A Response to a Cryptocurrency Cynic
By Henry Gillett on ALTCOIN MAGAZINE
Today is the 11th of October 2018. Cryptocurrency has existed for about 10-years and the market capitalisation has expanded to approximately $114bn USD. However, despite this expansion, pessimism continues to haunt the market, depressing the prospect of long-term sustainable growth. Crypto investors are considered fools and, in true 21st style, are undercut by the use of generalisation and ridicule.
A recent conversation with a crypto cynic captures the flavour of a common attitude:
“Crypto…
Is that a joke lol”“No, do you know much about it?”
“All I need to know is it’s a scam and you’re an idiot if you think anything different”
In this article, I discuss the current state of the fiat based system, analyse the possible applications of cryptocurrency and provide some suggestion about its potential market growth.
The Current State of the Economy:
Last night’s US equity market sell off was enormous and may indicate the beginning of a transition from a state of ultra easy monetary policy to a position where markets will be forced to place substantial focus on their own fundamentals. This, combined with obvious risk factors such as trade war concerns, a weakening in emerging market economies and rising oil prices, creates a highly combustible environment which will likely destabilise both the developed and developing worlds.
Investors have enjoyed easy equity growth funded by low interest rates and an ambitious monetary policy. Low risk investment and easy credit has lead to a softening of investor risk perception and the importance of diversification has been largely forgotten. Accordingly, high risk assets have appreciated and the value of lending has fallen.
In short, the market has been fuelled by increasingly large injections of quantitive easing. This has acted like economic adrenaline — leading to 300% returns on equities. However, like Paul Blart, a collapse may be imminent.
As seen below, following the GFC the largest economies in the world reduced their interest rates to record levels. Press releases and conferences indicate that moving into 2019 these will begin to reset as trillions of dollars are pulled back from the market.
More Cautionary Signals:
Recently, interest rate hikes (intended to cool down an overheating economy) have increased risk aversion and investors have moved away from growth and toward value investment. This is demonstrated by FAANG (Facebook, Amazon, Apple, Netflix and Google) stocks hitting their peak about three months ago and US Semiconductors 2 months before that.
Further, worsening relations between the West and the East are threatening the benign economic conditions to which we have become accustomed. The Trump administration has imposed US$250bn worth of tariffs on China, which has responded with retaliatory measures. US and North Korea are flirting so close to nuclear violence they can practically peck it on the cheek, with the respective leaders alternating between trading insults and expressing admiration for each other. A survey revealed that 93% of foreign correspondents predict that political rivalry and tension between the West and East will increase in 2019 and the Western alliances are divided over matters like climate change initiatives, refugee crises and foreign aid.
Finally, rising oil prices, fuelled by uncertainty over US/Iranian sanctions, has lead to price hikes, with the cost of crude reaching $83.27 a barrel (its highest level since 2014). Economic Analyst of Capital Economics, Andrew Kenningham, predicts that if oil hits $100pb by 2020 it will add 0.5% inflation to the global economy.
The aforementioned creates significant investor uncertainty and financial volatility. It also underlies the issue with our current fiat based monetary system. By having government intermediaries in control, the wealth of individuals is at risk. This risk, until recently, has been completely unavoidable.
*Enter crypto*
The Cryptocurrency Argument:
The value drivers for cryptocurrency are immense. The market has significant expansionary potential and the ability to steal the monetary premium of many non-money assets that are currently used for risk reduction and inflation hedging.
Tokenising the worlds assets:
The vast majority of the world’s wealth is tied up in real estate, bonds and equity. In other words, almost all the world’s wealth is in non-bearer assets. For example, if I were to sell my house I would be required to transfer title to the buyer. These records would be lodged with the government or appropriate agency and symbolise new ownership of the same asset. However, these systems are subject to significant risk. What if the contract was lost? misfiled? or hacked? How then do we then prove ownership?
How can blockchain technology improve this system? In a digital sense, asset owners could generate private keys, sign messages indicating asset transfer, and then broadcast those messages to the public so the world can verify the scarce asset hasn’t been double spent. Each private key could be attached to a public key, where Know Your Customer (KYC) can be mapped to some off-chain identity system.
The entire wealth of the world, which is about 700T, can be tokenised on blockchains. As more wealth is tokenised the blockchain would become more secure, meaning the property rights of individuals becomes completely protected. This occurs because as more nodes enter the system the cost of performing a 51% attack increases to the point that it is no longer feasible (cost greater than reward).
Wealth Protection for Corrupt Economies:
Cryptocurrency offers financial liberation for people living under corrupt or extremely volatile regimes. Currently, the people that hope to escape their local fiat currency (such as Argentina, Venezuela, Iran and Turkey ) are unable to do so. They do not have access to securitised gold that trades on regulated exchanges and, even if they did, they would be likely suspicious of governmental expropriation.
Cryptoassets do not require governmental approval and are cheap to acquire and store. In fact, all that is needed is an internet connection and a mobile phone. Nearly 3 billion people today live in poverty. These people are often unable to use banks as their wealth is to small to warrant protection. In fact, they often pay a 30% fee to store their money with individualised services. As these populations obtain access to the option to store their wealth in government free money, they will increasing opt to do so. This would lead to a dramatic expansion in the size of the cryptocurrency market.
Note, a $1 increase in crypto investment equals a proportionally larger increase in market capitalisation given the effects of velocity.
Hidden Wealth:
Studies indicate that the world’s elite (top 10%) store approximately 30T of their wealth in offshore bank accounts to avoid taxation or government intervention. Cryptocurrencies are bearer coins on a decentralised and immutable system. The government can not touch them.
As investors come to understand these financial benefits of privacy coins (Monero, Zcash etc.) they may begin to move substantial portions of their wealth into self sovereign cryptocurrencies.
Deflating The Monetary Premium of Productive Assets:
Following the decision made by President Nixon in 1971 to abandon the Bretton Wood System that pegged the US dollar to the price of gold, investors have increasingly looked for opportunities to store their wealth in non-money assets to avoid fiat inflation.
Real estate, debt and equity are the main assets that have absorbed these flows. The global real estate market is worth over US $200T, global equities are worth about US $70T and global debt is worth about US$200T. Of this, about 7% ( 33T) is not productive value but rather a wealth storage mechanism. This is an estimation based on the stock exchanges P/E ratio and by analysing the number of vacant properties worldwide.
Cryptocurrency trumps all these non-money assets. It is a better wealth storage mechanism than debt, equity and real estate. Additionally, it is highly liquid and unable to be expropriated. It does not need to be turned over frequently (unlike many commodities), which creates additional tax benefits.
Productivity Expansion:
Most importantly, the application of cryptocurrency offers us the ability to streamline inefficient systems and improve our economic capacity.
Among other things, cryptocurrency can be used for:
- Payment processing and money transfers: Expedite the transfer of funds from one party to another at higher speeds and lower costs (e.g. Bitcoin, Bitcoin Cash, Zcash, Ripple etc.)
- Isolate supply chain inefficiencies: Store supply chain data on a public blockchain to allow producers to isolate inefficiencies and give consumers the ability to validate the legitimacy of their purchase. (E.g. VeChain, Seal Coin)
- Digital ID’s: Assign each individual a digital ID thats immutable and secure. Currently, over 1 billion people worldwide face identity challenges.
- Data sharing: Provide a market place to share or sell unused data (e.g. IOTA)
- Digital voting: Provide an immutable, efficient, public and fair system for users to lodge votes on
- Food safety: Trace food from origin to front door by storing data on a public blockchain.
- Reduce energy costs: Create a decentralised p2p energy platform (e.g. Power Ledger)
Conclusion
Cryptocurrency has many potential future applications that could expand the market capitalisation significantly. This, alongside a relatively inefficient fiat based monetary system, makes it an exciting and promising field to be involved in. I wrote this article in response to a non-supported statement undercutting the industries legitimacy. I understand whoever is reading this is likely to already to be a crypto-supporter. However, if you enjoy this post I implore you to send it to a crypto cynic. Market perspective is truly clouded and it is preventing some promising technology from being realised.
Side Note:
I understand the argument for cryptocurrency being ‘digital gold’. I do not fully support this statement. Gold is often used to hedge against inflation. Mining rates indicate a 1.5% inflation rate for gold per year. For cryptocurrency to be digital gold, two things must occur.
- The volatility of the market must be eradicated.
- The inflation rate of coins must drop below 1.5% minimum.
The per annum inflation of Bitcoin was 3.87% in 2017. Consequently, it does not currently represent digital gold. Perhaps, in the future, this will change.
Disclaimer: This is not intended investment advice. Please do your own research before investing. The nature of cryptocurrency is inherently speculative so only invest what you are prepared to lose.
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The purpose of ALTCOIN MAGAZINE is to educate the world on crypto and to bring it to the hands and the minds of the masses. This article was written and composed by Henry Gillett on ALTCOIN MAGAZINE.
