Monday 17 February 2020

The Quiet Revolution That is Replacing Traditional Financing Models?

'The Moneylender and His Wife' by Quentin Metsys, 1514.

Posted by Emile Wolfaardt

Around the circumference of the globe and across the stage of history, the engines of almost all labor and commerce enterprises turn with one common goal in mind – to be financially profitable. This is true individually and collectively. We go to work each day with the goal of making money – of acquiring some sort of currency that we can use to exchange for goods or services. We earn ‘purchasing power’ – or units that we can exchange for something we want or need.

While most of us use some sort of currency, these units of purchasing power have not always been in the forms of coins and bills. Shells, stones, metals, and other animate and inanimate objects have been used in our history. And for the most part – the value is assigned as opposed to being intrinsic. Paper money is said to have assigned value and precious metal and gems intrinsic value. Yet, if sand was scarcer than diamonds, and was necessary – it would have an even greater value than diamonds - so perhaps all value is assigned.

But some people today claim that there is a revolution taking place in the financial world. Up to now – currency and purchasing power has been controlled by governments and financial institutions. Currency is determined to be ‘legal tender’ but it belongs to the government. In most countries, it is illegal to damage currency - it is considered damage to government property. The government and the financial institutions charge you to use the money. You pay when you deposit it, when you withdraw it, when you borrow it and when you are given it. Some banks will waive some of these fees under certain conditions and the government will waive taxes or reduce them in certain circumstances. In this model, Providers have custody of the wealth and grant access to the owners. This is called Banking. 

But a new form of financing has emerged that is not controlled by the government or the financial institutions. Rather, it is peer to peer financing – and it is structured around blockchain, and the currency is called crypto currency. Bitcoin is the largest of these and it constitutes about 80% of the market. In Blockchain, Owners have custody of the wealth and grant access to Providers. Its supporters say that instead of being controlled centrally by some body, it is ‘decentralised’ and controlled by the millions of people who own it.
Bitcoin was founded in in 2009.

The first few years of cryptocurrencies were hectic, and the investment opportunities were more like gambling. Lots of people made millions of dollars, but many more lost their money. As more and more people became interested in a blockchain financing model, the governments and financial institutions started to rail against it. Financial institutions like JP Morgan, Morgan Stanly, the IMF, Barclays Bank etc. all condemned them. 

Nonetheless, in 2019, it was institutional money and the Whales of Wall Street that were the biggest investors in Crypto Currency. Apparently, the FBI is the second largest holder of Bitcoin in the world (although their holdings do not come from investments). Currently, the big institutions are spending millions of dollars on crypto investments, and many countries are embracing it – some as a replacement currency to their own. Many mainline vendors like Apple, Google, etc. now accept Bitcoin as legitimate payment. And yet governments are recognising they do not have the ability to control it. Mike Crapo, United States Senate Chairman of the Banking Committee:
'If the United States were to decide ... we don’t want cryptocurrency to happen in the United States ... we couldn’t succeed in doing that because this is a global innovation.'
Not everyone is an enthusiast for the new money. Writing at, Saeed Elnaj says:
“Bitcoin’s promise was to bypass the centralized economic system and enable peer-to-peer exchange of value using the digital currency. But with the fluctuating price of Bitcoin, it is very hard to buy a cup of coffee or an album online. It is also impractical given the delay required to complete time-sensitive transactions. In fact, since Bitcoin’s astronomical rise in December 2017, the number of Bitcoin transactions has dramatically plunged.”
 And he suggests that rather the primary attraction of the currency is irrational.
“It seems that Bitcoin will likely cease to have meaningful value, defeating the whole point and philosophy imagined by Satoshi Nakamoto, the alleged inventor of Bitcoin. Its current value appears to be purely psychological, and the hype seems to be driven by irrational exuberance, greed and speculation.”
Money has gone through several revolutions, among them barter, precious metals, paper money, banking, money wires, credit cards ... and now, cryptocurrencies. Will this be a true revolution? Or a false dawn? Time will tell.


docmartincohen said...

Thanks for this interesting and thought-provoking piece, Emile! I think the issue of changing means of not only 'circulating' wealth but creating it too, has been much neglected by philosophers, ever since the great Adam Smith first defined the questions...

I think bitcoin is a good 'example' of how money works, but I'm not convinced it is as significant as you claim. Indeed, I see it as largely a 'tulip bulb' phenomenom, kept afloat by new investors but doomed eventually to fail. Which critcism could be made of ALL our currencies and investments though maybe... As you say, "time will tell".

Keith said...

An interesting subject, Emile, to tackle here. Thanks for taking it on.

My sense, though, is that cryptocurrencies in general, while making inroads into the world of finance, have not proven as disruptive to that world as might have been anticipated several years ago. Not near the ‘revolution’ suggested by the title here, anyway. With the exception of bitcoin, many of the cryptocurrencies newly floated over the years have fallen by the wayside.

Also, it has been harder to displace the official currencies of nations than perhaps anticipated. Cryptocurrencies seem to function more as legal ‘alternative currencies’ rather than actual displacements. Perhaps in part that’s because cryptocurrencies are digital (virtual) creations rather than things — unsettling, maybe, to people’s comfort with traditional (fiat) currencies.

Perhaps, also, slower inroads have been because cryptocurrencies aren’t backed by governments the way, say, the U.S. government backs the dollar, E.U. governments back the euro, the U.K. government backs the pound, and so on down the list. In the case of bitcoin, trust seems to rest on one’s faith in the blockchain performing as advertised. Cryptocurrencies’ backing is a nontrivial variable. As are, I believe, the spiky gyrations in value.

By way of a side note: As to the FBI being ‘the second-largest holder of bitcoin in the world’, as the post points out, several online articles provide interesting background, for those who find the size of the FBI’s purported holdings a head-scratcher and are curious to learn the story.

docmartincohen said...

This from Helen Ross, via Twitter just:

For a clear view of bitcoin I follow

[Who says that] "Bitcoin becomes systemically important once big investors are involved, and it is already in a bubble. This will not end well."

"Bitcoin investor: "I want to get rich really quickly. Oh and by the way, I think Bitcoin will replace fiat currencies." If you really wanted Bitcoin to replace fiat currencies, you would spend it on goods & services, not try to profit from it in fiat currency."

Aside from that, [Helen adds] I see the pro bitcoin lobby and who they are, and how they attack Frances. Illuminating. From Pepe the Frog to Max Keiser.

Thomas O. Scarborough said...

It's an interesting discussion. I tend to be wary of any overstressed claims, of which there would seem to be a few in connection with bitcoin and altcoins: security, privacy, returns, and so on. There are many devices in the heart. Further, Bitcoin is very new. There has not been time to understand its influence over time, in all sorts of ways. It is a system, and all systems have externalities.

docmartincohen said...

What would you say were the distinctive 'externalities' of Bitcoin, then, Thomas?

Emile said...

Docmartincohen - thanks for your thoughts. There are a number of moods that vogue well for cryptos. Trust in government and institutional initiatives is at an all time low. My own sense is that the Arab Spring, Brexit, Trump (good or bad), the Me Too Movement etc are all manifestations of the same dissatisfaction with the status quo. Also, the cost of finances is exorbitant and the process of moving money way more costly and burdensome than it needs to be. The world is as ready for a fiscal change as it has ever been. Crypto currencies are a flag of transition - growing exponentially currently. Big money and big fish are flowing into the cryptoverse - and at some stage it could reach tipping point - and then the impact could be global.

Emile said...

Keith - thanks for jumping in. You are correct - the disruption has not been what crypto evangelists promised - yet. The interesting thing is the adoption and investment rates we are seeing. And the wisdom that new offerings are bringing to the table as opposed to the early craziness. I have seem 20% to 30% growth in my crypto investments in the last 90 days - with a 24 month track record of similar returns. You are also correct - it has been difficult for nations to replace their national currency - but still they try. Some see it as truly inevitable - others as simply evil. Smiles.

Emile said...

While there are still many challenges, I believe there are a number of forces that give cryptocurrencies (or stage two - whatever they give birth to) a good fighting change. These include cost, decentralization, universal stability, speed, privacy, personal control, convenience and security. The financial world is in trouble. Three of China's largest banks have just been bailed out by their government to avoid foreclosure - with 500 more in trouble. Debt to GDP ratios are higher than they have ever been. When Greece went under the GDP to debt ratio was about 335%. The Netherlands is currently at over 500%. Many many countries are in the same situation. USA is at 115%, the highest it has even been. I believe the current fiscal system is in trouble and losing support fast. There are volatile cryptos that MAY provide opportunity for growth (I have made over 800% in some of my funds in 4 months) and stable coins - whose prices do not fluctuate - they provide security. I think the season is right, the market is ready and the opportunities are great.

docmartincohen said...

I'm puzzled why crypto-currencies stop countries going under, say through excessive spending and borrowing? What happens with a country like Greece - pre Euro - is the currency devalues, and post-Euro, the Eurozone generally pumps new money into the economy in exchange for some structural adjustments. With the crypto currencies there is nothing to stop the currency going up - and then crashing.

Thomas O. Scarborough said...

They say that if it seems to be too good to be true, it is too good to be true. The growth in itself seems troubling, although it is not all a story of growth. It seems to me, too, that money must always come from somewhere. If there is too much of it coming in, someone else is paying for it.

Emile said...

Docmartincohen - good ponder. I think that mismanaged cryptos will do the same as mismanaged fiat currencies. The difference is that you cannot simply print more cryptos, or regulate the value. The challenge is that while there are many benefits to a country adopting its own altcoin, the global market does not yet trust it. Also, access for those who have not digital connectivity is a concern. The learning curve is also a hiccup. It is my thinking that the market will transition in time.

Emile said...

Thomas Scarborough - I agree. The growth cannot be sustained. If you had purchased USD 1.00 when Bitcoin emerged you would have about USD 26 million now. ICOs (Initial Coin Offerings) provide some unique opportunity at adoption but the potential growth cannot be sustained. It is my thinking that positions held now will continue to do well as institutional and big money buys in. That window will last for a couple of years. Thereafter it will stabilize - and answer many of the challenged fiat currencies face. Bitcoin has done over 30% since the start of the year. My stable investments are producing about 8% a mnoth.

Emile said...

About 50 million people currently utilize blockchain/cryptocurrency based assets in one form or another. That number is expected to reach a billion in the next ten years.

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