Cryptocurrency & the Digital Future of Money
Digital currency was inevitable; crypto is merely its latest incarnation. Looking back over time, it’s immediately obvious that the long-term trend is towards the complete virtualization of currency.
- Gold & Silver (universal hard currency)
- Paper Currency (fiat currency)
- Checks / Money Orders / COD’s (paper representation of paper currency)
- Credit, Debit, PayPal & EBT (digital representation of paper currency)
- Cryptocurrency (digital representation of market value)
The drive for virtualization started with portability, because it’s cumbersome to carry around a pocket full of gold to go shopping. Paper started out as a representation of gold, later on it became valued simply by fiat. After that, checks & electronic transactions became representations for paper currency.
Why keep the paper currency? That’s where crypto has taken us. All currency, even gold, represents value — as long as the two parties in any business transaction can agree on the value of a currency, it doesn’t matter if it’s gold, paper, or electrons.
We’ve had completely electronic cash-exchange for decades now — that’s what your debit & credit cards are for. The paper bills stay put, or in the case of a bank loan, the paper never existed to begin with. It’s merely the ownership of it that gets shuffled around.
What crypto does is cut out the middle-man. Instead of an electronic banking system “squaring the ledgers” at the end of each day, the ledger is distributed and squares itself.
That provides many advantages: first and foremost, it cuts out a lot of the manipulation and interference from banks and governments. Why should they be involved in your business transactions in the first place? The only thing they contribute is trust: if you can achieve that without a 3rd party involved, it’s better off not to have them participate.
Another key advantage is that since crypto isn’t tied to a single national currency, it has the potential for trade & commerce on a global scale without the international transfers and monetary conversions that have been required in the past.
That’s what made the Ripple currency so promising for the banking community — it promised to facilitate international bank transactions, saving time & expense not to have to convert units every time money crosses an international line.
So, what are cryptocurrencies actually useful for that traditional currencies aren’t?
- Easier global / international money exchange
- Greater efficiency in the transfer of funds (less fees, in theory)
- Protection from currency manipulation by banks & governments
- Protection from sequestration & monitoring by banks / governments.
That final part is worth a quick mention. Here in the USA, sequestration doesn’t happen every day, but any number of government agencies are legally entitled to grab your cash or suspend your bank accounts. Crypto prevents that. Your money is yours, not being held by somebody else.
Is Cryptocurrency Real?
Bitcoin and the other 1,600 flavors of cryptocurrency are “real” as long as people agree they have value. When people cease to agree then it ceases being real.
Maybe that sounds like a non-answer, but any currency is a store of value, and even government issued “fiat currency” (paper money & coins) can become worthless overnight if people decide it has no value.
Zimbabwe, for example, had an exchange rate of $1 to S35,000,000,000,000,000. That’s the real, official currency of a sovereign government, and it had no value, so Zimbabwe just switched to the US Dollar. Their local paper is now worthless — not real at all.
Right now Bitcoin is at the other extreme: a single Bitcoin is worth $7,464.11 US Dollars. You can convert it to US currency & spend it on anything you want, no questions asked. That’s real. The value fluctuates rapidly though — a couple of weeks ago it was over $9,000, and where it will be tomorrow is anybody’s guess.
Not surprisingly, the rapid fluctuations in value mean there’s still a lot of speculation going on as day-traders attempt to ride the ups & downs. They trade Bitcoin & alt-coins on digital currency exchanges like Coinbase or Binance, using stable-coins like Tether as a hedge against the downtrends. Anybody can trade the markets, and millions still do, but it’s risky.
Will Crypto Replace Traditional Currency?
It depends on usability and social acceptance. Most financial exchanges are digital these days to begin with, why not replace paper money entirely?
Crypto offers a unique solution to make fiat currency obsolete, the public is getting excited about it, and right now the primary challenges are technical, not social.
There are real challenges, though: I’ve read that Visa’s network can process 47,000 transactions per second, bitcoin can only handle 3.3 to 7 TPS. So changes are needed before crypto has a shot at displacing cash.
Despite Bitcoin’s limitations, 2nd and 3rd generation cryptocurrencies (like IOTA) already provide solutions for the scalability issue — right now what’s happening in the exchanges is the market picking winners, and as new & innovative cryptocurrencies become (and stay) popular, business will begin to support them.
Isn’t Cryptocurrency Just a Fad?
Back in 2017, cryptocurrency was definitely a fad, complete with profound “fear of missing out” and irrational exuberance, but those days are long gone. The fad died back in December 2017, when Bitcoin’s value began to plunge from an all-time high of $17,500 down to a meager $6,000 by February 6th. The price dropped out of the sky, and the Bitcoin dropped out of the news just as rapidly.
They called it the Great crypto crash, and that should have been the end of it. The market crashed, crypto failed, end of story. That’s not what happened, though. Instead, despite the downturn, things keep pushing forward.
The newscasters of the day focused on the hype, the greed and the fear of missing out — but they missed something deeper. Underneath the get-rich-quick mentality there was social justice. Crypto was the voice of 100 million millennials quietly saying, “we’d rather not participate in a system that’s rigged against us, we’re going to do our own thing.” It was their rage against the machine, just like the internet had been for Generation X two decades earlier.
Remember where crypto came from: it was born in the Great Recession of 2007–2009, caused by big banks playing God with mortgage backed securities. It has a use case: it’s outside the system, away from the global manipulation of money by established banks, governments & the corporate elite.
Cryptocurrency is like an iceberg. Above the surface you see a flurry of news stories, day-trading speculators, and even corporate interest. Below the surface, however, there’s a massive community of people who are just plain fed up with the status quo, and looking for a better way. For them, crypto was the solution — and for many it still is.
What’s Next In Crypto?
Facebook and the Libra Association are betting heavily on the idea of “cryptocurrency is ready to grow up” — with the idea that Bitcoin and earlier cryptocurrencies educated the public about the risks & potential benefits, thereby paving a path to success for a more organized, well-funded approach.
Facebook founded Libra, but they’re not the same thing. Libra is a non-profit association with a total of 21 founding members including Visa, Mastercard, PayPal, Stripe, eBay, Uber, Lyft, Spotify, Coinbase and many more. These are power players in online finance & technology, and they see an opportunity to take crypto mainstream.
This “dream team” approach is why Facebook thinks it succeed in crypto where others have failed. Due for release in 2020, Libra is emerging after crypto’s hype cycle has dissipated — giving it more opportunity for development & deployment free from the speculation that earlier cryptocurrencies encountered.
Being a late-market entrant, Libra benefits from lessons learned during the first cryptocurrency boom, but much its also going to be subject to more regulatory scrutiny by lawmakers who have had time to take positions on cryptocurrency. The chairman of the Federal Reserve has already raised concerns about “money laundering, consumer protection and financial stability.”
So the idea started with Facebook, but it’s coming together as an industry coalition — and in terms of timing, I think it’s just about perfect. After all, we’ve been through the hype cycle, survived the subsequent crash, and the we’re all a lot wiser about the potential promise & associated risks of crypto as a result.
The promise of Libra is to deliver an open source, secure & stable currency. Hopefully it will remain free of the infighting that led to numerous hard forks in older cryptos, and it MUST be secured by tangible assets to remain financially stable — an important lesson we learned from the speculative rise & fall of Bitcoin.
If they can make it work, Libra may end up being the “training wheels” that introduces more people to the various types of crypto being traded online, and over the next decade, it could very well become a new type of digital currency for all types of online transactions.
My Cryptocurrency Disclaimer
Cryptocurrencies are highly volatile. Do your own research, always compare sources, and never invest more than you can afford to lose. This post contains personal opinions only, and not financial advice. I take no responsibility for any financial decisions that you make.
