Intrinsic Value of Money: Foundation vs Facade
Can Cryptocurrencies Combine Elements of Both Foundation and Facade?
Hello, 👋
In recent times, we have seen that when the dollar or other government backed currencies lose value, gold prices increase and when their value decreases, gold’s value increases. In the first case investors move from govt. currencies to gold and in the second case they move towards the govt. currencies. It seems that gold is seen as a safe haven whenever there is market or economy related risk which directly affects the value of govt. currencies. Now the question is why?
To answer this question, we have to understand the intrinsic value of money and the basics of the Foundation & Facade model. In this post, we will deep dive to understand the same. We will also see how cryptocurrencies are evolving combining elements of both Foundation & Facade model. Enjoy!
Garvit Sahdev enjoys understanding ideas that shape our world. The Thoughtful Tangle is an initiative to share this journey and experience with his friends who love to do the same. He selects one idea and dives deep into it to understand its basics, relevance, impact and opportunities around it. The thoughtful tangle is special because 👇
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Intrinsic value
The intrinsic value of money refers to the inherent worth of the material or substance that money is made from, independent of its use as a medium of exchange. This concept is rooted in the idea that money has value due to the physical properties of the material itself, such as its rarity, durability, and utility. In the past, many forms of money, like gold and silver, had intrinsic value because the material used was valuable beyond its function as currency.
It’s important to differentiate between intrinsic value and nominal value. The nominal value of money is the face value assigned by a governing body, like a $100 bill or a 1-rupee coin. This value is not based on the material of the money but on societal agreements and legal backing. On the other hand, intrinsic value is the actual material value of the money—how much the substance of the coin or bill is worth in the marketplace.
Intrinsic value is significant because it provides a kind of stability and trust in the currency. If a currency is backed by something valuable (like gold), people are more likely to trust its worth. In times of crisis or economic instability, people tend to turn to forms of money that have intrinsic value, such as gold, because they know it has a market value beyond its use as a medium of exchange.
During periods of hyperinflation, for example, paper currencies lose their purchasing power, but gold or silver retains its value because of its intrinsic worth. In such cases, people often convert their money into gold or other commodities that have intrinsic value to preserve their wealth.
Foundation vs. Facade: The Basics
The "Foundation vs. Facade" model is a framework used to understand the value of money by breaking it down into two key components: the foundation and the facade. The foundation represents the intrinsic value of money, rooted in the material’s inherent worth, while the facade refers to the perceived value assigned to money by society. The model emphasizes how these two aspects interact to shape the function and stability of currency.
The foundation of money is based on the intrinsic value of the material used to create it. Historically, money had intrinsic value because it was made from precious metals like gold and silver, which were valuable in their own right. For example, gold coins were valuable because of the scarcity and utility of gold, not just because they were stamped with a government seal.
The foundation provides stability to money because it is tied to something real and valuable. If a currency is backed by an asset with inherent worth (like gold), the value of that currency can withstand economic crises, political instability, or hyperinflation to some extent. People trust that the currency will hold its value because it is backed by something solid and universally recognized.
While the foundation provides stability, the facade of money is equally important in the modern financial system. The facade represents the perceived value of money, which is based on trust in the institutions that issue it, such as governments and central banks. Fiat money, for example, has no intrinsic value in itself—its value comes from the belief that the issuing government will accept it for taxes and that other people will also trust it as a means of payment.
In modern economies, money often lacks a solid foundation in terms of intrinsic value (like gold), but the facade of trust in the government, the stability of the economy, and the legal systems that enforce the use of currency provide its value. For example, the US dollar is largely valuable because the US government enforces its use and because there is global trust in the stability of the US economy. Even though the dollar has no intrinsic value—it's just paper or digital data—the perceived value (facade) is what keeps the system functioning.
The facade plays a critical role in facilitating liquidity and economic growth. Since money in modern economies is typically based on fiat systems, the trust and confidence people place in the currency are what allow them to use it for transactions, savings, and investments. It allows economies to grow, businesses to operate, and people to trade goods and services on a large scale.
When trust in the facade of money erodes, it can have significant consequences for both the currency and the broader economy. People often move their wealth into assets perceived as more stable or valuable. These assets may include foreign currencies (like the US dollar in many countries), precious metals (like gold), or real estate.
Can Cryptocurrencies Combine Elements of Both Foundation and Facade?
Cryptocurrencies, such as Bitcoin, Ethereum, and others, represent a novel form of digital money that blends elements of both foundation and facade. Unlike traditional fiat currencies, which rely heavily on government backing and institutional trust for their value (facade), cryptocurrencies are designed to operate without central authority.
At their core, cryptocurrencies like Bitcoin possess an underlying intrinsic value derived from their blockchain technology and the mining process. Bitcoin's value is supported by its proof-of-work mechanism, which requires miners to solve complex mathematical problems to verify transactions and secure the network. The process requires computational power, and miners are rewarded with new bitcoins, which gives Bitcoin a kind of cost-based foundation. The amount of energy and resources spent to create new bitcoins lends a certain intrinsic value to cryptocurrency, as its production is not free or easily manipulated, unlike fiat currencies that can be printed at will.
Additionally, scarcity plays a key role in the foundation of Bitcoin. Bitcoin’s supply is capped at 21 million coins, making it a scarce resource. This scarcity gives it intrinsic value similar to that of precious metals like gold, which has been historically valued due to its limited availability and the effort required to mine it.
Bitcoin's maximum supply is 21 million which is due to the mathematical rules set in the code. This limit was introduced by Satoshi Nakamoto. Bitcoin's hard cap, also known as the supply limit, can theoretically be changed, however, such a change would be very unlikely to occur.
While cryptocurrencies do have an intrinsic foundation, their value is also highly dependent on perceived value, making them reliant on the facade. The perceived value is built on trust in the cryptocurrency's ability to function effectively within the economy. This trust is fostered by the belief that cryptocurrency will continue to be accepted by users, businesses, and investors as a legitimate form of value.
How Cryptocurrencies Combine Both Elements
Cryptocurrencies blend these two elements—foundation and facade—in several ways:
Security and Trust (Foundation + Facade): The blockchain technology behind cryptocurrencies provides a strong foundational layer of security and transparency, but this security only has value because people trust the technology and the broader cryptocurrency ecosystem. Without trust in the network’s ability to remain secure and functional, the foundation would be meaningless.
Scarcity and Demand (Foundation + Facade): The limited supply of many cryptocurrencies, like Bitcoin’s 21-million-coin cap, gives them an intrinsic value similar to precious metals. However, the value is also shaped by demand. As more people adopt and believe in Bitcoin, its perceived value increases. This combination of scarcity and demand creates a dynamic balance between foundation and facade.
Market Dynamics and Volatility (Facade): Cryptocurrencies are highly volatile and can experience large price swings due to speculative trading. The market’s perception of cryptocurrency—whether it is viewed as a safe investment or a speculative asset—directly affects its price. In this sense, the value of cryptocurrencies is often driven by the market’s belief in their future potential rather than any intrinsic properties.
Decentralization and Regulation (Foundation + Facade): While cryptocurrencies are designed to operate independently of government control (a foundational principle of decentralization), they still rely on regulatory environments for mainstream adoption. Government regulation or lack thereof can significantly impact the facade, either by fostering trust and stability or by creating uncertainty and risk.
Future of Evolving Balance
The future of money, in the context of the Foundation vs. Facade model, will likely be defined by a dynamic interaction between digital technologies, decentralized systems, and trust in institutions. As we move toward more digitally native, decentralized, and technologically driven forms of currency, the balance between intrinsic value and perceived value will continue to evolve.
Governments, central banks, and tech companies will need to ensure that both the foundational aspects of money (such as security, utility, and scarcity) and the facade (such as trust, adoption, and stability) are carefully managed. The future of money will likely involve hybrid systems that integrate the best elements of both the traditional financial world and the new digital frontier, creating a more resilient and adaptable monetary system for the future.
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ABOUT THE AUTHOR
Hey everyone, I'm Garvit Sahdev 😎. I'm on a mission to gain a deeper understanding of the world, and to develop solutions that can trigger significant global change.
My curiosities span various domains including food, business theories, material science, market size calculations, economics, politics, and sports, etc. 🧐
Professionally, I have a diverse background spanning startups, consulting, policy development, market research, system building, ISO, colour physics, nanomaterial synthesis, textile chemistry, etc. 🐘
Note: Generative AI has been used for writing this piece under the supervision of the author.
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