What follows is an excerpt of my recently released book in the Escaping Oz series called An Observer's Reflections. The book consists of short articles on such diverse topics as economics, government, money, generations, and even empires. Below I discuss the crypto money phenomenon and invite reader discussion. In fact, the entire book's dedicated to inspiring rational discussion about some of our most pressing issues.
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I'm not going to discuss crypto money mechanics. There are far better expositions on this topic. I broached the subject of crypto money in Escaping Oz: Navigating the crisis in the deflation chapter. Specifically, I noted that a broad movement towards crypto currencies was deflationary. Crypto money is not subject to manipulation like the electronic versions used today since no central authority issues it. Many, if not all, have a maximum limit, making them deflationary at their core. Can you imagine the Federal Reserve, or any other central bank declaring the end of money printing (inflation)?
Crypto money resulted from an impactful technology known as a blockchain — a public ledger where users share the task of certifying transactions. There are many competing crypto currencies, the most famous of which is Bitcoin. Bitcoin is becoming more widely accepted in commercial transactions and has received the attention of central banks. In China, where money headed for the exits in 2016, investors parked their cash in Bitcoin. The Chinese authorities won't be far behind.
There are many merits to crypto money, decentralization of money issuance perhaps being most important. One of crypto money's flaws is possession. The money exists in cyberspace. There have been hacks on crypto currency exchanges. I suspect hackers will be more resourceful in future theft attempts. Crypto currencies are also subject to the Internet’s viability and the electric grid. What happens if the power goes out?
There's something to be said about money you can hold in your hand or store in a safe place. What's the old saying? Possession is 9/10 of the law?
Of greater concern is how investors and users of Bitcoin treat the currency. Remember what I said in the section on gold. Gold is more than just an investment, it remains money. If we're going to consider crypto currencies money, then we must treat them like money. Instead, there's considerable speculation with Bitcoin. In late 2013/early 2014, speculation drove the U.S. Dollar price from $200 to $1,200 in a few short weeks. Predictably, the bottom fell out. As I write these words in March of 2017, crypto currency is moving wildly near its highs again after the SEC shot down a Bitcoin exchange traded fund. I've discussed speculative bubbles in other Escaping Oz editions and will do so later in this book. Investors are bidding up the Dollar price of Bitcoin in a speculative fever that runs parallel to the euphoria in the equity markets.
For these crypto currencies to succeed, and they will have a role, we must treat them like money. To be money, they should meet these characteristics:
- A medium of exchange
- A unit of account
- Direct store or representation of wealth
The Greek philosopher, Aristotle, had his own thoughts about money that were very similar to these. Or perhaps I should say that mine were similar to his?
Bitcoin satisfies the first two characteristics. For now, the third characteristic is in question. Since Bitcoin is associated with Dollars and since Dollars don't satisfy the third characteristic, I'll invoke the transitive property of equality (if A=B and B=C then A=C). Once crypto currencies decouple themselves from fiat versions, they'll be better representations of wealth.
For the moment, Bitcoin serves as a spectacular transfer mechanism. Sending money internationally requires the use of the SWIFT network. SWIFT is not free, it's not convenient, and it's not private. Bitcoin transactions suffer from none of that.
For crypto currencies to succeed, they must not be the object of intense speculation. It's this speculation and manipulation that plagues the world's fiat currencies. Fiat currencies cause a host of economic ills. We don't need that.
Some final thoughts about crypto money...as long any money satisfies the earlier characteristics, why can't we use multiple forms? There could be competing monies in the form of private gold coins, government-issued coins, private bank notes, and any number of crypto currencies. We love economic competition. It gives us better outcomes. Why not competition in money? These new forms of crypto currencies will put the Wizards on notice.
Blockchain will disrupt financial services and sits at the forefront of economic decentralization. Imagine a financial world where consumers interact directly without a middleman. That's the hope for blockchain. This transition will take years though it has the promise of promoting financial and economic equality.
Where's my wallet?
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