“Cryptocurrency” is really a Commodity
Handling and understanding cryptocurrency as a commodity is wise for most.
Cryptocurrencies are created from three input factors. Time, Computers, and Electricity. Cryptographic hashing in all forms require time to program and computers that run on electricity to execute their hashing functions. The output is a unique code which may or may not be exchangeable for other things of value. Currency is a misnomer as they are more akin labor or silicon chips than fiat currencies derived from institutional mandates that are substantiated by the faith in the institutions that form them. While they may be used in place of currencies, fiat based or asset backed, that does not make them any different from commodities used in exchange in barter systems where money is not used as the medium.
This distinction is important, as they may be used as a substitute, they are not a juxtaposed replacement for fiat currencies. Thus, their threats and opportunities are isolated. Most importantly, their regulation is wisely handled as such. It appears that the US, by way of the SEC, perceives cyptocurrencies as such, commodities. Some nation states have an incentive not to permit free trade of such commodities, at least in the short term, as they can be used as an efficient substitute for fiat currencies, with one important, and threatening caveat, they are virtual and unparalleled in liquidity. The issues with this abound and vary. Not all commodities are or will be permitted to trade freely, obviously more so when they challenge material capitalization and trade strategies of vulnerable nation states. As dominant player in the global financial landscape for all intensive purposes, this is less of threat to the United States financial system.
Contrary, an important threat is mitigated, from the United States point of view, as we are participating in harnessing the value of the innovation without compromising the value and importance of our other financial institutions and structures, by handling “cryptocurrency” in a format that makes them compatible with regulation in the form of a commodity, while allowing them the flexibility the need to change and flow freely. Taxation is another subject and one that may change with our overarching structure soon. Additionally, components with debt and equity characteristics can be added to cryptographic “tokens”, as we see with Initial Coin Offerings(ICO’s), and that is a separate issue that needs to be handled as such. Commodity contracts can fall into the same situation depending on the structure of the contract and we have long standing mechanisms in place for those situations.
The bottom line is at their core, the most basic foundations of dominant cyptocurrencies are commodities in nature. Presenting them and understanding them as such beckons advantages for all that participate, because at their root, that is what they are.
While their values may collapse to zero or their technological or logical underpinnings may unravel, it does not negate that fact that their construction was formed by raw inputs of the other commodities listed. In most cases, noting that a collapse will result in a loss of the commodities that were input to form them actually makes them “real”, though not physical. While those inputs are often not linear in their requirement over time, by design, and trading out of the commodity is common, real capital is being exchanged to create them. Thus the notion that “they appear out of thin air” is false. The same could be said for all fiat currencies and online exchanges or contractual agreements.
Contrarily, they are often formed with measurable calculations on input costs and profits, with global rate arbitrage and economies of scale of capital dictating these terms. Mining is largely conducted by very wealthy and intelligent people. The miners inputs are commodities and most perceive them as such. Many speculate on the future value, again an aside. Yet, like the value chains in other commodities in the physical world, their is variance in the efficiency by which they are garnered and distributed, with similar risk weighting behaviors and transaction costs based on domiciliation.
The movement has grown by framing a diametric opposition to fiat currency and government, a great way to gather attention and motive activity at the margin. Yet this method is growing long in the tooth and unlikely to continue to suit objectives but more importantly dismisses the fact they are as much a currency as corn.
Like most lines of business that bypass established channels of commerce, they yield dismissal in varying forms, mostly as a result of being incapable of yielding profit for incumbents. Like most good arguments, they are based on truth, with a distortion of proportions and a desire to adorn scarlet V’s. In aggregate, oversubscribing to these semantics and beliefs will be detrimental to keeping pace with the positive changes brought.
As for the commodity nature, by design, bitcoin is modeled after gold. Most dominant forms of cryptocurrencies are modeled after bitcoin, more than they are not, based on the finite number of units being produced. Debt and Equity can often not say the same without covenants. Fiat currencies have little purpose for either.
An anecdotal experiment to help solidify how a cryptocurrency is formed from commodities can be produced using this video to construct ZCash(I do not recommend it), one of the top 10 cyptocurrencies by most metrics. As you will see, upon exploration, the immediate profit is negative, signaling most of what is described above and that there is likely much speculation going on.
