Cryptocurrency Is an Inevitable Step in the Evolution/Degradation of Money (part 4)

Decentralized Cryptocurrency Is New Global Store of Value

Cryptocurrency Is an Inevitable Step in the Evolution/Degradation of Money (part 4)

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Any real money must carry some intrinsic value which should not be easily taken off. That value is the invested labor (like in case of commodity money) or there should be the strict connection to something of value (like in case of representative money).

Fiat money can be devaluated without any efforts by the printing of banknotes by the central banks, thoughtless subprime lending by commercial banks or just by signing the corresponding decree by the head of executive power. No labor which creates real intrinsic value is involved, just the devaluation of the labor which was previously put in.

National governments have disconnected their currencies from real value and lost the basis for mutual settlements of the accounts in the epoch of globalization. The US dollar is inconvenient global reserve currency because after its detaching from gold in 1971 the US has been constantly debasing its currency for the whole world via inflation targeting policy.

All major currencies are somehow exchanged for US dollar and for each other, but they are also fiat money being debased by their governments. Thus this bunch of surrogate currencies floats up and down, having very relative value and just adding a mess into calculations, accounting and ruining the savings.

The ordinary people and national elites obviously do not want their savings just to melt away, but everyone is usually unaware about government's purposeful efforts in creating inflation, perceiving it rather as a bad weather. However, everybody needs badly a real store of value - something which is able to withstand constant governmental debasing of money.

That's why in the beginning of 21 century the next step in money evolution (or degradation?) has occurred with the emergence of cryptocurrency. It just had to happen because fiat money kept becoming more and more inconvenient and cheaper for everyone. A creator of Bitcoin Satoshi Nakamoto correctly saw the real cause of devaluation of fiat money and stated in the white paper: "The root problem with conventional currencies is all the trust that's required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust."
And he did a really outstanding job for returning to money its initial functions (if not to talk about the complete virtuality of cryptocurrency, but nothing is perfect).

So, cryptocurrency is
"a digital asset designed to work as a medium of exchange wherein individual coin ownership records are stored in a ledger existing in a form of computerized database using strong cryptogrphy to secure transaction records, to control the creation of additional coins, and to verify the transfer of coin ownership. It typically does not exist in physical form (like paper money) and is typically not issued by a central authority. Cryptocurrencies typically use decentralized control as opposed to centralized digital currency and central banking systems. When a cryptocurrency is minted or created prior to issuance or issued by a single issuer, it is generally considered centralized. When implemented with decentralized control, each cryptocurrency works through distributed ledger technology, typically a blockchain, that serves as a public financial transaction database.
Bitcoin, first released as open-source software in 2009, is the first decentralized cryptocurrency. Since the release of bitcoin, other cryptocurrencies have been created.

There are about 1600 different cryptocurrencies on the market now. The most notable one is Bitcoin (ticker symbol BTC) - a cryptocurrency invented in 2008 and launched in 2009 by an unknown person or group of people using the name Satoshi Nakamoto.

Actually, Bitcoin is the name of a peer-to-peer electronic cash payment system using bitcoins as a decentralized digital currency without a central bank or single administrator managing. This means nobody can influence the issuance (and thus - the price) of BTC. The exchange rate (the cost) of bitcoin is set just by supply and demand like it should be in a pure capitalism.
Bitcoin platform uses a technology named mining both for creating bitcoins and rewarding the creators - they can get a part of created coins.
There is also a great but hidden sense behind the mining process - you need to invest considerable time and money into the special equipment and electricity (from $5000 to $8500 as of June 2020) to mine 1 BTC. This is the real value which fills the new emerged coins and backs the BTC with a real labor which cannot be debased by any government.

It is interesting to note that no any government (authoritarian or democratic one) welcomes much the new emerged money.
For example, Federal Reserve Chairman J. Powell called cryptocurrencies "... highly volatile and therefore not really useful stores of value and they’re not backed by anything."

People’s Bank of China has banned so-called initial coin offerings (ICOs) and shut down local cryptocurrency exchanges in 2017. However, People’s Bank of China also quite unexpectedly called bitcoin an ‘investment alternative’ in April, 2021.

Turkey’s central bank simply bans the use of cryptocurrencies and crypto assets for purchases in April 2021, citing possible “irreparable” damage and transaction risks.

The creators have limited the issuance (mining) of bitcoin by 21 million coins. There are now about 19 million of them already in circulation and it will become economically unprofitable to produce more of them in the near future.
From my point of view, this adds to bitcoin other than 4 basic functions of money (medium of exchange, unit of account, store of value, standard of deferred payment) quite unusual 5th function - scarcity. It will just increase bitcoin's intrinsic value over time like the price of a rare coin or postage stamp increases over time with collectors.

Bitcoin uses innovative technology to create an entirely new form of payments architecture. Coins are held in digital “wallets,” secured using advanced cryptographic techniques. To make a payment, international or domestic, the wallet owner simply sends coins directly to the recipient’s wallet. Payment transactions are collected in “blocks,” which are validated by the community of bitcoin users. A validated “block” is appended to a “chain” of blocks: once appended, it cannot be changed. The “blockchain” is thus a complete and irrevocable record of all payment transactions.

At first almost nobody perceived cryptocurrency as a real alternative to current fiat money. However, national elites have noticed cryptocurrency over time and the blockchain technology became the main topic of conversations on the sidelines of the World Economic Forum in January 2018 in Davos (Switzerland). Every year the world's formal (presidents, prime ministers, heads of international organizatons) and informal (big businessmen, scientists and experts) elite gathers in Davos - a little mountain resort in Swiss Alps. JP Morgan Chase & Co Chief Executive Jamie Dimon wittily described World Economic Forum as “It is where billionaires tell millionaires what the middle class feels”.

In the beginning of 2018 the national elites apparently have figured out that blockchain technology was interesting and promising, so a lot of so called "stablecoins" emerged on the market since then. They are cryptocurrencies designed to be immune from market volatility, making them a "more useable" form of payment than traditional crypto (bitcoin, ethereum, etc). "Stability" is created by pegging the value of stablecoins to other "stable" assets such as fiat currencies or gold.

In March 2020 coronavirus clearly exposed a real global crisis and the national elites began actively buying bitcoin after the S@P 500 tumbled down by at least at a quarter (from $3225 on January 1, 2020 to $2584 on March 1, 2020). So bitcoin has been chosen as a hedge by those who had something to save, and as a result its price skyrocketed from $6438 on March 1, 2020 to $33114 on January 1, 2021.

On January 5, 2021 investment bank JPMorgan (JPM) said that "digital currency bitcoin has emerged as a rival to gold and could trade as high as $146,000 if it becomes established as a safe-haven asset."

Cryptocurrency kept conquering the world and for the first time it has got on the agenda of the virtual World Economic Forum in the end of January 2021.

Also a big shift has happened in the mindset of the central banks. Many of them (86%) are exploring digital currencies, 60% are working on “proof of concept” testing, though just 14% have actually launched a pilot program or are in development of their own cryptocurrencies (central bank digital currency, CBDC). CBDC are blockchain-based tokens that represent a specific fiat currency. Central banks are going to control the supply of CBDCs and give them value by authority. That means the CBDCs are the same depreciating fiat money just based on blockchain technology.

As for me, the main idea behind CBDCs is "if you can't beat them, join (and better - lead) them". Banks just cannot afford to miss the main financial trend of 21 century. Commercial banks try to earn some money and the central banks for sure protect their business, their right to control money flow and debase their currencies.

Apparently a lot of people will go with CBDCs just because of the central bank's "reliable reputation", cool name "digital currency" and "stability" of newborn digital fiat money. Almost nobody will notice the difference between "centralized" and "decentralized" cryptocurrency since people have no time to examine such boring things.

(to be continued)

P.S. Dear Reader! I am very much interested in your opinion on the subject of this article. Please, write a comment or ask a question if you want to clarify something.
Igor Chykalov
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