just want to describe the intuitive process I went through as I started to think about why something like Bitcoin became so hyped up and considered valuable by the population at large. For when you think about it, money is so ubiquitous and ever present in our daily lives that we just take for granted that its existence and nature of operation is as necessary as drinking water and eating food. Furthermore, it has an objective and quantifiable metric to delineate what we can earn for our labors, what can be purchased and most importantly, the level of well being and status within our society. It is considered the “root of all evil” as well as the means to great happiness. For something based on quantitative objectivity it confers a vast amount of qualitative subjective value.
So to set the stage, let’s delve a bit into what money is in general then into what it represents for cryptocurrencies. Something like a piece of fruit is easy to assess in terms of value, since when I eat it, it keeps me alive and if its ripe, tastes good as well. But what if I run out of fruit? Fortunately, everyone needs to eat and there’s a good chance that someone eats fruit and has some. I could go and ask someone for some and get some, but most likely that person will be stingy since they may want to save some for later or need to share it with their family. Because of this, I will try to barter some item I have that they my want in exchange for the fruit that I want. Maybe a loaf of bread for a sack of fruit. Problem with this method of exchange is that we must both have what we each want at the same time to make this bartering transaction to work, or go though a lengthy and cumbersome process of negotiations to barter various things till both parties are satisfied.
So at some point, money was created as an intermediary form of exchange like coins and paper money that’s easy to handle, store and exchange. It assigned a quantifiable measure that could be calculated and assigned to items and services purchased and sold. To avoid disputes and to more easily tax citizens, this form of money is backed by a government.
A good example of this type of commodity money is gold and silver. Out of all the metals out there, these two are solid, non-corrosive, malleable so that they can be easily shaped and reshaped, and are conducive for facilitating the properties of money listed above. Gold and silver are also found in mines all over the world. That is why for example, a bank note issued by the Bank of England in the 18th century was a promise to pay the bearer a certain pound weight of sterling silver (hence the origin of the name of the British currency as “pounds sterling”).
As well as being a form of money, it has other intrinsic values such as its use in electronic components as well as jewelry. But most of the gold and silver is actually locked inside vaults, used as backing for bullion based investments. People that use gold and/or silver as an investment are unlikely to actually have them physically in their possession. Gold and silver works as a store of value because you can’t just go on producing more of it (creating inflation), and we have a good idea on how much of it can be mined, excavated and refined.
Physical gold and silver is really not that easily transferable. You can not easily buy some gold from a person on the other side of the world, and have it in your hand in a few minutes. This is why it ends up in a vault, so you just transfer rights to it. This leads to a market of selling gold and silver “on paper”, i.e. rights to some gold or silver somewhere. In actuality, more rights to gold and silver are sold than actually exists, for buying gold or silver through an exchange-traded fund (ETF) is not the same as physically owning gold or silver. People are actually buying gold and silver that does not exist, and it doesn’t seem to matter for those involved. The market seems to work, because there is an interest in keeping it working.
Because what it boils down to is that people don’t actually need the physical gold and silver in their possession, since they can obtain a representation of something that provides them with the assurance that it is based on gold and silver. This is despite the fact that we don’t know whether the gold or silver we purchased actually exists in a vault. Though that should make us a bit uneasy, we’re actually quite fine with that.
This representational aspect of gold and silver lead to the creation of coins and notes that became a mere abstract token to exchange goods and services for society at large. In other words, money is a purely social construct rather than a monetary commodity. This socialization is predicated on a credit relationship, or promissory note between individuals, communities and organizations so as to offer a product or service to the holder of the promissory note or token. This also entails that the promise is credible (i.e., “creditworthiness”) and that it is transferable so that others can accept it as payment for trade.
Over time, this creditworthiness was conferred to the government which lead to the creation of fiat currency, which is monies underwritten by the government but not tied to nor redeemable through gold and silver. Fiat money has been the dominant kind of money globally since 1971, when the United States terminated the convertibility of dollars to gold. It’s important to note that credit in the majority of modern economies are issued by banks through their lending operations, and the role of the government is to guarantee that bank deposits can be transferred into cash.
With this philosophical background on the on metaphysical ontology of money, let’s see how cryptocurrencies fit in. Cryptocurrencies have known properties like that there will only ever be 21 million Bitcoins, for example. It’s mathematically easy to prove that a Bitcoin is a Bitcoin, since it’s based on pure mathematics as you can run a piece of software to validate it for yourself.
Crytocurrencies like bullion-based ETFs don’t actually exist on your computer device. What does exist on your machine is cryptographically strong keys that gives access to spend something that everyone can validate exist as well as validate that it is not fake. This is the blockchain in a nutshell.
So when you obtain a cryptocurrency, you are mathematically assured that it is valid while simultaneously validating to anyone who wants to transact it with you that it is so. The information on the creditworthiness of the cryptocurrency, is distributed to thousands of nodes throughout the world, and everyone of them can validate the your transaction and be assured that the owner of the keys was the one that initiated the transaction on something called the distributed ledger.
Everyone holding a copy of the ledger on the blockchain will have an updated view of who owns the said crytocurrencies you transferred. This is done through a cryptographically strong way and every node on the blockchain will perform the same validation. This “Proof of Work” can be computationally expensive for it acts as a timestamp of transactions, which allow a cryptocurrency like Bitcoin to be validated by calculating from the first Bitcoin up to present as well as exactly how many Bitcoins exist and are in circulation with the exact address that holds them. A Bitcoin owner’s key is what confers that person right and only theirs, to transact them.
To sum up, the three items that gives cryptocurrencies value are:
- They’re limited so that they cannot be inflated
- They’re easy to transfer and store
- They’re easy to mathematically verify
Furthermore, unlike traditional fiat currencies that exist because a central bank run by the state created them out of thin air, the consensus is that the three benefits of cryptocurrencies outlined above keep them from being manipulated by the whims of the state. Unlike gold and silver which are physically difficult to verify against the quantity and value assigned to them, cryptocurrencies are a whole lot easier to deal with and use pure mathematics to verify.
The correspondence of the total value of the cryptocurrency market amounts is supposed to be in proportion to what money people are willing to put into the said cryptocurrencies. This “efficient market hypothesis” model entails that if I want to sell a cryptocurrency or buy a slice of pizza with it, I should always be able to find a buyer. It shouldn’t matter what cryptocurrency I use (Bitcoin, Litecoin, Ethereum, etc.), since the sum value of those transactions will equal the current cryptocurrencies on the market.
With this understanding of the general philosophical background as to the why and how cryptocurrencies came into being, we will discuss how this fits within the Schopenhauerian framework of the “World as Representation” and the implications on the human condition.
I glossed over and highly simplified how cryptocurrencies work through blockchain. For those who want a bit more information, below is a YouTube video that explains the technical details quite well without getting bogged down in technical minutia: