4 Rules of Real Money: Spot Scams Before You Lose | MoneyWise

Key Takeaways

• Seigniorage is Real: The difference between what money costs to make and its face value is a hidden tax we all pay
• Gresham’s Law: Bad money drives out good—people hoard real assets and spend worthless ones
• The 4 Essentials: Real investments have power backing, hard collateral, real profit, or can pay taxes
• Exit Liquidity: If you can’t identify who the sucker is, it’s probably you

Introduction

Ever feel like the next “big investment” is just a trap? From meme coins to overhyped startups, millions of people lose money chasing returns that were never real. The uncomfortable truth? Most of these “assets” were designed to take your money from day one.

What Makes Money Real

Real money isn’t just paper or code. Throughout history, currencies had value because they were backed by something—gold, government power, or productive assets.

When governments mint money, the difference between production cost and face value is called seigniorage. It’s a hidden tax we all pay. A $100 bill costs about $1 to print—that $99 difference? That’s seigniorage.

The problem with unbacked assets (like most cryptocurrencies) is they have none of these backing mechanisms. No government enforcement, no collateral, no productive output.

Gresham’s Law in Action

Here’s the danger: when bad money floods the market, good money disappears. This is Gresham’s Law.

People hoard real assets and spend worthless ones. If you can’t tell the difference, you end up holding the bag when the music stops—and it always stops.

This principle explains why:

• People kept gold and spent paper during hyperinflation
• Investors exit to cash when markets panic
• Scam tokens eventually crash to zero

Are You the Exit Liquidity?

If you’re chasing triple-digit returns in meme coins or unproven startups, ask yourself: Am I the investor or the exit liquidity?

Exit liquidity is the person who buys at the top so early investors can cash out. Whenever something looks too good to be true, someone is probably getting rich—and it’s not you.

The 4 Essentials Checklist

Before you invest, check these four essentials:

1. Power Backing — Is it backed by real power or authority? (Government, major institution)
2. Hard Collateral — Does it have physical or tangible backing? (Gold, real estate, equipment)
3. Real Profit — Does it generate actual, verifiable profit? (Earnings, dividends, cash flow)
4. Tax Accepted — Can you pay taxes with it? (Legal tender status)

If none of these apply, it’s probably not money—it’s a gamble.

Frequently Asked Questions

What is seigniorage?

Seigniorage is the profit a government makes from issuing currency—the difference between the face value and the production cost. When a $100 bill costs $1 to print, the government effectively gains $99.

Why do scam coins eventually crash?

Scam coins lack the four essentials: no government backing, no collateral, no real profit generation, and they can’t pay taxes. Without these, their value relies entirely on finding new buyers—a Ponzi structure that always collapses.

How can I tell if an investment is legitimate?

Apply the 4 Essentials test. If an investment has at least one of: government/institutional backing, hard collateral, proven profit generation, or tax acceptance—it’s more likely legitimate. If it has none, proceed with extreme caution.

What is exit liquidity?

Exit liquidity refers to buyers who purchase an asset allowing earlier investors to sell and exit with profits. In scams, retail investors often become exit liquidity for insiders who dump their holdings.

Bottom Line

Don’t get wrecked. Stick to the four essentials. Before putting your money anywhere, ask: Does it have power backing, hard collateral, real profit, or tax acceptance? If the answer is no to all four, you’re not investing—you’re gambling.

Protect your wealth by understanding what makes money real.

Related Content

• The 4-Part Scam Test: How to Spot Investment Fraud
• Federal Reserve Explained: How Government Controls Money