Cryptocurrency Is an Inevitable Step in the Evolution/Degradation of Money (part 5)

Evolution of Money: from Reality to Virtuality and Then Back to Reality

Cryptocurrency Is an Inevitable Step in the Evolution/Degradation of Money (part 5)

Image from a little corrected by author

Since 2009 we all have been witnessing the beginning of a new kind of money - cryptocurrency. Everything has a beginning and an end. And everything has advantages and disadvantages.

The main advantages of bitcoin from my subjective point of view are:

- It is the decentralized cryptocurrency which is issued and verified by thousands of miners. Thus it cannot be debased by any central bank which makes it the best existing store of value. It is better than gold since the price of gold is affected by its global mining and use.

- The price of bitcoin depends solely on the balance of supply and demand on the market, it is not limited by anyone or anything.

- A "cap" of 21 million coins in circulation makes bitcoin a scarce currency and much sought after store of value which will just appreciate it.

- You can send any money to any user using your generated public and private keys. The network verifies the signature using the public key; the private key is never revealed. No mediators are needed and there is relatively low commission so far to send money (average transaction fee is $30.03 as for April 29, 2021). Transactions are well protected by cryptography, verified by a lot of users and irrevocably recorded using a public-accessed blockchain technology.

- No one can access the bitcoins in your account, only the owner of the private key (i.e. you). Or anyone who has it.

Main bitcoin disadvantages are:
- Bitcoin is highly volatile currency, which is not convenient for buying and selling.

- If really only 0.5% of bitcoin wallets own 87% of all bitcoins ever mined (as of 16 March 2018), then yes, they can skyrocket the price of bitcoin, but that's what pure capitalism is about. Do not buy bitcoins if you don't want to. You can invest in gold, stocks or stablecoins instead.

- Many people don't want to send their money to an anonymous person, they trust reputable businesses and online ratings.

- Every transaction works as "electronic cash" and you cannot cancel a confirmed transaction. It's gone forever.

- If you lose your private key, you won't have access to your account and use your bitcoins. This creates a good environment for fishers, scammers and hackers. Сrypto criminals have stolen $1.9B in 2020, down from $4.5B in 2019.

- Bitcoin gives you complete anonymity, which may be an advantage or disadvantage. You can pay for a batch of drugs anonymously, but if you never get them there is no one to complain to. If you want to dispute the transaction you need to pay through legitimate services like PayPal under your real name.

- You need to wait about 10 minutes for confirmation of any transaction because of payment verification to prevent double-spending. In a store (Point of Sale) it is too long. In addition bitcoin is unable to process chargebacks, that's why very few people buy anything with bitcoins. Most bitcoin users use cryptocurrency exchange services to exchange bitcoins for fiat money and pay for goods and services in a traditional way.

- A few merchants accept bitcoins for payment yet.

- Mining process consumes a lot of electricity.

- Bitcoin is entirely virtual money which is accessible only via Internet and dependent on the availability of electricity. However, all present civilization is based on electricity and Internet.

Thus the main disadvantages of bitcoin NOW are:
1. its volatility, and
2. its existing inconvenience for fast, reliable and revocable buying and selling.
That's why a lot of economists say that "... the price of Bitcoin ... is so volatile that it is almost impossible to imagine it becoming a reliable store of value or means of exchange."

About bitcoin's volatiity.
Yes, bitcoin is volatile, but it is growing, and growing fast especially since March 2020. In 2021, people (mostly elites) keep buying it and the growth continues - bitcoin cost was more than $59K as of April 1, 2021.
However, it also falls quickly, generally having a steady upward trend, despite significant (+/- 10-15%) fluctuations. As of April 30, 2021 bitcoin cost was $56K after falling to $49K on April 25th.

I think that a good half of the bitcoin's current price is just a speculative demand, which engenders its high volatility.

Besides, it is not only bitcoin that grows so fast - the US dollar, euro and other main currencies also devaluate quite rapidly because of creating tons of fiat money by central banks to mitigate coronacrisis. According to some sources more than 3 trillion USD have been created by the Federal Reserve just in 2020.

The governments fight economic crises (which they create time after time) only by stimulating the demand (as John Keynes taught them) through "quantitative easing", and if that does not help - by "dropping money from a helicopter".

The "quantitative easing" is a method of central banks to quickly increase the domestic money supply by purchasing longer-term government bonds, as well as other types of assets, such as mortgage-backed securities and in that way spurring economic activity. In this case, the central bank buys financial assets from commercial banks and other private companies for a newly emitted electronic money (i.e. creating money out of a thin air), spurring the inflation also.

The "helicopter money" is the term coined by Milton Friedman in 1969. It is about direct cash payments to individuals, unemployment benefits, forgivable loans to small businesses, etc.

The US government has already been using both methods: on March 15, 2020 the Fed announced a quantitative easing plan of over $700 billion and CARES Act was implemented by Trump and Biden's Administrations in 2020-21.

Interestingly enough, Investopedia states that no one has been able to really assess the financial results of quantitative easing:

"Most economists believe that the Federal Reserve's quantitative easing program helped to rescue the U.S. (and potentially the world) economy following the 2008 financial crisis. However, the magnitude of its role in the subsequent recovery is actually impossible to quantify. Other central banks have attempted to deploy quantitative easing as a means of fighting off recession and deflation in their countries with similarly inconclusive results."

It seems that quantitative easing works (if it does) just because the governments are unaware about any other methods to stop the financial crises, not to mention about preventing them. And people perceive the inflation in their countries as something natural... "If the blind leads the blind, both will fall into a pit."

Bitcoin cannot "stop" its growth because the central banks won't give up Keynesian policy of demand (and inflation) stimulating. Bitcoin will be just rising in value all the time because of the constant inflation of fiat currencies and the $146K/BTC prediction of JPMorgan Chase is not a limit of its growth. Along with that bitcoin of course will fluctuate significantly due to rise or fall of speculative demand.

About bitcoin's existing inconvenience for fast, reliable and revocable buying and selling.

- More and more large and medium-sized companies begin to accept bitcoin as payment for goods and services. Right now they are Home Depot, AT&T, Starbucks, PayPal, Whole Foods, Rakuten, Burger King, etc.

- Your savings in bitcoins might have been stored in your PayPal e-wallet as early as October 2020 without depreciating, and you could exchange them for dollars or euros as needed. PayPal even promised that "beginning in early 2021, PayPal customers will be able to use their cryptocurrency holdings as a funding source to pay at PayPal's 26 million merchants around the globe" and then it took a break until March 2021.

- In the beginning of February 2021 Elon Musk and Tesla backed Bitcoin by $1.5 billion purchase.

- Also in the beginning of February 2021 MasterCard announced its coming support for some cryptocurrencies on its network.

- On February 29, 2021 Visa allowed the use of the cryptocurrency USD Coin to settle transactions on its payment network.

- And at last on March 30, 2021 PayPal has fulfilled its last year promise and allowed its users not only to buy, hold and sell cryptocurrency, but also to pay with it for purchases. You pay in bitcoins, PayPal converts the price to dollars, for example, and transfers money to the seller. You receive the goods and keep keeping your savings in non-depreciable cryptocurrency.

All the above shows that bitcoin (albeit being completely virtual) provides a good protection of the savings against man-made inflation, becoming a real store of value and a convenient medium of exchange. "A penny saved is a penny earned" is the main rule in the epoch of fiat money. It seems that investing in decentralized cryptocurrencies is much better idea than any pension plan in any country taking into consideration the inflation targeting policy and the way governments are now devaluating their (our) currencies.

Many renowned economists (Nouriel Roubini, for example) warn that "bitcoin bubble will go bust". Yes, bitcoin is rising in value and may fall someday ... And to rise again ... And to fall once more to rise again, so these predictions will come true on a regular basis. This is, after all, a 100% capitalist market that reflects not the real value of an asset, but the "hopes and beliefs" of the participants... And, of course, rumors. For example, the info that about 50% of all bitcoins are controlled by China, which means the Chinese may crash bitcoin someday.

On the other hand, there is the opinion of another economist, also a Nobel Prize Laureate Robert Shiller, who said in 2019 that bitcoin price bubble can last as long as 100 years. I would not be surprised by the fact that the governments of different countries already have billions or trillions in bitcoins in their portfolios (it's just practical thing now since they also have to save their valuables somehow), backing and stabilizing the new cryptocurrency... These are Yin and Yang components of life which is so wonderfully unpredictable.

Meanwhile, Grayscale Bitcoin Trust is officially the largest public bitcoin holder, owning around 700,000 bitcoins, which represent about 3.5% of total supply and is worth more than $31 billion as of March 17, 2021.

Actually, all the predictions are correct. And none of them because the question is when these predictions will come true. Somewhen down the road bitcoin really will cost nothing as well as the US dollar before that (and all other fiat currencies) since all of them are "virtual" and not "commodity" money. One day there will be no Internet and no centralized electricity or water supply, just like now air travels or Olympic games, for example, are slowly disappearing from our lives... It's hard to believe this is possible, isn't it? We have built such a mighty civilization, right?! Ok, but who would have believed in 2019 that half of the world economy would stop, many countries would close for quarantine and planes would almost stop flying in 2020 even because of a serious virus?

Over the last 5000 years the humanity with its money has passed a glorious way from reality to virtuality with little understanding of thyself and no inner change. We will be brought back to reality from the total virtuality we are in now, so the next step in the evolution/degradation of money will be barter again. The only difference is that we will exchange a can of gasoline for a loaf of bread or ammunition for a gun.

If there is a beginning, there will be an end. Life happens in between, so don't be afraid to live here and now. The main thing is not just looking, but also seeing.

P.S. This series of articles is in no way an attempt to persuade you to buy (or sell) cryptocurrency. I'm not an economist or financial adviser and these articles are just sharing some of my speculations about money in general and cryptocurrency in particular. Thanks for reading.


P.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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