The Future of Cryptocurrencies

In recent years, cryptocurrencies and Blockchain technology have attracted controversy from financial institutions, the media and the wider community. Last year saw phenomenal growth; the cryptocurrency market capitalisation grew by more than 1,200%, coupled with which, start-up projects raised in excess of $5.6billion through Initial Coin Offerings. The natural extension of such growth is to question what the future holds for this newly-found asset class. Is Blockchain technology revolutionary? Are cryptocurrencies a threat to the fiat currency market? Most importantly, do cryptocurrencies display the financial characteristics to suffice as transactional tender?

Bitcoin and other cryptocurrencies display the attributes of good money. Let us consider Bitcoin. It is scarce; the maximum supply is limited to 21 million. Given the transparent nature of the Blockchain, we are able to determine what the total supply is today, tomorrow and even in 10 years from now. With fiat currencies, this is an impossibility; central banks have no means of determining the current supply of funds in circulation. Economic policies that are yet to be found and implemented further-distort speculation. Bitcoin is easily divisible; the cryptocurrency can be cut and divided into tiny fractions, all of which are identical, and recombined at will. Furthermore, Bitcoin transactions are recorded as a ledger entry on the Blockchain. The ledger entries are backed up on thousands of computers around the world. If the internet went down, most means of value transfer would suffer; namely, PayPal, Internet Banking facilities, etc. Bitcoin isn’t different in such regards, and thus, it isn’t a weaker choice of value transfer. In addition, Bitcoins are fungible; each Bitcoin is identical in nature, each of equal value. Bitcoins are also durable; they cannot be destroyed. Bitcoin is recognisable; each Bitcoin wallet can attest authenticity. Unlike gold, which can be filled with Tungsten, Bitcoin cannot be counterfeited. Bitcoin can only be created by way of mining. Bitcoin is highly portable; it can be sent anywhere in the world at negligible costs, which automatically adjust as per the current value of the cryptocurrency. It has no physical weight nor any recognition of geographical borders. It cannot be physically controlled. Given the decentralised nature, its value is determined solely by the free market; no permission is needed from any third party; it is uncontrolled. It perpetuates economic freedom. Programmability, something that is impossible with fiat, is a vital quality for today’s digital age.

Now, let’s examine the currently-employed fiat system. Physical cash has no intrinsic value beyond the material itself. The value is artificially allocated, without any backing or financial support from an underlying asset. The transactional value, and by extension, purchasing power, isn’t determined by the free markets, rather, through central banks by way of economic policies. Wealth is supposedly attained through real enterprise and labour, the value of which is founded through artificial and centrally-controlled means. Such a dishonest system is unequivocally unethical, unjust and unfair. How can you have a free market when the most important support for that market, money, is centrally regulated and controlled? In addition, fiat currencies have a limited lifespan of 50 years — the US Dollar became a fiat currency in 1971. Furthermore, fiat currencies offer no scarcity. Artificial value can be created out of thin air at will, with no limit on supply. As mentioned, there is no way of determining the current circulating supply. Increasing the money supply devalues of wealth currently in the hands of the public, wealth accrued through hard-earned labour and enterprise — inflation affects everyone. Hyperinflation has devalued the Venezuelan currency to an extent where it is worth less than the paper it is printed on. In addition, fiat isn’t physically durable. It can be lost or destroyed. Fiat currencies are accepted as legal tender for as long as the issuer permits, who can wilfully impose restrictions at will. Moreover, banks can limit financial services to consumers without reason. Holders of wealth are reliant on such services to transfer wealth. Furthermore, in addition to banking policies, users of fiat currencies are reliant on their respective governmental state policies; the Turkish Lira saw a significant decline this week against the US Dollar. Another drawback is inconvenience; financial intermediaries often employ service hours; requests to transfer funds must be submitted before a certain cut off point — try issuing an international wire transfer on a Sunday evening. Such services can often be slow and expensive; usually, it is quicker and cheaper to physically post cash to the recipient. In addition, the sender may psychically have the submit the transfer request from the bank or a similar intermediary. Furthermore, the sender is reliant on the financial intermediary agreeing to comply with the transfer request; requests to transfer perceivably-suspicious amounts would often be questioned; requests to send funds to certain countries would be denied, and in some instances, confiscated by the authorities. The fiat financial system reinforces a ‘nanny state’, perpetuating authoritarianism. Fiat currencies find value by decree, not by merit.

What about other alternatives, such as precious metals? Let us consider Gold. Gold is a heavy, occupies considerable volume and is impractical as a means of transactional exchange. Consider using Gold to run payroll or purchasing a pizza. Gold is impractical for commerce. Digital certificates, a gold standard equivalent, could be an alternative to consider; however, the backed Gold would require warehousing. This would lead to centralisation, exposing users to counterparty risks; security concerns and associated costs need to be considered, too. In addition, with such an alternative, value wouldn’t be controlled by the free markets; control would be with the government, resulting in some of the above-discussed challenges.

Cryptocurrencies are challenging the accepted norm. They offer superior advantages to the traditional system. Their decentralised nature offers transparency, freedom and financial justice through the free markets; moreover, they cannot be controlled. Given the significant benefits over the fiat predecessor, a gradual switchover is inevitable, as seen in Venezuela. Cryptocurrencies are faster, cheaper and safer. Wealth is no longer in the control of banks; cryptocurrency holders control their own assets. Millions of people around the globe don’t have credit cards. With access to the internet, anyone of any race, creed, nationality, location, credit history can send and receive funds through their phones almost instantly at negligible costs. Nobody can stop this economic revolution. Fiat currencies only exist due to the the momentum of tradition.