I am writing this lengthy, perhaps unrefined, essay after reading an intriguing article shortly after one of my subscribers raised the topic of crypto via KakaoTalk; prior to this, I had paid so little attention to crypto that I was even unaware of what Ethereum was.
I. The Nature of Money and Currency
Money is a contractual means established among participants who agree to recognize that “a certain good possesses an absolute value.” It serves as a tool to facilitate the exchange of substantial goods and services in the market. Currency (bills and coins) embodies the intangible value of money and can only function as a medium of exchange when it contains such value.
Because currency is limited by its utility as a medium for exchanging goods or their value, it affects only nominal value. This nominal value—the “means of exchanging the means of exchange”—cannot influence the intrinsic value of actual goods. This is precisely why economics considers the real market and the financial market separately. Consequently, two goods with identical intrinsic values will always maintain the same real value, regardless of any differences in their nominal values as expressed by different currencies.
II. Equilibrium, Desire, and Market Intervention
The discrepancy between a good’s intrinsic value and its real value is typically balanced at an equilibrium point determined by the relative value (purchasing power) resulting from the tug-of-war between supply and demand. However, when the gap between real and intrinsic value is exacerbated by human demand (desire)—which cannot be accurately measured—non-linear equilibria may form, or the market itself may collapse. Examples include the Veblen effect or the Dutch Tulip Mania. To prevent such collapses, governments intervene through fiscal policies, such as implementing progressive taxes when the real estate market overheats.
The equilibrium between intrinsic and nominal value involves more factors than that between intrinsic and real value. When goods are exchanged, the price is the equilibrium point derived from supply and demand, representing the real value or purchasing power. When this real value is expressed through currency—which participants have promised to respect as a contract—it becomes nominal value. Thus, currency is the “means of exchanging the means of exchange.”
III. The Credibility of the Contract
Just as a good’s real value is its relative value for exchange, currency also possesses relative value (the exchange rate). As long as the contract remains valid, the intrinsic value of a good does not change based on the type of exchange medium (the Law of One Price). Therefore, inflation—the rise in nominal value—is ultimately a monetary phenomenon.
However, when the contract or its credibility is compromised, a significant gap emerges between nominal and real value. This occurs when trust in the purchasing power of the state that issues the currency is damaged, leading to a decrease in the relative value of that nation’s currency (a rise in the exchange rate). If the discrepancy between real and nominal value becomes too great, the market collapses (default). To prevent this, governments intervene through monetary policies, adjusting interest rates, bond liquidity, or the money supply.
IV. The Structural Contradictions of Virtual Currencies
Money is an intangible total of a contract based on trust, and currency is the tool developed to typify this concept. Therefore, money and currency possess no absolute value of their own; their relative value as exchange media stems from the intrinsic value of the goods being exchanged. Just as derivatives cannot exist without a stock/bond market, and those cannot exist without a functioning economy, all value is only possible when the trust between contracting parties is maintained.
In contrast, virtual currencies can be created by anyone with programming knowledge, leading to over 800 varieties. It is unclear who the contracting parties are or who guarantees their value. While some argue that consensus among parties is an advantage, I am skeptical of transactions without third-party guarantees, especially in a reality where guarantors often bear the burden when parties disappear. There is simply no reliable foundation for trust.
V. The Insularity of Virtual Assets
Even if one argues that the long-term price surge of virtual currencies must have a reason, consider rare, high-value virtual items in online games. Do they possess such high intrinsic value? Their high trading prices are limited strictly to the participants of that specific, insular market. If a user tried to trade a virtual item for a luxury vehicle with a non-gaming dealer, claiming the item’s high value, they would likely be taken to a hospital or a police station. There is no established trust or promise between users and non-users that these different forms of goods share equivalent value.
The fact that scammers have raised 60 billion won by claiming China or the UK would guarantee the credibility of their currency, and that Ethereum’s surge is tied to adoption by major corporations like MS and IBM rather than intrinsic value, clarifies whether virtual currencies are objects of investment or speculation. Furthermore, their “surging prices” are ultimately calculated in fiat currencies like the USD.
Conclusion: A Structural Time Bomb
In my limited view, a private virtual currency whose price can crash to one-tenth when a server is hacked will likely never replace existing currencies as a universal medium of exchange—unless the US, China, and Japan simultaneously abolished their own currencies to adopt a single virtual standard.
Moreover, I do not understand the logic that a virtual currency, whose value is linked to fiat currency to form an equilibrium, can replace that very fiat currency. Beyond technical explanations of the generation process, I would like to hear a logical explanation for how a virtual currency, whose value is formed based on a fiat benchmark, can replace its own reference point. To me, this looks identical to the structure of China’s WMP (Wealth Management Products)—a known time bomb in the capital market.
While considering that Bitcoin rose 750,000 times over seven years, it might not be a bad idea to purchase a small amount of Ethereum—only as much as you can afford to lose. However, before putting money in, one must clearly understand whether they are a person who can surf the waves of madness characterized by greed and fear, or someone likely to be swept away and lost at sea.