The Prudence of Cryptocurrency

Cameron Ponce

2018

The Prudence of Cryptocurrency

                Currency is the foundation of the modern world, and specifically modern capitalism.  Without currency, the world would still be restricted to a barter economy, trading chickens for iPhones and guns for rice.  It is essential for any open world economy to have established currencies or at least a tradeable and relatively stable standard of value in order for a price to be set for goods and services.  While the world needs a currency, every nation having a currency can be counter intuitive and cause more problems to arise than are solved.  This is why a mystery savior referred to through the internet as Satoshi Nakamoto created Bitcoin and blockchain technology.  Cryptocurrency is proposed to be the world currency that everyone needs in order to avoid domestic recession by addressing issues with current currencies, allegedly solving them, and proving itself as a viable and legitimate form of technological advancement.

                There are several well-known problems that surround currency in this day and age.  First and foremost, the fact that a Federal Reserve of sorts controls the supply and value of domestic money.  Increasing supply decreases value which directly leaves civilians subject to government seigniorage and inflation.  Along with the world’s governments inflating currencies to raise money for themselves, tariffs and interest rates can also affect the international value of domestic currency by changing the amount of foreign investment and net exports into the country.  In the past these things were not as much of a problem because currencies were backed by the gold standard, making gold the ultimate world commodity and basically equating it to a world currency.  However, since a large portion of the economic world has abandoned the gold standard, the only thing holding currency to value aside from durability is simply the fact that society believes it has value.

                Cryptocurrencies, blockchain technology, and specifically Bitcoin aim to bring actual world value back into a currency by creating a new standard of wealth.  Cryptocurrencies are digital assets meant to monitor the exchange of assets, reduce transaction fees, and hold intrinsic value.  Bitcoin, the first cryptocurrency, introduced blockchain technology which is a chain ledger of transactions, and also simultaneously the distribution of the total supply of the cryptocurrency.  Blocks on the chain need to be ‘mined’ by high powered computers (often top performing graphics cards for gaming or actual super computers specifically designed to solve blockchain equations) and every time a block is mined, the transaction gets confirmed on every participants ledger and then rewards a set amount of bitcoin per block to the miner.  There are multiple aspects of mining that make Bitcoin comparable to gold, mainly the set supply.

There are twenty one million Bitcoins on the chain and more will never be created, only distributed through miners.  This helps ensure long run immunity to inflation since total supply can never be increased by the government, only distributed through the community.  Mining Bitcoin also gets more difficult and less rewarding as time goes on, much like actual mining for gold.  Every time a block is mined, the next block gets increasingly difficult to mine and every four years the amount of mined Bitcoin per block is halved.  As more people acclimate to the crypto community, demand will rise while supply will only be distributed at a decreasing rate.  Along with this, since cryptocurrencies are not concrete currencies they are stored on digital wallets.  Since a large concept is to be immune to hacking, if one were to lose their wallet or password to their wallet, they would never be able to recover their Bitcoin or other cryptocurrencies.   These things combined, in theory, will drive the price of Bitcoin in a positive direction for as long as it exists, making it a scarce and valuable resource.

While Bitcoin and the development of blockchain technology truly is a technological and economic stroke of genius, many people have trouble seeing it as such.  The dot-com bubble installed an abundance of fear into investors, and many view Bitcoin and other cryptocurrencies as the next Internet bubble.  The first thing that needs to be addressed and recognized is that Bitcoin is merely an exchange of value, a currency, not an investment.  Even though the way it is programmed makes it highly probable that one’s money will appreciate long-term while in Bitcoin, it should be viewed by the purpose for which it was created as a world currency, not a money making opportunity.

To suspect that the cryptocurrency market is a bubble would be far from illogical.  A bubble is defined as many new companies profiting on a product or service that is yet to exist.  This does, without a doubt, directly define the majority of cryptocurrencies on the market.  However, similar to the Internet bubble, top companies such as Google had actual new and useful products and were not merely shells of companies.  Bitcoin and a few other top performers such as Stellar and Ripple serve the community by technologically advancing online payments and providing an actual product with economic significance.  The use of these cryptocurrencies can lower transaction fees by taking out the middleman job of public banking and allow users to transfer money directly, even when dealing with cross border payments.  So yes, the crypto market is most likely a bubble with many useless contributors, however the market leaders are almost guaranteed to prevail and guide the world economy to peaks previously unknown to man.

The cryptocurrency market currently holds $108.3 billion, with Bitcoin making up over half of the total holdings.  Broad money, or the total amount of liquid assets according to the CIA World Factbook is in excess of $80 trillion.  This makes the entire cryptocurrency market currently worth 1/74th , or 0.014% of the entire world economy, with Bitcoin making up around 0.0068% there is only room to grow.  While the crypto market currently holds a pretty insignificant amount of the world’s total broad money, the US stock market is estimated to hold around 20-30 trillion, or 25% or more of the worlds money.  If the equivalent of even 1% of US stock holdings were held in cryptocurrencies, that would be enough to double the value of Bitcoin and other cryptocurrencies.  When taking into account the entire international economy, the potential is much higher than just 1% of U.S. stocks.  With massive firms such as Fidelity, which manages around $6.9 trillion, beginning to offer cryptocurrency products and investment opportunities for investors, the rise of Bitcoin and other top crypto performers will be inevitable.

Cryptocurrencies and Bitcoin specifically provide a possible solution to economic recession.  As previously stated, there are many factors that effect a domestic economy and currency value.  If the whole world traded and used one currency, the economic fall of one country would not be enough to tank the value of the currency and therefore in many ways would prevent a full scale recession from ever taking place.  While things like disease, political interference and geological restraints could make a country go through rough patches and lose money, a world currency would ensure stable price levels and provide a quick correction, or at least make it easier for economists to address the issues at hand.

Cryptocurrency, specifically Bitcoin, is the intellectual solution to economic recession by effectively addressing and solving the issues that surround existing currencies, advancing payment and ledger technology, and ultimately providing a path towards an equivalent world Purchasing Power.  A world where everyone understands things to have specific value, tied to a standard that everyone can agree upon based on actual economic design and reasoning.  A new gold standard that is scarce, hard to find, and very desirable due to it’s long run immunity to inflation.  Bitcoin, and the blockchain technology that it introduced will forever change the financial world and guide it towards a super-efficient economy.