Here is why virtual currency has no real value.
This note serves to explain the “managed currency system = monetized economy” model by using double-entry bookkeeping. I have named the account items “central bank borrowing,” “central bank lending,” and “money created for liquidity shortage.” I also note that central banks around the world “do not manage” the managed currency system by using the ensuing double-entry bookkeeping system. I came up with this model to simply explain how currency value is actuarially used as collateral. In the case of virtual currency, you just need to replace “＄” with the respective names of each virtual currency and replace “central bank” with the authorized issuer of the currency.
Borrowing for capital investment
(Cash) ＄A (Borrowing) ＄A
(Cash) ＄A (Central bank borrowing) ＄A
(Lending) ＄A (Cash) ＄A
(Cash) ＄A (Money created for liquidity shortage) ＄A
(Central bank lending) ＄A (Cash) ＄A
(Borrowing) ＄A (Cash) ＄A
(Cash) ＄A (Lending) ＄A
(Central bank borrowing) ＄A (Cash) ＄A
(Cash) ＄A (Central bank lending) ＄A
(Money created for a liquidity shortage) ＄A (Cash) ＄A
Commodity prices rise when the demand for existing goods and services increases, creating supply shortages. In response to the increased demand, companies boost their production capacity through capital investment. This modification also happens when companies put new goods and services on the market. When they cannot cover the costs of capital investment with their own assets, they try to increase their capital or borrow from financial institutions. When borrowing, if there are no surplus funds within financial institutions in the market, central banks issue new funds.
You might ask yourself why central banks create money, which prompts inflation, when inflation is already underway. However, the total amount of money circulating in the economy and the amount of money actually used for consumption are not the same. Commodity prices are determined by supply and demand (including asset-building savings such as savings = equity investment). Therefore, money that is not used for consumption = demand does not affect commodity prices.
However, when the supply and demand of existing goods and services on the market are not balanced out at equilibrium by new supply of and demand for goods and services, central banks should not recall and cancel the supplied money to prevent cash-flow breakdown in the market, which is directly reflected as an increase in GDP.
The important thing to note here is that you cannot control commodity prices simply by issuing money, without first securing the amount of supply needed for goods and services = supply capacity, as doing so simply cannot shore up the required demand.When the nominal value of a currency is 0, its real value is also 0, and commodity prices go up infinitely. This rise occurs because of the fact that currency value is not at all linked to supply and demand.Therefore, the aforementioned “money created for a liquidity shortage” should be accounted for as lender’s debt, not as lender’s net assets, as this is the amount before the repayment of the fund begins and before the supply capacity is determined. Once the supply capacity is set and the fund is not recalled and cancelled, “money created for liquidity shortage” is moved to net assets from debt.
Whether it is virtual currency or legal currency, issuing money without securing supply capacity beforehand yields no value.Virtual currency uses the supply capacity built up by existing legal tender; therefore, it can be misleading; however, its actuarial value is absolutely 0. The actuarial value of currency can be explained formally, as in the ensuing exercise, using double-entry bookkeeping.
Virtual currency has no value.Issuers of virtual currency swap their currency’s value with the value of block-chain technology. I do not know whether they have the intention to cheat anyone; however, as long as the currency is issued without the purpose of trust creation for capital investment, we have to say that its value never rises above absolute 0.
For those who have already invested in, or are thinking about investing in, virtual currency, I strongly recommend that you rethink your decision.
This note is also a warning to central bank officials around the world.