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https://medium.com/ummati/the-importance-of-trust-in-determining-value-a148a1fbc9ed?source=rss——bitcoin-5

To understand the nature of money is to understand the nature of trust. It’s a shame so much emphasis in economics is placed on econometrics and modelling quantitative theories- it is also essential to have an understanding of human psychology and sociology. This goes back to the impossible quest for objectivity.

I saw a Scandinavian movie that joked about the absurdity of the idea of objectivity in the social sciences. It featured a researcher tasked with observing the behavior of single men who live alone. The researcher enters the man’s house and sits in a high chair in his kitchen, scribbling notes about each thing the man does. Eventually the man starts hiding out and eating in his bedroom.

The Cryptocurrency News Group The Importance of Trust in Determining Value

The idea that something as complex as a human economy can begin to be understood by someone who doesn’t have background in the workings of human psychology or societies is one of the most stunning events of the past century- and one that has probably cost millions of people their lives. The narrow minded focus on profits and production efficiency simply leaves no room for other concerns, even some that are concerned with profits as well, like sustainability of ventures.

Trust and expectations

Value ultimately boils down to trust. Even transacting with gold can grind to a halt with a total absence of trust. For example, someone could coat a piece of iron with gold and sell it as pure gold. The ridges that still appear on the edges of coins are there to prove that no one has shaved dust off the edge of the coins.

The Cryptocurrency News Group The Importance of Trust in Determining Value

Similarly, even dealing with agricultural goods like grains, there has to be trust that they are of a uniform quality. Unfortunately, there has been no way to quantify this relationship- this is partly what led to the rise of secret societies like the masons.

The masons and similar orders arose out of the Crusades and the need to draw finances in various locations. There was no internet or telegram at the time, so sometimes letters of credit were used from affiliated finance houses, but an even more effective means was to have secret knowledge which was shared only with members that fulfilled certain criteria and answered to the same command structure.

So if someone showed up, knew the secret handshake and all the rituals, you could be sure that you were part of the same organization that had the same aims, and that you could extend credit to them.

This is probably the source of rumors that secret societies sometimes associated with the Illuminati control the global financial system and orchestrate wars for profit. It’s probably impossible to know in this life the veracity of such rumors. There is undoubtedly still disproportionately high representation of elites in secret societies with various lineages- even the Greek system of American universities is an example of this, as is the Bohemian Grove. It’s unclear if they are quite so sinister as people make them out to be, but without any doubt the overall result of the system that these elite preside over is quite unwholesome, to say the least.

The Cryptocurrency News Group The Importance of Trust in Determining Value
The Bohemian Grove in northern California, a private club where most US presidents and other elites have participated in mock human sacrifices to an owl statue every summer.

So what is trust?

So we know trust has been the key to the financial system for a very long time, from the most basic to the most advanced transaction or deal. Clearly, technology has enabled expansion of this trust, which in turn has enabled a major increase in complexity of the global financial system. In short, trust is the expectation that someone will do what they say they will.

The simplest way of building this value is simply to do what you say you are going to do. Blockchains stand to vastly increase the potential for trust for the simple reason that it is possible to prove beyond any shadow of a doubt that you did what you said you were going to do, and to display this information to the whole world. This is similar to what various credit systems have sought to do, but there has not been until now any such system that made this information available to anyone in the world with access to an internet connection.

One of the main criticisms that has been leveled against cryptocurrency, particularly by Muslim scholars, is that it is not backed by anything. It certainly seems that way, since you can’t hold a bitcoin in your hand, but consider the creation of value through artificial scarcity.

Artificial Scarcity

People have figured out before that if you can create something that people want and then make it scarce that you can make money at it. I remember when I was about 13 the beanie baby craze hit America. Suddenly everyone had beanie babies, there were specialty beanie baby shops, and guides with the estimated value of beanie babies.

The Cryptocurrency News Group The Importance of Trust in Determining Value
This beanie baby sold for over $2000 until crashing to below $10 a few months later.

Some people invested their children’s college money into beanie babies, expecting the value to increase, and ended up losing everything. Others became incredibly rich.

Now, beanie babies clearly have utility, intrinsic value, if you will. People think they’re cute. They were protected by intellectual property law so no one could exactly copy them in the US market.

Trading cards are another example of the creation of value by the means of artificial scarcity.

What these examples illustrate is that value is very much connected to people’s perception. If people perceive something to be valuable it will be.

The case of cryptocurrencies is a little different. A cryptocurrency offers quite a bit more utility than a beanie baby. I travel internationally a lot, and I’ve had to deal countless times with hassles, extortionate exchange rates, delays, fees, ID document requirements, and a long list of other pains associated with transferring money internationally. I was very excited when I learned about bitcoin because it allowed me to circumvent all of these hassles. I also hated banks and their morally reprehensible practices, and suddenly I had the power to keep my money digitally on the blockchain.

Besides that, I learned that people could buy and sell illegal items on the internet. People may associate this with criminal activity, but a practical example is hepatitis C medication. The medication is protected by intellectual property in America, but is produced generically in places like India and Brazil. In India, the full treatment course costs less than $1000, while in America the cost is over $80,000.

I had a friend who was suffering from hepatitis C, but could not afford the medication, and had been put on a years long waiting list since he had public insurance. I looked the medication up on bitcoin marketplaces and found the Indian equivalent was available for a fraction of the price he would have had to pay through a legal pharmacy.

Additionally, anyone who cares to look can see the value of all fiat currencies declining over time. If one wonders where that value is going, you learn that it is going to the people who receive the newly minted dollars- the banks. Cryptocurrency allows us to get out of that system.

Now to me, and many people, these things are all very valuable. Not to downgrade the value of cuteness, but the type of utility of cryptocurrency clear has trillions of dollars worth of real economic gains that it can bring. Creating something that is inherently deflationary just adds to that value- there have been many inflationary cryptocurrencies created since bitcoin, and they are still valued by the communities that use them.

All of bitcoin’s value ultimately comes down to one thing- trust. You know when you are getting money, because you know who has what. In the case of cash, you could get paid in counterfeit notes, someone could pay you with a stack of $20 notes that secretly has $5 notes mixed in. In the case of a bank they could loan out all of your money, and if the debtors default, they may just apologize and tell you they can’t return your money, as happened during the great depression.

With bitcoin your money is secured by math- and math represents the essence of transparency. There is no chance of numbers being two faced. Not only money, but transactions are also secured in this way.

In other words, the secret societies behind many of the crusader orders that were foundational to the establishment of the present global banking system have become completely and finally obsolete.

Building Trust

The Cryptocurrency News Group The Importance of Trust in Determining Value

There are still issues with bitcoin that many alternate cryptocurrencies have tried to fix, but really none of the problems other currencies have tried to address have been nearly as big as the problem that bitcoin actually did successfully fix.

The prime question in my mind is not so much how to fix deficits in bitcoin- different people have different priorities and may use different cryptocurrencies. The question to me is how to take the essential value, trust, and increase it.

The curious thing is when I started to research Islamic financial contracts, that I realized that they are designed to build trust. In the case of beanie babies, value was created by the company that produced the toys, Ty, announcing that they were going to discontinue production of certain lines. This involved expectation that the company was being honest- they could have just produced more anyway and profited from it.

So beyond mere supply and demand, trust is a major element of value. The wisdom of designing contracts to build trust is apparent when we consider that as trust increases, so will prosperity.

The power of credit ratings in the international economy is clear- credit downgrades of nations can result in thousands of people losing their jobs. This illustrates the power of trust very well.

The three biggest credit rating agencies, Moody’s, Standard and Poors, and Fitch, have a combined annual revenue of nearly $7 billion, which points to the value of being able to assess trustworthiness. It also points to the value of tools that can make possible the building of trust between parties that otherwise would not have been able to trust eachother.

In a way, trust represents a bigger reserve of potential value than all the gold, oil, and gems hidden in the earth. It is there, existing as unseen potential, and sadly very little energy is being put into building the machinery to bring it into the light of day. What I mean is that there are trustworthy people all over the world who could be very successful if they were to establish relationships, but they need a platform where they can connect, get to know each other, and transact with some protections.

The great thing about trying to provide a platform like this to Muslims is

  1. It’s much easier to target people to let them know about the platform
  2. There is a shared identity that spans hundreds of millions of people all over the world with very different talents and cultures
  3. Our religion has built into it instructions to get away from the present interest based system, increasing the incentive to utilize such a platform.

This is a real advantage over other systems aimed at a more generalized audience. One of the fascinating things about a currency is that its value is often a reflection of the strength of the community behind it. The Muslim community has been severely weakened by the placement of borders dividing our lands, but now we have for the first time in God/Allah knows how long the ability to transact freely with eachother over these national borders.

These transactions can also be the basis of community, so if we can find ways to build trust with eachother we can actually have that trust take real tangible form in the value of our currency- just as it presently does in the value of paper currencies.

However, rather than that value being a function of supply and demand plus trust in the government (which means of course the value will go down, since supply increases and governments all over the world constantly give people reasons not to trust them) the value becomes supply and demand plus trust in the community. It is not trust in the communtiy to issue the currency, since the issuance is automated, but rather trust in the community to accept and use the currency. And since supply is fixed, as long as the use of the currency by the community increases, so will the value of the currency.

The Cryptocurrency News Group The Importance of Trust in Determining Value


The Importance of Trust in Determining Value was originally published in Ummati on Medium, where people are continuing the conversation by highlighting and responding to this story.