Is Cryptocurrency The New Gold?

Is Cryptocurrency The New Gold?

Cryptocurrency,Gold,Bitcoin, Ethereum, Dogecoin, Alt-Coins,bitmoneycoin,harbouchanews

Bitcoin, Ethereum, Dogecoin, Alt-Coins - words like these elicit hysterical reactions. People seem to either be passionately optimistic or vehemently skeptical about cryptocurrency. And even though a lot of controversy surrounds cryptocurrency, most of the crypto commentators are beginning to change their tone. This begs the question: What happened and why are they starting to take cryptocurrencies seriously? 

Cryptocurrency is certainly becoming more mainstream. In response to customer demand, Vast Bank in the U.S. has partnered with Coinbase to enable people to perform cryptocurrency transactions from their bank account and we've seen a leading crypto exchange collaborating with a major cloud ERP provider for digital accounting solutions, I get the distinct feeling that cryptocurrency is set to play a significant long-term role in the world’s financial system and in our lives. 

On the other hand, it was only recently that some of the most respected names in finance condemned crypto, calling it ‘a gambling device’, ‘having no value’, ‘having no credibility’, ‘evil’, ‘rat poison’ and so on. One very respected investor even said he ‘prefers bananas to Bitcoin, because bananas have value.’

I must confess that I used to agree with them and saw crypto in much the same way.

But I've changed my perspective.  And most of the crypto commentators are also beginning to change their tone on this subject. While some have apologized for their skepticism, others are now looking to build their own cryptocurrencies in some of the world’s largest financial institutions.

The True Value of Money

The first time that paper money was used in China, more than 1000 years ago, it was also met with confusion and widely condemned. Just like crypto today, it was not the government that originally invented it. When making large coin-based transactions proved difficult, merchants came up with a mechanism where pieces of paper had text inscribed on it indicating its value. Transactions were completed by handing the paper-note after which parties visited warehouses where the exchange of coins took place.

Incidentally, the warehouses that stored large volumes of bulky coins became the first banks. As paper grew in popularity, the government outlawed it and surprisingly thereafter, issued its own notes as legal tender and the world’s first real national paper money was born.

Interestingly, a thousand years after those original paper notes were banned, China has now banned cryptocurrencies. Could history repeat itself with China doing what it did a millennium ago - this time developing a regulated cryptocurrency? El Salvador on the other hand recently made Bitcoin a legal tender. It goes to show how extremely different the views of cryptocurrency can be and for this reason, are we in the early stages of a reinvention of money? 

A Currency Must Evoke Confidence

A $50 note in your pocket has no intrinsic value. To use the banana metaphor, the paper itself is worth less than a banana. Yet we have great confidence in that note and can buy many bananas with it.

When the US Dollar was removed from the Gold Standard in 1977 a lot of leading economists and bankers were nervous. If that $50 dollar bill in your pocket was no longer exchangeable for ‘real’ gold, they thought, there might be widespread panic and a collapse of the monetary system. Nothing of the sort happened and the US Dollar has been the stable basis of a large part of the world’s economic growth for half a century now. In fact, most agree today, that this growth would never have been possible if the Dollar had stayed on the gold standard.

The same thing happened in many other currencies and today, currency is basically just another word for confidence. If a government can maintain confidence in its currency, then all is fine. And as we have sadly seen in countries where confidence in the currency is lost, the currency (and economy) collapses with often devastating effects for the population. 

Scarcity Drives Bitcoin’s Value

In a cashless society where the use of notes and coins is disappearing quickly, we are nonetheless confident that the digital number that is written on our bank statement is worth something. Most currency in that sense is already digital today. But digital currency and cryptocurrency are not the same thing.

Digital currency is simply the digital representation of a national fiat currency issued and controlled as legal tender by a central bank. Cryptocurrency on the other hand is usually created privately in a securely encrypted blockchain network where the value is simply based on supply and demand. Gold, however, is mined and its value is based on supply and demand.

Both Gold and Bitcoin are valuable owing to their scarcity. We don’t know how much gold there is on Earth, but we know that there will only ever be 21 million Bitcoins. On the contrary, nobody knows how many US Dollars there will ever be. In the latest round of stimulus another US$3.5 Trillion will be added to the money supply (Just to put that into perspective, adjusted for inflation, that is about the same amount of dollars as the US spent on World War II).   

But wasn’t gold supposed to be our inflation-hedge that was independent of governments, something we could always turn to in times of volatility? 

The Quest for a New Inflation-hedge

In these very volatile years of COVID-19, quantitative easing, explosions in the stock markets, populist governments, negative interest rates, Brexit, and dire warnings of inflation, gold was expected to explode but it has hardly moved much at all. It has about the same value as it had in 2012. On the contrary, since 2012 Bitcoin has moved from being worth less than $1 to more than $ 40,000.

Could it be that the money that previously flowed into gold in times of turbulence is now flowing into Bitcoin?

The Economist magazine reported that in Q2 of 2020, just the Ethereum cryptocurrency alone settled $2.5 Trillion worth of transactions which was the same amount as Visa.

We are living through a major milestone in the history of money. And while uncertainty cloaks the future value of Bitcoin and Ether, it is certain that these experiments will herald a new age of money that might be independent of governments and central banks.

Will Governments and Central Banks Recognize Cryptocurrency?

When times get rough, it is good to have someone in authority who can help the financial system adapt to shocks. Monetary policy includes many tactics that help to regulate and stabilize the economy. If all money were in private crypto networks, these tools would not be available, and we would be on our own. Many central bankers around the world are looking closely at cryptocurrency to learn and see if some of the advantages can be adopted into central bank digital currencies.

Many hope that this research is accelerated. If the central banks of the world wait too long to create widely acceptable cryptocurrencies, much of the population will increasingly put their confidence in these private currencies that innovative programmers think up. Of course, it is fine to have these private cryptocurrencies, but it would also be comforting to know that the central banks are also leading and innovating money so that the dependency on the private sector for crypto is not exclusive.  

The pressing question when it comes to the value of money is this - who do you have more confidence in - governments, the precious metals industry or computer programmers’ algorithms?   

The Safety Net of Monetary Policy

Investors are increasingly spreading their bets. Although theoretically extremely secure, there are a growing number of interesting stories about how things can go wrong in crypto.

The Canadian founder of the QuadrigaCX crypto exchange died with the passwords to hundreds of millions of dollars of investor funds which no one can access now. The Turkish crypto exchanges Vebitcoin and Thodex were both shut down after instability and fraud, prompting the government to ban the use of crypto for payments. And elsewhere in South Africa, the largest crypto exchange collapsed after the family of the founders disappeared with $3.6 Billion in Bitcoin.

Whenever such incidents happen investors are left high and dry, volatility explodes and there are questions aplenty about the ability to improve and perhaps regulate crypto.

I am hopeful that the central bankers of the world come together quickly to provide leadership in the age of crypto. Even though the efforts of innovative, private crypto innovators are remarkable and should continue, I would hope that we can also have cryptocurrencies backed by central banks upon which the tools of monetary policy can be used.

Call me old-fashioned, but should serious instability ever set in, it would be nice to have someone in the government to call for help. Otherwise, we are on our own. It might also help us come to grips with the environmental aspect of crypto which consumes an enormous amount of energy. I believe that having both unregulated and regulated cryptocurrencies and coexisting exchanges will improve acceptance, innovation, stability, and a better future for crypto. 

Forbes 

Previous Post Next Post