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How to Tell If a Crypto Coin is Money, Currency, or a Poker Chip

Money? Currency? Does it really make a difference?

The coming of Crypto Currencies, such as BitCoin, Etherium, and Steem, has created vicious arguments about what they are. Are they Money? Are they Fraud? Are they something entirely new? The one thing these arguments prove conclusively is that a great many people don't even know what Money is, or how to tell what is or isn't Fraud.

This isn't surprising. If you live in the United States and were born after 1965, then you've never held real Money at any time during your life. What you are familiar with is a Currency, not Money. Of course, everyone is encouraged to call that Currency “Money”, and as Adolf Hitler famously observed,

“If you tell a big enough lie and tell it frequently enough, it will be believed” *

The lie about Currency being “Money” doesn't seem like that big of a lie, provided we only consider their surface appearances. Usually, Money is used as a Currency. The problem is that what we use as Currency isn't always Money, and that can lead to serious trouble.

Both Money and Currency are important for trade and moving value around the community. But, one is designed to preserve your accumulated wealth, and the other can cause that wealth to slowly dwindle away and finally vanish. Most people, looking only at the surface similarities, think that this distinction doesn't matter. They think such differences are too subtle to worry about, but that is not the case.

People often allow words to confuse them, which is unfortunate. Currency and Money are related but they are not interchangeable ideas. We have different words because they do different things, and what a thing does is far more important then what you call it. Specifically, does it put money in your pocket or does it steal your shirt?

Money is a Game, but It Can Be a Deadly Game

I'm going to do my best to keep these ideas simple, because they are, in fact, amazingly simple ideas. Two things usually stand in the way of people grasping these ideas, however:

Many people are more frightened of being “Wrong” in the eyes of some teacher or authority than they are of losing Money.

People fail to realize that money isn't Real.

Money and Currency are rooted in perception and agreement. Both concepts deal with the idea of Value and the agreements made between one person and another. Value means something different to every single person and agreements between people can vary wildly. It's an emotional game that takes place in the mind and imagination. Despite that fact, the money game has real world, life and death consequences. It is a very good idea to learn to play this game well. The repercussions of failing to learn the rules, or ignoring the difference that exists between simple ideas like Money and Currency, can cost you very dearly.

Even Very Simple Ideas Can Be Overwhelming and Confusing

If Money was a board-game it would be rated for people ages 9 and up. To prosper and win this game requires no more complex or sophisticated knowledge than that possessed by the average fourth grader. I've worked diligently to boil these ideas down into a simple and clear explanation that even adults can understand. No matter how simple I make these concepts, however, most people will not fully grasp them the first time around. I encourage you to read this article more than once. The longer you have lived; the more comfortable you are in the habit of calling Currency “Money”, the more you will need to work to separate these two ideas.

I suppose I should also cover myself by saying that nothing I will relate here is meant to serve as financial advice. Knowing what money is and something of the specific role it plays in personal wealth management is not the same as trying to tell you what you should do in your personal situation. Every person's situation is different, and no amount of definitions or practical guidelines can tell you what you should do in your specific situation.

What Was Money?

Pieces-of-eight fill all the requirements of a good Money.

Once Upon A Time, Money was made from commodities. That is to say, real things. Things like crops, livestock, metals, mined gems, lumber, or anything that you could actually hold and use. People were not comfortable trading real things for something that did not have similar utility or value. Over time it became clear that some trade goods were better for trade than others. Food goes bad. Livestock can be injured or die.

Over two thousand years ago, people developed a list of qualities a thing must have in order to make an acceptable Money.

These qualities were:

Durability- For something to be good as money, it can not rot, rust, die, corrode, or lose quality over time.

Divisibility- You need to be able to make change. Ideally, you need to be able to do this with the item itself by cutting it up into pieces which retain their relative value. This is hard to do with a cow.

Consistency- One unit of money, ideally, needs to be exactly of the same size, shape, weight, and/or value as every other similar unit of money. One silver half-dollar is basically the same as every other silver half-dollar, that's consistency.

Convenience- A unit of money is not useful if it is too heavy to carry, or difficult to transport. Money needs to be both portable and needs to get around with a minimum of expense and difficulty.

Intrinsically Valuable- This is the idea, again, that Money should have value beyond what an authority said it has. Back in the time when a few day's walk could take you somewhere with a different government and Currency, this was very important. Just because something had the picture of your King on it made little difference. People wanted something they could use and trust.

Over time it became clear that Gold and Silver were the best choices to fit this list. Metal coins and bars didn't decay, you could cut them up to make change (“pieces-of-eight” were coins made to be easily cut into eight separate pieces, hence the name), they could be made from a specific weight and quality of metal, be made the same size, they were fairly small and light compared to wagon-loads of lumber or herds of cattle, and people desired them and recognized their value in most places. When people say that “Gold is Money”, it is this list of requirements that they sight as support for that idea.

As time went on and trade began to circle the world Gold became increasingly difficult to use. Traders and Governments needed to make increasingly larger purchases. Gold and Silver began to lose the Convenience that helped make them Money.

Gold is heavy. It travels slowly and requires expensive protection. Once at it's location it requires special storage facilities and even more expensive security. These requirements slowed trade, and steadily bleed away the value of the Gold simply from the costs of storage and transport.

Gold and Silver were still more Convenient than herds of cattle, but they were too slow and expensive to service a Worldwide Market. To answer this problem ideas about Money had to evolve.

What Is Currency?

People began to realize that there was no replacement for Gold in terms of real things with Intrinsic Value that could be Money. As nothing could replace Gold and do a better job, people began to realized that there was more to the value of Money then simple Intrinsic Value. Speed, low expense, and portability began to take on greater importance than what a Money was made from.

The understanding developed that for something to be Money it must have an additional quality to Intrinsic Value. This new quality could be called Practical Value. People began to create Money systems where Gold was held for its Intrinsic Value, but various forms of pure Currency (which were simply symbols that represented Money) replaced Money in daily transactions. This began the separation of the two concepts of Money and Currency.

Currency became possible because people found greater opportunity and Convenience in its use. Because early Currency systems still represented Money, which had Intrinsic Value, people had Confidence in the safety and value of Currency.

Intrinsic Value, Practical Value, What's the Difference?

I am using the terms Intrinsic Value and Practical Value in relation to Money and Currency, but what do these things actually mean? And, is there a simple way to tell if something has one, the other, or both?

Value is difficult to define. The exact meaning is different for every individual. Despite this difficulty, there are several general principals that can help us know if most people would consider a potential Money or Currency to have either Intrinsic or Practical Value.

For something to have Intrinsic Value it must:

Be made from something that has real world, practical use. Even if the system that supports and creates a particular form of Money fails, the coins or units should still have value in Trade.

People have to actually want what Money is made out of. It must either fulfill a personal desire or be recognized as something that can be easily and quickly passed on in trade. Something that is only valuable to a small portion of the population isn't good enough to create Intrinsic Value.

Money should also be a long-term Store of Value. That means that Money should buy roughly the same amount of goods in ten years as it buys now. The importance of Stability can not be understated. Without stable value, it becomes impossible to make long-term budgets, plans, or build wealth. Stability is critical to long term planning.

Because Money must also serve as Currency, it should also have three additional aspects. These aspects help define the presence of Practical Value. A Money must have all these aspects while a Currency only needs to have Practical Value. So, what is Practical Value?

Practical Value has to do with how quickly and easily trade can take place. It takes into account more than what the Money is made from. Practical Value provides a gauge of how useful the entire trade system is to achieving personal goals. The main criteria that define Practical Value are as follows:

For Money or Currency to have Practical Value there must be a system of support for trade. This would include some way to establish relative values for trade, minting of coins, standard weights and measures, as well as means to safely transfer Currency from one person or place to another with minimal expense or delay. These services are provided by institutions like banks, mints, exchanges, and markets. In the case of Crypto Currencies, these services are provided by the software itself, online exchanges, and Crypto Coin Miners. Whatever face it takes, without supporting infrastructure any potential Currency will lack Practical Value.

Money and Currency must have Liquidity, which means that you can sell, buy, or exchange the Currency for goods or services quickly and easily. This means that there must exist a Network of users who all agree to take the Currency in trade and agree on the Currencies worth.

Finally, people must have Confidence in the Currency. It is not enough for the support and market systems mentioned above to exist. These systems have to work reliably, and fairly. Equally, they must inspire faith that they will continue to do so.

Put another way for greater clarity: Money derives Value from being made of something in Demand, and the Stability of its value over time. In theory, for something like Gold to lose Demand we would have to invent a technology to “Print Gold”.

For a Currency to lose its Practical Value people simply have to lose Confidence in their ability to conduct trade. This is an extremely important thing to know. Currency can not exist without the Confidence of its users. I could say that the value of Currency IS Confidence. Lose that Confidence and a Currency will always die.

Currency is Faster and More Convenient, But Also Dangerous

The modern definitions for Money and Currency suggest this relationship. Currency is defined as “whatever is commonly used in trade”. Money is defined as “something of value that is used in trade”.

While this might seem to be a small, even insignificant difference, a Currency's lack of Intrinsic Value has serious repercussions on its behavior and on its role in wealth creation. This is especially true when it is fully divorced from Money, as it is in the modern world.

Because Money is a Store of Value it maintains its worth over time. Because a Currency has no Intrinsic Value its worth fluctuates, usually in the downward direction.

Currencies are notoriously subject to abuse. Bankers and Politicians have frequently over created Currency. This has always resulted in the value of the Currency being slowly stolen away. We call this loss of value Inflation. Eventually, this Inflation runs out of control, becoming an extremely painful period of Hyperinflation. Waves of Inflation and Hyper-Inflation rob the people of their savings and corrodes the Confidence in both system and Currency alike. An unbacked and poorly managed Currency will always leave the people holding it with nothing.

Currency Creates Wealth, Money Stores Wealth

This problem of failing to store value should strongly suggest that a Currency should never be used to secure long term wealth. Put another way, Currency is necessary for Trade, but don't Save for the future in Currency. Currency creates Wealth, Money stores Wealth.

Crypto Currencies are Changing This Relationship

This traditional relationship between Money and Currency appears to be changing with the creation of BitCoin. By putting an absolute cap on the number of BitCoins the problem of Inflation is largely destroyed. In fact, this limit and the fact that there is no central authority to abuse the Currency creates a condition that is strongly Deflationary.

Provided Demand continues to grow, BitCoin will naturally trend upward in value over the course of its existence. This still leaves such a Currency vulnerable to loss of Confidence or Network repudiation if it fails to serve its customers or if something better comes along. However, unlike many traditional Currencies, only system failure or better competition would result in BitCoin falling to zero.

What is true of BitCoin, however, is not true of every Crypto Currency. At this time there are no Cryptos that qualify as Money. It is unlikely that any ever will.

Some Cryptos qualify as Currency. A few, such as BitCoin and Ether, even qualify as something more than Currency but less than Money. Far too many are based on flawed thinking or are complete Fraud.

There is another option, though, besides Currency, something more than Currency, or Fraud. There are a number of Cryptos that are attempting to create services and value but aren't designed to be used in widespread trade. These Cryptos appear to be created as either something to enable pure speculation or to facilitate the use of a confined program, website, service. This class of Crypto Coin might be best called a Poker Chip.

Poker chips become worthless if no one wants to play

Crypto Poker Chips?

The difference between a Currency and a Poker Chip is simple. Currency must have a large and diverse Network of support and is readily acceptable in exchange for goods throughout that Network.

Poker Chips are essentially valueless tokens used in place of Currency for gambling or payment only within the Casino. You can't buy anything outside the Casino with a Poker Chip. In order to obtain Currency for trade in the larger world, the Poker Chip must be cashed out.

Poker Chips are not Fraud, but they have limited utility and value based on people's interest in the program that creates them. Whether or not a Poker Chip has any value depends on the answer to one simple question:

Does the program or site generate work or value that creates a steady Demand for Poker Chips?

These single site Cryptos absolutely must create enough interest to produce a constant flow of actual Currency into the system. Without people willing to buy in, no one will be able to cash out. At that point, the Poker Chip has no value.

I've heard people proclaim these systems Ponzi Schemes. They are similar, but the two aren't quite the same. The difference exists in the genuine attempt to create a Desired product, versus only creating hype based promises.

A Ponzi Scheme attempts to create this influx of Currency into the system based only on exaggerated promises and hype. A Poker Chip works diligently to provide some form of actual work, entertainment or value. If this created value inspires Demand enough to keep people buying into the system, then a Poker Chip could last for a very long time. When people are paid for doing work and creating value, and the people paying receive an actual benefit from that work, then the system is not based on fraud. However, if the site fails to create enough value to drive continued support then, like a pure Ponzi Scheme, the Poker Chip will quickly become worthless.

How to Evaluate a Crypto Currency

With these definitions of Money and Currency, you now can discover which role any particular Crypto plays. This tells you several things:

You can now find out what role a Crypto plays. Is it a Poker Chip, a Currency, or something more?

This understanding gives you a gauge of how long any particular Crypto is likely to last.

You have several warning signs for a potential Currency collapse. This allows you to get out of most Cryptos before they may collapse.

You now have the basic understanding needed to use Cryptos to build long term Wealth.

To keep this article as short and simple as possible I have not explored the detection of pure Fraud, how to set up a Wealth System, how to manage risk, or how to tell if a Crypto might be an Asset. I plan to write additional articles on all these issues soon. For the moment it is a good start to be able to know the difference between Money and Currency, and why Poker Chips are useful but dangerous. I will revisit Poker Chips again in my article on Fraud.

During the course of this article, I have put all the important aspects of Money and Currency into bullet points. This lets you quickly pick this out by simply scanning through the text. These are the points you need to remember when looking at any new Coins to figure out what it actually is. Turn each requirement into a question. Instead of saying Money or Currency must have this specific aspect, ask does this Crypto Coin have that aspect. For instance, if we take the first five criteria for something to make a good Money and compare them to the world of Crypto Currencies:

Money must be Durable becomes “Is this Crypto Currency Durable?"

Money must be easily Divisible becomes “Are these Crypto Coins Divisible?”

Money must be Consistent becomes “Are units of Crypto Currency Consistent?”

Money must be Convenient becomes “Is this Crypto Currency Convenient?”

Money must have Intrinsic Value becomes “Does this Crypto Currency have Intrinsic Value?”

For these first five criteria we can answer them for the Crypto world right now in this way:

Crypto Currency is very Durable because the whole system exists on every computer that holds the block-chain. Provided even one computer survives with this fundamental structure intact, the whole system could be recreated. On the other hand, your own holdings are only as durable as is the equipment you run it on. Viruses, mechanical failure, power surges, and all the problems computers and phones are vulnerable to could destroy your means to access your Currency. The answer is that the Crypto block-chain system is far more Durable than any Currency system that has ever existed, The individual coins, however, are nowhere near as Durable as Gold or Silver coins. If you are going to use Crypto Currency you can rest confident in the System, but you should take pains to carefully secure your individual Coins from loss, theft, or destruction.

Nothing could be more Divisible that a Crypto Currency. Unlike Gold and coins, a Crypto Coin can be easily divided into trillions of parts.

Like Divisibility, Crypto Coins ensure precise Consistency between individual Coins and between even the smallest piece of a Coin.

There are limitations to a Crypto Currencies Convenience, but they remain far more convenient than any historical Currency. Obviously, if you lack internet or cell signal then you will have difficulty using Cryptos, and many places lack both. On the other hand, for places where there is strong and widespread support for computers and cell phones few Currencies could ever compete with a Cryptos ease of use and transfer.

When it comes to Intrinsic Value, the general answer is No. Cryptos don't have all the aspects that suggest they have Intrinsic Value, and they aren't designed to. Because of this failure, Cryptos will never be Money, as I've already said. On the other hand, the best Cryptos do have some ties to Intrinsic Value in the form of Gold or another backing. These Cryptos are not Money, but they may act like money over time. I worry about such systems being subject to abuse, however. Most particularly I worry about reports that the Coin has a certain level of backing and in fact, it has none at all. These backed Cryptos have a very interesting promise, but I would choose to wait before saying that they will ever be “as good as Money”.

Because these answers remain the same for all Crypto Currencies and Coins you will not have to rehash these issues unless something changes. The questions we do still need to ask are the three questions that help point out a stable Currency, and the two questions that determine if something is a Poker Chip or a Ponzi Scheme.

The first three questions that we should ask are:

Does this Crypto Coin have strong programming language, few bugs, exchanges that are easy to use, a wide Network participation, and options for trade beyond a single website? In short, does the Coin have the support to function as a Currency?

Is the Coin in question Liquid? Can it be exchanged or used for the purchase of goods and services with a minimum of time or difficulty?

Do Coin users demonstrate Confidence in the Coin and the Coins function and exchange system?

The answers to these questions vary widely from one Coin offering to another. Many of us lack the skill set to determine these factors for ourselves, but they are very important. I highly recommend that anyone who wants to know if a Crypto is Currency or something less should seek out experienced and qualified advice from people who both read computer code and understand Money. Personally, I find the analysis of Clif High at https://www.halfpasthuman.com/ to be excellent, but I am sure there are many other options. If you lack the ability to answer these questions yourself it is vital that you seek out such analysis from an informed party. Cryptos that fall short of being Currency are likely to lose any wealth you invest or create with those Coins. If you are seeking to use your Coins to live on then you also need to know that you can use them easily no matter what or where you intend to buy.

In the case of Poker Chips versus Ponzi Schemes we need to ask these two other questions:

Is there genuine, consistent effort to create or distribute goods or services with real value?

Is there enough demand and excitement for the products and platform to ensure a steady exchange of Currencies for the Poker Chips?

If all a Crypto Coin offers is hype and promises with no proof of actual work being done, be very careful! Such a Coin is almost certainly a Ponzi Scheme. People who enter into Ponzi Schemes will eventually get burned. Even if a Crypto appears to be a Poker Chip and not a Ponzi Scheme, watch it carefully! If interest in the site starts to fade you could still become trapped in the Poker Chips with no way to exchange them for something of value. There is a reason I am calling these Coins “Poker Chips”. If you are playing with a Poker Chip, you are gambling. Be sure you recognize this fact and plan accordingly.

Fraud, Assets, Wealth, and Risk

In future papers I will dive deeper into the issues of detecting Fraud in Cryptos, how to recognize which Cryptos can be used as Assets for developing Moneymaking Systems, how to use these understandings of Currency, Money, and Assets to build a system that will create and preserve long term Wealth, as well as addressing several strategies for managing Risk when trading or speculating on highly volatile Crypto Coin markets. If you have found this information useful, please feel free to comment and upvote so I know to keep going.