In my previous post: Cryptocurrency: To Bit Or Not To Bit I elaborated on the Bitcoin as the first cryptocurrency Icarus, Bitcoin Cash and the usage of cryptocurrencies. We’ll take it from there.
The role of the central banks
The central and private banks will not give up their power. During the recent years and especially since the financial crisis 10 years ago, central banks are printing money in order to get out of their debt and stimulating investment activity. Once the government starts to print money, we all know that there will be inflation and no happy ending. The real time bomb we are sitting on is when the inflation starts to be a galloping inflation and the fiat money will be per law the only accepted medium of exchange. People will run after real assets such as gold. However, gold ownership will probably become illegal as history has shown.
One of the positive things about cryptocurrencies is to challenge this monetary system unless it is a kind of deliberately big show from the so called globalists. Our current monetary system is not old. It literally started in 1971 when US President Nixon abolished the gold standard. From then on, the world currency, the dollar, was just a paper currency that could be increased at will. This had profound consequences for the entire monetary system. The value of foreign exchange was no longer linked to a fixed anchor.
Unlike the gold standard, which imposed some restrictions on central bankers because they always had to put gold in their currencies, the central bankers suddenly had a free hand in their monetary policy. The time of tight rules was over. The tide change can be observed well in the current monetary policy.
Fiat money is created through creation from nothing. Today’s coins and notes are fiat money because their manufacturing costs are negligible relative to their nominal value. For gold coins, which have a commonly accepted inner value, this would be different.
For example, the ECB just prints billions of euros to buy government bonds, which eventually will inflate the money supply. The abolition of the gold rule was one of the causes for the financial crisis 40 years later because states have been able to pile up debts largely unhindered.
But there is also some truth in the opposite. Having kept the gold standard would resulted in a rigid fiscal corset which was also an effect in the great depression during the last century. A loose policy allows more flexible intervention.
The money released from gold has risen far more than the value of goods and services produced. In this way, huge imbalances and speculative bubbles have formed in the world that led to the catastrophe by 2008 at the latest. Also the mutual monetary policy followed since the 1970s some chaotic rules. The central banks intervened around the globe to steer their own currency.
Ten years after the last financial crisis, the central banks keep the interest around zero or even in the minus, claiming that this is necessary to have incentives to invest into the real economy. However, fact is: the investors put the money back into the casino like financial system, focusing on short term profits by feeding the speculative bubbles instead of aiming for sustainable growth.
In contrast, people in favor of Bitcoin say that it can be trusted because there is nobody that can inflate the entire money supply and it is predictable and agreed upon.
The argument against cryptocurrencies regarding money laundering is that nothing is traceable and Bitcoin can be misused for weapons, drugs and so on. However, the same applies to fiat money, regardless of KYC and AML.
At the end of the day, you could argue that cryptocurrencies are de facto as real as the promise to pay the bearer of the sum on a paper money note backed by the government. Also because both systems do not have an underlying value such as gold. There is a small difference though: the banks and the government will never allow independent anarcho capitalists to take over their field of interest and power. How can I have faith in the markets when they are manipulated, especially the financial and currency markets? The blockchain tries to open the door to give back the financial freedom to individuals, but it will not succeed. At least not in the near future.
Blockchain
The interesting thing about the disruptive blockchain is the ability to process secure and direct transactions in the World Wide Web without the involvement of intermediaries. The blockchain is not only the underlying technology for cyber currencies but can be used for contracts, wills, transport papers, financial transactions or any other object representing an accepted value. Today, we are still using the payment services offered by trusted intermediaries such as Postfinance, UBS, Credit Suisse, Visa, MasterCard, PayPal, etc. The blockchain, however, ensures that suppliers and consumers connect directly and comprehensibly to every party in the network without the need of a third party player.
The blockchain is based on a decentralized database, which is distributed in a peer-to-peer network of participating computers, also called a digital ledger. A distributed system has the advantage that the majority cannot be controlled by an attacker, it cannot be manipulated or hacked. In this network, parties participate in a blockchain based solution and follow the rules of this blockchain.
Bitcoin is the first example which made blockchain technology popular. Using a blockchain means giving up control since you are trusting an algorithm. You are trusting mathematics to issue money instead of a human decision. As we know, human beings can become corrupted and can serve different interests.
Will cryptocurrencies do the same to the banks like the email did to the postal industry? What changes is that you do not need a permission from the bank to transfer money between each other.
Anarchist or Libertarian?
Blockchain can be used for any exchange of values, not just cryptocurrencies. Once when everybody agrees that the balances in the blockchain are valid, the system works. Anarchists love the blockchain, not only because it is based on an open source software, but also because it promotes the non-aggression principle. Even if you try aggression it is no longer going to change who owns what because it is in the blockchain. No government approves the transactions, you are the sole decider which transactions go out and go in. This has some fundamental impact on governments – they cannot longer collect taxes from people who are not voluntary willing to pay taxes on it. The free market will be the ultimate decider. As opposite to the fiat money, which is under control of the banks, the libertarians rather have people to get a little bit of reward to keep the system safe and secure. It is very appealing to people where the government doesn’t get to say how you can spend it.
We will see governments struggling for survival as they realize that they do not have longer a meaning to collect taxes. Since cryptocurrencies depend on the blockchain, are these new currencies the new anarchists? As an attack on sovereign states? The cryptocurrency is based on libertarian principles and its supporters oppose any regulations. However, if it becomes too colorful for the states, they will put a stop to the cryptocurrencies with regulations. First with a media campaign and then with laws. That would be poison for a hyped cryptocurrency such as the Bitcoin, because many people then become insecure and this would be a serious risk of an intended crash.
It looks like the original idea is now getting perverted. The geeks and the nerds have a different worldview and find more their fulfillment in the matter, like a kind of virtue. As I worked with developers in the past, they are simply from a different planet and different from the people with a pure business and profit mind set. If you mix both groups together, you could create a tremendous new era of freedom, stability and power to the people. However, in most scenarios, greed can quickly open doors to corruption and history starts repeating itself. On the macro level, we are in the end of an economic cycle. Whether it was a political system such as the communism in the twentieth century or an economic system based on compound interests and debt, they all collapse about every 70 to 80 years or so.
These times in particular invite us to stay fearless, to consider our behaviors and habits and to have a strong backbone. A crisis normally helps to become who you really are.
Bitcoin is eventually not really an alternative currency. Proper money always either has an intrinsic value (like commodities) or it represents a debt (like fiat money) and cash. Bitcoins, however, have neither an intrinsic value, nor do they include a liability or exchange promise.
Perhaps that is one of the reasons for the people believing in Bitcoin. It is because no government or banks is backing the digital currency up. They love Bitcoin because it is a digital asset, enriched with this kind of democratic flavor (open source) and safety (decentralized network). They don’t care that Bitcoin can never become money.
What is your opinion on Bitcoin and cryptocurrencies? Happy to read your comments.
In the next posting, I will give you my thoughts about the opposing forces, how governments are dealing with those forces and the Hysteria behind cryptocurrencies.
This is 2 much fun. The commitment level here is amazing.