Bitcoin and the Monetary Revolution in Cryptocurrencies
https://www.marketsandmoney.com.au/bitcoin-and-cryptocurrencies/2017/07/03/
Sam Volkering July 3, 2017
It’s my firm belief that physical money, coins and cash are on the verge of extinction. Not just that your ‘paper money’ will exist in digital form, but it’s only a matter of a time before the primary global currency is a ‘cryptocurrency’. A cryptocurrency is a currency likebitcoins, rooted in cryptography and created digitally. More on that shortly.
I also think we might just be at the beginning of a whole new monetary system, one controlled by communities of people, a peer-to-peer regulated system.
In finance, it’s a given that old, antiquated business models can’t survive unless they innovate and evolve. And one of the most ancient, old-fashioned systems in operation is the monetary system.
Sure, there are fancy financial tools like MBSs, CFDs, derivatives of derivatives, monetary easing, and a whole raft of other complexities. But simply, economies are driven by demand and supply. And money is just an intermediate in financial transactions.
Now, I don’t know about you, but I’m sick of unpredictable markets, governments printing money to buy things they can’t afford, and incurring debts they’ll never pay off.
Not to mention stealing money from hardworking people. It just makes me wonder how long society will put up with it.
The key question when it comes to the monetary system is: Is there a better way?
Obviously, precious metals like gold and silver are alternative ways of storing wealth, because historically we’ve attached value to them and they’re a finite commodity.
But as for your money in the bank…have you ever wondered what it really is? I can tell you that it’s not sitting in a vault, so you can just go and pick it up all at once from your local branch. It’s really a bunch of binary numbers, a whole heap of 1s and 0s that exist on computer networks and servers.
What’s important to understand is that this new wave of cryptocurrencies is not too different from how your money currently exists. But what makes cryptocurrency better is a central bank can’t just come along and ‘print’ more of your crypto-coins and devalue your wealth.
So what does the future of money look like? Astechnology and innovation advance, so does the way we transact, bank and deal with money.
Not your typical wallet
If we look back at the 1950s, the bulk of people were paid by cash or cheque. If they decided to bank their money, they had to physically go to the bank.
If they needed cash for the weekly groceries, they had to get the money from the bank teller. Because of this, money would shuffle about the world, physically transported from A to B.
It was inefficient, and security was an issue.
But people started to tire of always going to the bank for money. So in 1969 (in New York), you could use a coded card to withdraw money from an Automatic Teller Machine (ATM). Today, there are an estimated 2.2 million ATMs worldwide.
With ATMs came bank cards, debit cards and credit cards. This meant people didn’t have to carry cash around anymore. In fact, we didn’t even need the cash in our account, thanks to credit. We could simply use a plastic card to buy things.
Then, thanks to the internet, we could simply transfer funds to other accounts or merchants. We had no need to physically go to a bank anymore. So bank outlets have slowly been shut down.
You can also have a ‘wallet’ on your phone to store your bank details to pay retailers. You can even touch your phone with another phone or merchant terminal to instantly transfer or pay money. This is thanks to a tiny piece of technology called Near Field Communications (NFC).
And there’s evidence to suggest Western countries will stop using cash and coins completely. The American Institute for Economic Research has found that in Sweden (in 2013) only 3% of money in circulation is made up of physical money. In the US, that figure is 7% and falling.
Think about the last time you went grocery shopping. Did you pay with cash or card? When was the last time you bought plane tickets with cash, or a cheque?
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It’s not about bitcoins — it’s about a monetary revolution
Today we have NetBank, EFT, BPAY, PayPal and NFC as part of our day-to-day vocabulary.
All of these are faster, alternative ways of processing money. They’re all digital and they’re all driven by complex algorithms that make up electronic financial systems.
And over the last couple of years, a legitimate currency alternative has come to the fore. The beginning of a monetary revolution. And if you haven’t heard of bitcoins by now, then you’re about to.
For a moment, let’s sweep aside the insane price movements of Bitcoin, which has seen the value of one coin peak on Wednesday at US$266 and plummet to an intraday low of US$105.
[Ed note: That’s no typo. Those figures are hundreds of dollars. Just four years ago. Mind blown yet?]
The technical explanation of Bitcoin deserves about 10 articles worth of information. And I’ve been following it since 2010, when the price was US$0.05, so I’ve seen the ups and downs, and get how they work.
Bitcoin, at its heart, is a decentralised digital currency. To be more technically correct, it is a cryptocurrency (a currency created and based on cryptography). Acentralised financial system does not control or regulate it. A community controls it, and transactions (although visible) are shrouded in a veil of anonymity.
This is partly the reason for its recent price movement. And when you look through the hype and hysteria surrounding bitcoin, you can see an underlying need for an alternative solution to the current financial system.
Do you think bitcoin would have seen so much activity if the world had been in financial harmony? I doubt it. I doubt it’d
be US$266 a coin. More like $7.
The current hype surrounding bitcoins started when the Cypriot government decided to steal money from bank deposit holders. This sent the price of bitcoin through the roof, as fear grasped southern European states and the world realised no one’s money is really safe.
Because if you were a Cypriot and held bitcoin, there’s no way any government or bank could have taken or stolen your bitcoin. And even if they wanted to, they wouldn’t know which Cypriots had them because of the level of anonymity.
Bitcoin might just be the alternative non-government financial solution the world has needed, particularly over the last five years.
And I see a future where a cryptocurrency (likely bitcoin) will be the primary global currency. Others will exist and sit alongside bitcoin. Already there’s a RuCoin, which is a Russian evolution of Bitcoin, as well as Terracoin and Litecoin. All are various cryptocurrencies which are used, stored and traded like normal currency. Bitcoin is just the first.
Sam Volkering,
For Markets & Money