People, states and cryptocurrencies
What are cryptocurrencies? What are they needed for? What is Bitcoin today? Why do people buy cryptocurrencies? How are they used? There are many answers to these questions: for example, Bitcoin is called real hard money, digital gold, funds repository, a means of funds transfer, and much more. In my opinion, all of these are misleading. As a loyal fan of the crypto market, I have a right to be skeptical too. I want to clarify the relationship between people, states, and cryptocurrencies.
As for now, cryptocurrencies still are not money. They can not be used in daily life. Indeed, no state will abandon its fiat currency, which is the basis of every economy. Actually, the fiat money is used in taxes, it is a legal means of payment, it’s emitted by central banks to fund the government programs, and it is viable for the maintenance of the current system. I don’t want to discuss whether this system is good. I also do not like the current process of hidden taxation by the constant issue of fiat currencies. Some hotheads even call the emission process a kind of robbery. But this process supports the existence of a current world economic system. The collapse of this system rarely leads to anything good. The paralysis of the state, which we have already seen many times (Zimbabwe, Argentina, Venezuela…) is not cured when the local fiat currency is rapidly depreciating, and it is de facto replaced by the US dollar or, for example, Bitcoin. Bitcoin will not solve the state problems associated with incompetent management or corruption. However, the very existence of cryptocurrencies can, in some sense, balance and limit the uncontrolled printing of fiat currencies in third world countries, where this process often exceeds reasonable limits. The accessibility and privacy of cryptocurrencies make them an excellent tool for saving funds in places where there is no faith in fiat money.
Remarkably, the launch of potential cryptocurrencies of large ecosystems (Libra and Gram), drove a bitter opposition even though Libra is 100% backed by fiat currencies. Cryptocurrencies in general, and Bitcoin in particular, cannot become money yet — this is extremely dangerous for the entire world economic system. This can cause paralysis of state functions. In this case, the current economic problems associated with the coronavirus will seem very insignificant.
Is it necessary to change something? Yes, sure. Is it necessary to turn Bitcoin into money like state fiat currencies? No. Moreover, no one will turn Bitcoin into money, since 66% of Bitcoin hashrate is concentrated in China. It is just very dangerous. Everyone understands how quickly the Chinese Communist Party (no one hopefully forgot that the Communist Party is in power in China?) can put all these mining capacities under its full control. I am sure that they can do it in 3 days.
You can say that there are some shops that accept bitcoin, there are credit cards tied to bitcoin. But these arguments actually don’t hold water. Indeed, the number of shops that accept cryptocurrency is very small, and with a card tied to bitcoin, you still pay in fiat currency.
Many articles have already been written that state that Bitcoin would make a good and stable currency. Probably, if Bitcoin became money, then its price in fiat currencies would skyrocket, and all the holders would be fabulously enriched. Do you want Bitcoin to go up to $1 million? Do not rush to answer, I will ask this question differently: “Would you like the US dollar to depreciate so much that Bitcoin would rise in price to $1 million?” Can you imagine what will happen in the world in this case? But, you can relax, this will not happen. Bitcoin has many exceptional qualities that a stable currency needs, but that is not enough. Therefore, for now, Bitcoin is not money, and it will not become money in the most developed and influential countries (USA, EU, China, etc.) in the foreseeable future since there is an enormous risk that such a scenario will provoke a real catastrophe.
And yes, Bitcoin is great for the role of the native Internet currency (if you forget that 66% of the hashrate is concentrated in China). Will it become a native Internet currency? Will people be able to overcome the technological barrier of ownership and payments in Bitcoin? Why should they do this? We all understand that payment on the Internet by credit card is convenient and relatively safe. Do you want more? PayPal, WeChat Pay, and many others are at your service. I understand that all this is not private enough, but is there real mass demand for this privacy in society today? I do not think so. If you look at the situation from a different angle, not only buyers should want to pay for goods and services in cryptocurrencies, but sellers should also prefer to get paid, for example, in Bitcoins. And why do they need it if it’s not about something criminal? If you want to keep your assets in cryptocurrencies, then it is easier to acquire these Bitcoins independently without complicating your business with unnecessary restrictions. In general, Bitcoin may well become the native Internet currency, but this will not happen before buyers or sellers have financial incentives to use it. In this case, they will have to overcome the technological difficulties and an opposition from the state to switch from transactions in fiat currencies to transactions in cryptocurrencies. I do not really understand how that can happen unless you take into account the global financial crisis, which will lead to a sharp massive depreciation of fiat currencies. But I don’t even want to consider such an option.
Nevertheless, I am still confident that in the future, we will see a world currency on the blockchain. Today the world is too fragmented, and there are too many conflicts of interest between different states, hence the chances are slim that they will agree on a single currency. However, we understand that this is possible, and the history of the euro is an excellent proof of this. In my opinion, a very slow global integration process will lead to a single currency on the blockchain. And maybe this blockchain will be the Bitcoin blockchain. But I think that it is much easier to create such a public blockchain “from scratch,” taking into account all the mistakes rather than trying to adapt Bitcoin to the future state’s requirements. If everything is done correctly, the hashrate of such a blockchain will quickly catch up and overtake the Bitcoin hashrate. It would be very good if the United States and the EU led such a process before China did so.
“Digital gold” or a means to preserve wealth.
Bitcoin is often called digital gold, showing that it is well suited to preserve wealth. Bitcoin can not be counterfeited, it has a minimum ratio of transparent emissions and existing supply, it can actually be used as a means to preserve capital alongside gold. It even has several advantages, namely mobility, and divisibility. It is problematic to split a gold coin into several parts and is not so simple to carry it, while your Bitcoins are available for you anywhere in the world. But, in my opinion, not everything is so rosy.
First, the 5,000 years of the history of gold as world money and 11 years of the history of Bitcoin cannot even be compared. Most people trust gold, but a tiny percentage of the world’s population trusts Bitcoin.
Second, gold is a physical asset, and Bitcoin is a virtual asset. A bar of gold cannot be remotely damaged. For most people, Bitcoins do not look so reliable. Moreover, 66% of the Bitcoin hashrate is concentrated in China. That means that we cannot rule out the scenarios in which China consolidates all its production capacities. This way China may simply discredit Bitcoin and turn all the Bitcoin assets into electronic garbage.
Third, one cannot simply create gold. The mining process is complicated, expensive, understandable. Also, Bitcoin does not miraculously appear, and its creation is associated with high energy costs. However, there is a question of how much other cryptocurrencies, including forks of Bitcoin, are perceived as independent from Bitcoin. Yes, I understand that you can’t even compare the hashrate, but this argument is for those who are deeply familiar with the crypto market. And what about ordinary people? For them, there is gold that is really suitable for protecting capital, there is silver, which in the past also played the role of money, but today it no longer plays the role that gold plays. And there are all the other metals, some of which are very expensive. In the eyes of most people, only gold is suitable for mass investment. Is this the case with cryptocurrencies? I am not sure about it. In my opinion, the current simplicity of creating crypto assets is an obstacle for any crypto asset, including Bitcoin, to be used as a capital protecting means.
As a quick summary: it may happen that people will use Bitcoin to protect capital. Indeed, it has many qualities that make it an excellent candidate for this role. But today it is unlikely, the history of cryptocurrencies in general and Bitcoin, in particular, is too short to form the necessary level of trust. You could even say that this usage still does not exist at all. On top of that, 66% of the Bitcoin hashrate in China does not contribute to the formation of this very trust.
I think Bitcoin is another refuge for the excess liquidity that arises from the fiat currencies issue by Central Banks. At the same time, real estate, gold, and stocks and not cryptocurrencies (e. g. Bitcoin) are preferred investment options. This is the current situation — in the ongoing crisis, Bitcoin behaves very similarly to the high-risk securities. https: // twitter.com / novogratz / status / 1234133971400904704? s = 20.
Can Bitcoin Become Digital Gold and a wealth protection tool? Yes, it can. But we have to work on this. The same people that are interested in such an outcome should work on it. After all, a lot of people write articles about Bitcoin’s glorious future as money and as a wealth protection tool. Some people keep tens and hundreds of thousands of Bitcoins in their investment portfolios. It seems to me that these very people should be interested in seeing their assets grow in value, rather than turn into electronic trash. It is necessary to invest more managerial and financial resources in R & D, ecosystem development, training, and, importantly, in control of the full decentralization of the network, so that in the future there could not be a situation in which more than 50% of the hashrate will be concentrated in China or elsewhere or where there will be a risk of consolidation of these capacities.
Using cryptocurrencies and stablecoins in cross-border payments is cheap and convenient. The prime reason for the growing popularity of payments in stablecoins is purely economic. Those who regularly transfer significant amounts, for example, from Europe to China, know very well how high the conversion and transfer fees are. Stablecoins solve these problems by keeping commissions to a minimum. True, they are used only for payments between individuals or in the shadow zone of the economy. And the share of such payments in the total volume of fiat currencies payments is just negligible. Is significant growth possible? Will conditions be created so that not only private individuals but also companies can safely accept and send stablecoins and take these operations into account in their official statements? I doubt it. I can’t imagine how a company, for example, from Germany will pay for production at a Chinese factory in the same USDT. From the point of view of the state, payment in stablecoin, even 100% backed by basic assets, is not equivalent to payment in foreign currency. The transactions that involve tokens are very difficult to tax control, blocking withdrawal in case of violations. Such transactions do not have guaranteed reversibility. Plus, the massive use of stablecoins popularizes cryptocurrencies in general, which discredits fiat currencies and increases national risks. Therefore, I believe that stablecoins will not be allowed as money into the real economy. Cross-border payments in stablecoins will grow steadily. They will continue to be a bridge between fiat currencies and crypto assets, they will continue to be used by the most advanced people in personal payments, and they will continue to be popular for cross-border transfers in the gray zone of the economy. But we shouldn’t expect their sharp growth until they become legal in a large ecosystem (e.g. Facebook).
After the boom of ICO and IEO, which caused billions of dollars in losses for investors, I have only one question left — what was it? In most cases, ICO investors, financing a blockchain project at an early stage (often even at the idea level), did not receive any rights to the company’s capital. I will not consider cases where, as a result of ICO / IEO, the cryptocurrency of the future new blockchain is sold — there are few such cases, and this is more likely an exception, confirming the general rule. Drawing parallels with the real world, I want to make my favorite comparison with airlines. ICO utility tokens are like pre-selling miles for a future airline. If miles are sold quite a lot, if you manage to create an airline using the collected money, then investors (who bought these very miles of the future airline) will be entitled to make some flights at a discount for these miles. And there are many questions. The most important thing is whether this new airline will be created at all, whether a specific investor will need to fly somewhere in the future, and whether it will be possible to sell these miles to someone later, at least at a discount. In general, all risks in this design are left to ICO / IEO investors, and all current and future profit (if the airline is created nevertheless) to the organizers. For me, this is not a very fair scheme.
But everything changes if what investors receive are not some obscure utility tokens, but future shares of the company. This is also a chance for outstanding ideas to get financing without resorting to loans and without turning to venture capitalists. This is a chance for everyone to become co-owners of the future technology giant at an early stage. That means to invest when the company’s shares are still not very high. Moreover, there is no need to invest sizeable amounts of money.
I think this scope of the blockchain application will grow rapidly. Of course, it will also receive its dose of bureaucratic regulation, which de facto protects the rights of investors, but this will not stop anyone. Blockchain crowdfunding is cheap, convenient, and efficient. I am confident that we will see new future technology giants that start their business with STO.
The small private investment.
If someone receives private investment to create their own business, then someone else makes this investment. Blockchain expands the investment space. Blockchain securities provide billions of people with access to quality investments with a low entry threshold. Clearly, if the security was transferred to the blockchain and received the name of a security token, nothing guarantees its quality, liquidity and future profitability. Obviously, it all depends on how high-quality and liquid is the asset behind the security token. But the blockchain has already eliminated all the major barriers to small private investments from all over the world: residents of Russia, China, Brazil, and almost every country in the world can quickly and easily invest in companies and Securities of European or American companies. Yes, there is regulation, there is AML / KYC, but the ICO lesson was not in vain — we all understand that this is necessary mainly to protect investors themselves. Anyway, billions of euros of private investment have already flooded the tokenized securities market. And this is just the beginning.
So what did we end up with 11 years after the first cryptocurrency appeared? Why is blockchain used today, and what are our prospects for the coming years?
First, cryptocurrencies, including Bitcoin, have not yet become money, and their prospects in this capacity are very doubtful. Leading states will consistently and firmly resist all attempts to transform cryptocurrencies into money, and they have all the means for this. Therefore, as long as states are legitimate and strong, cryptocurrencies will look like high-risk securities with incomprehensible collateral and doubtful prospects.
Second, currently, Bitcoin is just the internal currency of the Bitcoin blockchain. This is a high-risk asset, but Bitcoin has every chance to become a “digital gold.” I do not think the primary obstacle to this goal will be a confrontation with states. There will be no confrontation. Here the primary rival of Bitcoin is time. It takes a lot of time for billions of people to believe and get used to the fact that Bitcoin is safe, so they overcome the technological barrier and the fear of fraud and learn how to use Bitcoin. We have to work a lot on these, we have to spend huge managerial and financial resources. Who should do it? The same people that invested a lot of money in Bitcoin and hope that over time these investments tremendously increase. Perhaps they already do all this. Perhaps there are organizations and associations of cryptocurrency whales that set similar goals. Perhaps all of this is already there, I’m just not aware of it.
Third, cross-border payments and operations in the gray zone of the economy constitute a very significant application segment for cryptocurrencies and stablecoins. Moreover, the volumes of such operations will only grow over time. That is the reason the government agencies will try to block the use of cryptocurrencies and stablecoins in the real economy.
Fourth, today the fastest growing and most promising application of the blockchain is the process of attracting private investment and private investments themselves. It is the investment sector of the economy that will change most in the coming years because billions of euros of investments from around the world have already poured into this market. And this is the same field where the state is not an adversary, but an ally of all interested parties. After all, it is safe to use blockchain in securities. Indeed, this is just a novel form of representation for real assets that everyone is used to, the same real assets that everyone has long been working with.
In the end, I allow myself to draw a few conclusions. Blockchain has already come into our lives, it already affects both ordinary people and states. The governments of key countries are already reacting, so far, however, only prohibiting and restricting operations in the crypto space. Now the entire system will change in a civilized manner. Currently, the cryptocurrency field and its main infrastructure in the form of cryptocurrency exchanges consider cryptocurrency transactions as high-risk securities and serves as a bridge between cryptocurrencies, stablecoins and fiat currencies. Soon, however, the development focus of the entire cryptocurrency market will shift towards fundraising and private investment. I am not ready to predict now how exactly this will happen. I see interest in digital securities, both from the business side and from the huge number of private investors. In such a situation, this industry will inevitably experience exponential growth. And I have every intention of taking part in this festival!