A Super Simplistic Way to Think About the Rise of Cryptocurrency
I’m a passionate crypto enthusiast. I basically chat with people for a living as a VC. I have a lot of chats with people that don’t see the value in the crypto / blockchain /ICO space, including a lot of very smart people that have been more successful than myself. All the conversations basically start and end the same way, so I thought it might be useful to write out my view and share it.
Of course, a growing number of people I speak with are believers of some level — maybe 10% of those in the tech space. This is for the non-believers
Of the non-believers, responses are almost all the same: they don’t understand (assume no one understands), crazy valuations already, too late — already up 700% in a year, too many companies (tokens) / can’t be so many use cases, gambling/speculating instead of investing, bubble will burst soon, no intrinsic value, regulatory risks, etc…
These are basically the same concerns I heard as a VC in 1995 of the early Internet. And I think these voices are as wrong about Crypto as those voices were about the Internet.
There are many aspects of Crypto / Blockchain that I think are world changing, but I’m going to just speak to the fiat currency replacement part here. This is easier to think of in the developing world, as first world citizens don’t have as drastic of challenges around currency, which means our need of a better currency isn’t as acute.
First, some simple math and macro economics. The total currency in the world is about $86T — this is the M2 money supply. The vast majority of this is in the world’s biggest economies — US, CHina, Euro, but a meaningful portion is in some rather ugly currencies like Venezuela, Sudan, Nigeria, etc… The later countries have huge inflation, abhorrent monetary policy, and corrupt leaders — and thus a currency that no one really wants to hold. These countries and others have averaged around 20% inflation per year, which, in a population that also doesn’t generally have banking — means that the governments are effectively stealing 20% of people’s savings each year by printing cash. So the wealthy people in these countries that do have banking hold as little of the local currency as possible and immediately convert their cash to USD, Euros or the global stock markets. No one would choose to hold a depreciating asset if they have the option of non-depreciating assets.
So why do the middle class and poor people of these countries use these currencies? Obviously, because they have no choice — there really haven’t been other options until the last year or two.
This is the case with at least 40 of the world’s 180 currencies — no one wants them, except for the issuing governments. And these governments will fight to the death to keep their own currencies. Outside of the power of taxation itself, this is the most powerful tool any government possess. The ability to print money is all that keeps many of these governments in power. But as a consumer, being forced to live with these depreciating currencies is a huge destroyer of savings and wages.
Enter cryptocurrency. The developing world is seeing an explosion of crypto wallets and hundreds of exchanges (online and human) that are making it possible for the non-wealthy to move their money into bitcoin. The market is still early and the human fees are quite high (upwards of 5% of deposits) — but that is acceptable compared to the ~10% inflation these 40 countries average. As the number of venders / leaseholders accepting crypto increase, these fiat currencies will eventually get marginalized. As the holding amount of the fiat currencies declines, the impact of printing money will cause inflation to skyrocket, as these governments can’t simply stop printing money — it’s how they pay for all their services and employees.
As a super simple example, if country X is printing $100B each year to meet obligations (above whatever tax revenue), and has a total currency base of $1T, then this will cause 10% annual inflation (again, this ignoring a huge amount of other factors). Now as that $1T currency base effectively drops due to people adopting cryptocurrency, the inflation rate has to go higher — until it becomes even more unsustainable. Eventually the fiat currency will become worthless and that government will have to drop it and adopt something else.
So what is the value of these weak currencies today? Depending on different estimates, about $5T in USD. The total amount of M2 currency is still the same — people need to earn wages and buy goods. So that alone would give a future value of crypto in general of $5T. Again, this is ignoring non-currency use cases like Etherium, NEO and EOS.
The total value of all Crypt is ~$150B USD today — so that means it would have to increase ~30x in value just to fill this part of the void that is coming. No one knows how long this will take, and these countries will fight this change with every regulatory and legal challenge possible (including jailing a lot of people). They will succeed in slowing adoption, but this isn’t a trend that can be stopped.
Once consumer adoption in a country reaches about 15% is when foreign lenders will finally see the trend lines and refuse to keep buying the worthless paper currencies from the weakest issuers. I would guess about 10 years before we see several currencies fail. Eventually I believe all fiat currencies will fall to digital currencies, including USD and Euro, but that will take a lot longer.