The present establishment loves to tout how cryptocurrency could de-stabilize the financial system. What is ironic is the opposite is taking place.
In this article we are going to cover some of the major points of what is being created while also looking into the core problem with the global monetary system. It is not what people typically think.
To start, we have to understand that much of what takes place is outside the eyes of the financial media and, actually, the Central Banks. Anyone who studied how things actually work comes to understand how things are more integrated than what is presented. Thus, a great deal of the impact comes from outside what the politicians, Federal Reserve, and financial media discuss.
Unfortunately, the bankers spent about 50 years building this system up and then another 20 de-stabilizing it. Here is where the opportunity for cryptocurrency and its associated developed to step in.
So let's get started to see where all this is going.
The Collateral Of The Internet
We discuss collateral a great deal because it is vital going forward. The biggest problem in the financial world right now is the absent of high quality collateral. In fact, this is at the heart of the entire global economic network. Outside United States Treasuries, we see a glaring absence of anything that we can depend upon.
In a recent article, we have a commodity expert opining that Ethereum is becoming the Internet's collateral. This is something that is easy to disagree with. That is not to say that Ethereum does not have the possibility of becoming quality collateral. It does. However, so do a lot of other assets classes, headed by Bitcoin.
The key to understand is there is not going to be a "winner take all". When it comes to collateralization, it comes down to trust. As long as people trust Ethereum in terms of liquidity, price discovery, and stability, then it can serve effectively in this matter. The last bit, of course, is something all of cryptocurrency needs improvement on, which should come with time.
Another major point to understand is the world is starving for this. Without high quality collateral, or not enough of it, the entire financial and economic system is very fragile. This means the stability the establishment is so fond of talking about is not really there.
We only need to look at the Great Financial Crisis to realize what happens when there is a global questioning of collateral. That event was triggered by the collapse in confidence in collateral. Suddenly, outside Treasures, everyone was questioning the value of the collateral that was put up. This included the previously heralded Mortgage Backed Securities which many tried to put on par with Treasuries. As we found out, they were not.
Thus, we can make a case the present financial system is rather unstable at the moment since the underlying problem, a lack of quality collateral, was not improved upon in the last 15 years. To date, we still face the same problem as before.
Again, here is where cryptocurrency can step in.
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Financial Resiliency
One thing we can all agree upon with Bitcoin is that it is resilient. There is no doubt it was tested. Over the last decade plus, people attacked it in all manners. Yet, it still keeps churning along.
The reason it has this quality is the fact it is not centralized. Since there are nodes all over the world, nothing that is done can take it down. Sure, the price will fluctuate wildly, yet the system keeps plugging along. Regardless of what happens, transactions keep going through.
We could see that develop with other assets within the cryptocurrency world. Here we see the onset of many forms of collateral that can step in to stabilize the global economy. Through this stability, we could then also see a massive increase in the growth rate. At the moment, much is hindered by the lack of capital that is accessible by the masses.
The merging of money and the Internet makes a great deal of sense. Few are aware but the global financial system mirrors a computer network more than it does a financial one. There are different "nodes" located throughout the world, all having an impact. The entire system is really nothing more than a set of standards, just like computers. However, unlike that system which upgraded its standards over the decades, the financial system is still using the same ones from half a century ago. This is what is causing a downfall.
Cryptocurrency, along with the decentralization of finance, is changing that. Here we can see the upgrade to the system that is needed. Cryptocurrency is a monetary system that is being created in a digital realm, with global reach and outside the control of any single entity.
This drives those in power nuts but it is crucial for financial stability and economic growth.
Decentralization Is Stability
What made the existing financial system so powerful, the one in the shadows at least, is that it was decentralized to a much greater degree than what most of us are aware of. A large portion of the financial activity takes place outside of our prying eyes. What we see with the domestic banking system, central banks, and the markets is just a small part of the whole. More financial activity, by orders of magnitude, takes place outside what was just described, to the tune of hundreds of trillions (if not quadrillions) of dollars.
A key component is each "node" is free to do as it sees fit. This was helpful when the system was expanding and efficiency was the norm. Today, we see the exact opposite. The Japanese "node" can start to hinder the entire system if it embarks upon something quirky, say QE infinity. Or the EU "node" can start to set things afire by going to negative interest rates and nuking their money market.
Here we can sum up the problem very simply: it was not decentralized enough.
The number of "nodes" runs in the thousands. This system contains thousands of banks and financial institutions who are all involved. While that is rather large, it is obviously not decentralized enough.
So what is cryptocurrency bringing to the table and how it is providing stability. Now we are seeing the number moving from thousands into millions (potentially billions). Each person is a node in this financial operation. We all have the ability to start involving ourselves in the game. We can lend, borrow, and collateralize the same as the existing financial system. At the same time, we can create many forms of high quality collateral to back our activities. It is something that we can keep reproducing to ensure economic expansion.
Decentralizing Finance is going to be one of the greatest ideas that humanity ever had. The impact over the next couple decades is literally incalculable at this point. We are going to see enormous progress from this single concept.
After all, it has the solution to what the global economy truly needs.
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