Overnight, Bitcoin continues to hover above $29,000. Most likely, the Federal Reserve’s July interest rate meeting has commenced. Tomorrow, we should know the outcome, and the market is poised to make a decision.
When it comes to cryptocurrencies, we talk about the concept of “Seigniorage,” which originates from the French term for feudal lords or princes. It refers to the profit gained from minting currency, which is the difference between the face value of the currency and its minting cost. For instance, if it costs 1 cent to produce a $1 bill, the seigniorage would be 99 cents.
Seigniorage is not a tax; instead, it’s a special benefit, a revenue earned through issuing currency.
When a regular commodity is produced, its price is determined by the balance between social supply capacity and overall consumer demand. However, when this commodity is used as a widely accepted medium of exchange and a store of value, people tend to hold onto it for transactions or store it for future use, increasing its demand and tightening its supply, leading to a value much higher than its regular commodity equilibrium price. Since the production cost remains low, the profit margin expands.
With paper money, the cost is even lower. It appears that the practical value can be separated from its added value, leaving only its exchange value and store of value functions, essentially making it pure currency. However, economists persistently discuss an erroneous belief that the value of money must stem from its practical utility.
In the United States, when the government issues debt to the market through the Treasury Department, and the Federal Reserve absorbs the debt from the market, the issuance of dollars is completed. By typing in a few numbers on the keyboard, trillions of dollars are created. In 2020, the Federal Reserve injected nearly one-fifth of the total amount of dollars issued in the past 200 years into the market within a year.
This debt-based currency issuance method benefits the first receivers of the newly created dollars, those who take on the debt, by enjoying the excess value generated by seigniorage.
In our country, the government cannot directly raise debt in this manner and have the central bank engage in quantitative easing by printing money. The group that incurs massive debt benefits first, enjoying the seigniorage. In recent decades, the real estate market has been a market that enjoys this special benefit.
When you take out a loan to buy a house, the bank increases its liability by creating new money on the asset side using the mortgage property and provides it to the real estate developer. You act as raw material for the bank’s currency creation, but the newly created money is divided among the developers and other entities in the industry chain.
Cryptocurrencies like altcoins create new quasi-currencies through stories or cheap collateralization and reserve a large portion of near-zero-cost initial currency for themselves before issuing it to the market, thus extracting significant excess seigniorage from the market. For example, if a token is priced at $1 and 100 billion coins are issued, with 10% going to the project team and venture capitalists, they directly enjoy seigniorage worth 1 billion dollars.
The gold industry is a highly resource-consuming sector. Gold mining incurs tremendous costs and comes at the expense of environmental pollution to extract gold from the earth’s crust. As a result, gold mining companies enjoy seigniorage, but it is merely a modest profit after deducting the high costs from the market price.
Bitcoin is different from the US dollar, real estate, and altcoins. It is somewhat similar to gold in that it is directly issued to miners at high mining costs, allowing miners to reap the seigniorage. Bitcoin’s mining costs usually make up 50% to 100% of its market price, making the seigniorage a reward directly given to those who contribute to the Bitcoin system’s operation. It can be generous or meager, driven by fierce market competition and elimination.
Furthermore, Bitcoin miners’ income consists of two parts: a portion comes from the newly added Bitcoin in each block, and the other part is transaction fees paid by users for processing transactions in the block. The second part is a free-market-priced income for transaction services and does not include seigniorage. Only the first part of newly added Bitcoin contains seigniorage. As Satoshi Nakamoto said many years ago, “Coins have to get initially distributed somehow.” It’s just that some ways are relatively fairer, while others may not be as fair.
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