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Bubble, trouble, hodl and forks: Cash is no longer king


By Justin McCarthy | June 18, 2018
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Cash is no longer king Chapter one dealt with an introduction to blockchain and cryptoassets. In this edition, I explore more on the purpose of Bitcoin’s existence, what it may or may not mean for the world of finance, economics, governments and social structures.

To properly understand cryptocurrencies it is necessary to see money in a historical perspective. It was only after studying the history of trade that I got it, and that remains my first piece of advice to anyone who asks. As a species we are conditioned from birth that bank notes are the only means of trade — that the R20 tuck money is the gateway to a sandwich and a cold drink. I frequently wonder how many people have even noticed the quiet disappearance of the Reserve Bank Governor’s promise to pay the bearer of a banknote the equivalent value? Equivalent in what? Once upon a time it was gold, but the Fed abandoned the gold standard in 1967 and the Bank of England in 1973. So, what backs a national currency? Many retort, “the economy stupid”. Really? If the US economy underpins the dollar how come US debt levels stand at $21 trillion, or $174,000 per taxpayer? ( http://www.usdebtclock.org/ ) How come the UK’s debt exceeds its GDP by 130%? Even the economic powerhouse of Germany has a GDP to debt ratio of 1:1,2.

Who could forget the sub-prime mortgage crisis that tilted the world into a massive recession in 2008? It was a series of events that perfectly demonstrated the fundamental structural weaknesses in mainstream capitalism. Even more demonstrative was the Federal Reserve’s (and other central banks’) response to it, “bailing” out the very masters of this criminality to the tune of trillions of dollars. To do so meant inflating an already overstretched economy, ballooning national debts to perilous levels. When this giant Ponzi scheme bursts, the fallout will be incalculable. History will judge the central banks very harshly for their asinine response of creating trillions of dollars out of thin air under a contrived PR stunt called quantitative easing. In truth, it was a cold political act in selling future generations into economic slavery.

It’s an unlikely coincidence that Satoshi released the Bitcoin blockchain code a year after Bear Stearns hit the wall. Electronic money is hardly new, but what Satoshi solved was the intractable problem of double spending. All central banks are subject to human disposition, largely politically motivated. Bitcoin is mathematically metered and thus impossible to alter, to create more of, to regulate or to manipulate (excluding price manipulation, which is a different matter to which I will return in a future post). But nobody can just create more Bitcoins. Nor were the 17 million Bitcoins in circulation created out of thin air — a common misconception. They were mined through countless exabytes of computing power and hundreds of TW of electricity. Mining pools spend massive amounts of capex and opex setting up, maintaining and running their operations, all at considerably high risk.

Crypto assets don’t take power away from banks and governments to print money. They empower anyone to print their own money allowing the market to choose which monetary properties are most desirable to them. In other words, cryptocurrencies have the capacity to liberate citizens from the tyranny of centralised authority. They permit freedom of choice in environments where authorities legally decree what currency can be used to trade, what the interest rate is on lending and borrowing, and how much of the currency they can issue to prop up a faltering economy. Worse yet, this is the same bunch of people who set the tax rate, determining how much of your income they will redirect to state spending, little of which may actually be beneficial to you. This is the stuff that terrifies regulators. They are the ones accustomed to defining the rules, and now these anonymous decentralised entities are eroding their power base.

Where one sits on the scale between ‘compliance at all costs’ to ‘complete anarchy’ will define one’s reaction to this state of affairs. What cannot be denied is that the world needs much less politically motivated economic and monetary policies. Overregulation is a cancer that churns out bureaucratic waste like a meat grinder. Nothing is quite as inefficient as government, no matter their intentions.

If you had $100 in 1918 it would be worth $1 today. It is widely acknowledged that for a unit of account to be recognised as money, it should display 6 properties, namely: portability, fungibility, divisibility, scarcity, durability and wide acceptance. On the matter of durability, it’s clear from the massive devaluation of the US dollar that this currency fails that test. So does every other fiat currency — the US dollar just happens to be the most durable of the lot. The graph below benchmarks the main global currencies against gold over the last 115 years. It’s a grim picture.

Currency Depreceation

Source: Bloomberg, CFMS-Thomson Reuters, ICE Benchmark Administration, Metals Focus, World Gold Council, US Global Investors


In countries with high inflation the rate of depreciation is obviously higher. Even a low CPI rate of 3% (the average in the UK over the last year) will halve the value of your Pound in 23 years. At 10% your 100 units of whatever currency will devalue to zero in a decade. That’s the underlying problem with inflation and a fractional reserve banking system — it makes the rich richer and everyone else poorer. Cash is no longer a store of value, but cash is most often the only asset the bottom end of the economic pyramid has access to.

Because central banks can and regularly do “print” more money (not literally, but by adding some zeros to the money supply), no fiat currency meets the scarcity property either. Divisibility? Not really. Sure, you can break a R10 note into 10 x R1 coins and a R1 coin into 10 x 10 cent coins, but that hardly meets the requirements of the digital age where two decimal places just doesn’t cut it.

Cash doesn’t meet the portability requirements either. Who travels with large wads of cash when we have a piece of plastic? The bank card has been around since 1946, credit cards since 1958. Retail banks are desperate to eliminate cash because of the associated costs and risks. Just imagine yourself working as a guard or driver in a cash-in-transit van every day. How safe would you feel?

So, cash today meets only two of the six criteria listed. Debit and credit cards meet three — with the benefit of portability & safety, plastic has become the de facto replacement for cash. Bitcoin, on the other hand, meets all the criteria save for broad acceptance. Whether it will ever achieve that status is a moot point, but it’s a near certainty that any number of cryptotokens will be widely accepted within a decade or less. Like any asset class, there are many different classes of cryptos, with the ones providing a unique benefit/s being the ones that will flourish. Thousands of others will perish because they offer no distinctive, lasting benefits.

In the next chapter I will talk more about the history of money and its role in as the weapon of choice for tribal chiefs, monarchs, religions, emperors and governments — in other words centralised authorities. Against this background the advent of decentralised money starts to make real sense.

Disclaimer: This article is not intended as investment advice nor will the author be responsible for any investment decisions that are made on the basis of this article. Cryptotokens are speculative investments that are not for the risk averse.

Photo by Olga DeLawrence on Unsplash