In what ways is it possible to give value to a coin?

Leaving aside coins with intrinsic value (coins made of gold, silver and other precious metals) we find ourselves in the situation of having to give value to a currency that initially, upon its creation, has none. In fact, the act of will through which we create currency is not sufficient to give it economic value. More is needed.

Basically there are 3 ways of giving value to a currency.

1. Currency as a monetary instrument in Economics

The first way is to assign a conventional value to currency that is determined, precise and stable over time. This value is usually assigned at the time of its issuance and, concretely, represents and quantifies the purchasing capacity (or power) we wish to give it.
An ideal currency should maintain stability in terms of purchasing power, hence stability in the prices of goods and services.

In contrast, the ECB’s monetary policy toward the euro is set, as a goal, on a continuous decline in purchasing power of (or around) 2 percent per year.

The type of currency whose value is arbitrarily assigned also goes by the name of fiduciary currency, since those who accept it have confidence in those who create and manage it, despite the fact that such currency has no intrinsic value in itself other than the certification of the bank that issued it, which undertakes to act as guarantor.

In reality, fiduciary currency, created and issued by central banks, is at the same time also legal tender, that is, it is forcibly imposed by law by the state thus obligating every resident citizen to accept and use it as state-validated currency. For this reason, it is also referred to as forced tender currency. However, it is still the trust we place in it that makes each person well disposed to accept this type of currency since, in doing so, we accept its superimposed, conventionally decided value and thus recognize its stated validity and value, in terms of purchasing power.

In reality, a legal tender currency, (so-called fiat currencies) whose value and price is conventionally established and fixed immutably does not exist. There are legal tender currencies that are highly stabilized and used by the vast majority of people as a monetary instrument to spend in the Economy. At the same time, these currencies are traded in the financial markets, so they will also be affected, albeit minimally, by fluctuating trends according to the laws of supply and demand, decided by financial market participants. Speculation on the price difference is therefore also possible for fiat currencies, however, their use in Economics, as a means of payment, prevails.

2. Currency as a financial product

The second way of giving value to a currency is to let the market decide its value, that is, its price. In this case, currency is considered primarily as a product, and like any other product it will follow the typical law of supply and demand. We will therefore have currencies whose price (and value) varies continuously over time, increasing or decreasing depending on market trends, with movements that are often unpredictable and difficult to interpret. This is the case, for example, with cryptocurrencies, particularly unstabilized ones such as Bitcoin, Ethereum etc., which are placed on particular financial markets called exchanges, centralized or decentralized, on which it is possible to buy and sell them h24, 7 days a week. In cryptocurrencies it is almost exclusively the financial market that decides the value of the different coins listed there.

If we consider monetary creation oriented mainly to the financial markets, as in the case of the highly speculative coins (cryptocurrencies), it is therefore the market itself that decides their value, instant by instant, with more or less volatility depending on the situation. The use of such currencies as a means of payment is still minimal at this historical stage, so the volatility effect and speculative interest prevail. The latter, again in the case of cryptocurrencies, is clearly affected by everything revolving around such “products.” In some cases the underlying designs of the currency count, in other cases speculative interest has no concrete design basis but depends on trends, fads, emotional, psychological and other more or less imponderable or bizarre factors.

3. Ecomonetary arbitrage

At the moment that currency is created and put on the financial market, the twofold problem arises of how to increase the value of that currency, or rather, its market price (initially zero, since it is created out of nothing and without any underlying collateral) and at the same time how to prevent speculative attacks by certain market participants eager to create and exploit volatility in order to profit from it. At the exact moment the currency is put on the market, that is, listed on exchanges, its price begins to take shape and fluctuate both upward and downward. This is where speculation comes into play, capable, in many cases, of seriously damaging the development of a currency and making its use as a means of payment in the Real Economy difficult if not impossible. Ecomonetary arbitrage was born exactly with the intention of facilitating projects and increasing the value of existing coins already listed on CEX or DEX exchanges, encouraging their widespread use as payment instruments that can be used by anyone.

Traditional arbitrage, on the other hand, originates as a mechanism through which the price of the same product placed on different financial markets tends, after a certain interval of time, to rebalance and level off. The concept is very simple: one buys the product in the market where the price is lower and resells it in the market where the price is higher, until price equilibrium between markets is achieved. Arbitrage then exploits the small price differences that exist between different markets, relative to the same product allowing a profit to be made. Price differences between different markets are transitory, as arbitrage will quickly tend to bring prices back to an equilibrium condition, provided the markets are connected to each other. Otherwise, that is, with disconnected markets, arbitrage will be impossible since there is no way to transfer that particular financial product from one market to another.

Ecomonetary arbitrage, viewed closely, is a new type of arbitrage, very similar to traditional arbitrage but with one major difference between the two types: in traditional arbitrage, different financial markets are involved that are connected to each other, while in ecomonetary arbitrage the financial markets are connected to the Real Economy. A currency subject to ecomonetary arbitrage will thus take on the dual role of a product listed in financial markets and at the same time a monetary instrument used in the Real Economy.

Ecomonetary arbitrage is of great utility since it can be used as a strategy to bring the value of a currency to a desired price. Technically, a value is fixed to the currency, that is, its purchasing power in the Real Economy is decided. The chosen price acts as an anchor when we go to connect the financial markets on which the same currency is listed. The anchor we have created by establishing a value to the currency will serve to fix the upper potential, while the lower potential will be given by the market price of the currency in the financial markets. Consequently, the lower potential is variable instant by instant, as the currency is continuously traded at market price fluctuating with its own volatility.

Connecting now the financial markets with the Real Economy, the existing mismatch between the two potentials will activate a flow of money from the lower potential (financial market) to the upper potential (Real Economy) tending to balance the different prices according to the principle of communicating vessels, taking into account that the upper potential is fixedly anchored while the lower potential is free to vary.

In ecomonetary arbitrage, the anchoring of the upper potential turns out to be decisive. If the value of a currency used as a means of payment in the Real Economy is higher than its price in the financial markets, market participants will have an incentive to buy that currency in the financial markets (exchanges) where the price is lower, and to spend it in the Real Economy at the higher price we set. The unidirectional flow of money from the financial markets to the Real Economy will continue as long as the two prices are aligned near the upper potential (anchor point). At equilibrium we will have two almost equal flows, in both directions, that is, the flow of money from the financial markets to the Real Economy will counterbalance the flow of money in the opposite direction, from the Real Economy to the financial markets.

In ecomonetary arbitrage, the greater the initial imbalance present between the two potentials, the greater the driving force that can move the money flow from the financial market to the Real Economy.

Conclusion

All three ways of imparting value to a currency analyzed here are affected by and subject to the phenomenon of speculation, albeit to different degrees in each case.
Exit currency (EXIT) is a currency that embodies at the outset the ideal characteristics to make it an excellent payment instrument. Upon issuance, EXITs immediately take on their own face value, that is, they are conventionally priced. Moreover, EXIT is a currency that is not listed on any financial market, so financial speculation is precluded at the outset.

Should EXIT holders later attempt to engage in speculative activity on the currency, ecomonetary arbitrage can become a very useful resource to use in such situations along with other options that may be implemented if necessary.

 

(Foto: Emil Barbarini, dipinto)