This article was written in 2013.
As governments around the world manipulate currencies through quantitative easing and other slew of foreign exchange mechanisms and fiscal policies, some of you may have seen your savings depreciate in value. That means you can now afford to buy a lot less than what you could some few years ago. Research has shown that currencies have depreciated by over 8 times in the last 50 years alone. Our hard earned money seems to be depleting each day even though the figures on our bank statements tellus otherwise.
The Era of Quantitative Easing
Take the US dollar for example – the world’s trading currency. Lots of governments and sovereign wealth funds around the world hold US dollars since much of the trade around the world takes place with US dollars. There could only be one winner to this game of quantitative easing, and that is no other than the US. With quantitative easing comes depreciation of the US dollar and this means that whatever holdings of US dollars held by these governments, funds and even individuals, would depreciate in
value. So much so that most have lost faith in paper currencies. Does this hurt the US? What the US loses in its dollar value can be more than made up for with the printing of more US dollars. It is no zero sum game here. In fact it works positively both ways for the US. Not only can the US afford anything it so desires simply by printing more of its own dollars, it also helps that the depreciation makes US exports appear
cheaper and thus improves its trade. Much as other countries would follow suit in printing more of their own currencies to shore up its trade imbalances, none would have the might of US since other currencies are not widely used for trade and therefore
is also subject to conversion to US dollars in order for trade to take place. So there could only be one winner in this game. Where countries like China work extremely hard to produce goods, US can easily buy anything simply by printing more of its dollars, and in the process, causing inflation on a massive scale. There is a saying that China can produce anything in this world. But I would also add that the US, with its monetary stimulus program, can certainly buy almost anything that China and the world can ever produce. In fact, “hot” money has been streaming into Asia, causing escalating prices in sectors like real estate and commodities. And this could potentially create asset bubbles that could cause serious repercussions to the fragile economy which is still recuperating from the financial crisis of 2008. Surely this is not socially responsible behavior. As citizens of the world, everyone should do their equal part to contribute to society’s advancement and not rely on the printing of fiat currencies to pursue their ends. Some may argue that QE simply serves to stabilize the economy. True. But at what cost? At the cost of citizens across the world? Where hard earned savings are slowly but surely eroding in value by the day? At the risk of causing another financial meltdown?
The Bitcoin Era
Well, not unless there is another currency, another global trading currency that is, that
could replace the US dollar as the world’s trading currency. Enter the era of Bitcoin. A “pseudo” currency, as you may call it, but one that has bucked the trend of depreciating dollar values; one that many may not even have heard of or used. Bitcoin is the world’s “first decentralised digital currency”. It has appreciated over 12 times in value since the start of 2013 to trade at US$250 per bit coin at its high, but has since dropped to US$150 per Bitcoin.
So what is this Bitcoin and why has it appreciated against all currencies, even
surpassing the rate of inflation? Well, unlike traditional currencies which are issued by central banks and appears in the form of printed currencies, Bitcoin has no central monetary authority and has no physical presence. Instead, it is underpinned by a peer- to-peer computer network made of its users’ machines and we would probably never see a physical Bitcoin in circulation. Bitcoins are mathematically generated using computer networks executing difficult number-crunching tasks. The system was set up so that it becomes progressively more difficult to mine Bitcoins over time and the
total number of Bitcoins that can ever be mined will be limited to just 21 million. There is therefore no way a central bank can utilize its quantitative easing guise to devalue currencies already in circulation.
The process of mining is much like solving a complex cryptographic equation. If your computer gets the right answer, you will be awarded with a block of Bitcoins. On average, one block of 25 Bitcoins are mined every 10 minutes. As more miners joins
the race, the level of mining difficulty goes up as compensation to push the rate of Bitcoin block creation down. The value of 25 coins per block is halved for every 210,000 Bitcoin blocks mined, ensuring that less Bitcoins can be mined as time progresses. This in turns controls the supply of Bitcoins and therefore its value.
Bitcoins can also be bought and sold in return for traditional currency on several exchanges and can also be directly transferred across the internet from one user to another. This makes Bitcoin potentially an attractive currency in which international transactions can be settled without the costs of bank charges, transaction charges and the hassles of dealing with international exchange rates. But will it resolve the ills of traditional currencies? Is it ready yet to do this?
In an age where we can buy just about almost anything over the internet, an online
currency makes for convenience and expediency. It facilitates transactions over the internet to anyone in the world. Even real world brick and mortar transactions could benefit from the use of online currencies. Imagine just using your phone or mobile device to pay for any item you pick up from brick and mortar stores anywhere in the world or via the internet, without having to consider exchange rates or the fees that come along with conversion, without the need to handle dollar bills and without the high transaction fees involved. Sure, there is Paypal. But unlike Paypal, where credit cards are required and the transaction is still denominated in traditional currencies, with Bitcoins, there is no need for credit cards and bills; and the hassles that come with it. No need to carry large amounts of cash in hand. And most importantly, one can be assured that whatever Bitcoins one has in their eWallet stored somewhere in the online space, will not be easily depreciated by some actions or decisions of governments around the world. For unlike dollar bills which can be created at will by the Federal Reserve to pay its bills, the supply of Bitcoins is determined by forces outside the control of government officials.
Bitcoin as the World’s Trading Currency?
For naysayers who say that Bitcoin is but a bubble because it has no intrinsic physical value nor any future earnings except for what people are willing to pay for it, I would add that the same could be said of gold. Gold certainly has ornamental value, but little commercial value apart from being used in tiny proportions in electronics and dentistry.
Yet people have pegged a price to gold at values that are somewhat unimaginable, only because of it being much of a relatively rare commodity. A price of $1200 per ounce of gold and $150 per Bitcoin is surely not justified by the fundamentals. But neither is a price of 1 dollar. There are no fundamentals. But as long as someone gives you your candy bar in exchange for that dollar, you would not call dollars a bubble. Butwould someone give you a candy bar for your Bitcoin? That is the bigger question.
And then the green activist might argue that the mining of Bitcoins wastes energy.
Powerful computers are required to mine Bitcoins due to the complex nature of the mining process; the amount of energy used to mine bitcoins per day was last estimated to be equivalent to the energy powering about 31,000 homes or US$147,000. But
again, the same can be said of gold and paper currencies. Resources are required for the mining of gold and printing of currencies requires both electricity and paper, which also means trees are being lost in addition to energy consumption. However, these surely consume less energy than that of the thousands of miners using powerful computers to mine Bitcoins.
Another important issue would be that the opacity and complexity of the system means it appeals to those with more nefarious purposes – Money laundering, illegal drugs,
human trafficking. But then, could one also launder paper currencies in the same way?
However, that the ease of the Bitcoin system enables convenient trade, is a double edged sword. On one hand it creates all the convenience to effect trade, whilst on the other hand, it makes it convenient for criminals to get away with their wrong doings. But I am certain that if the geniuses who invented the system wants any good out of the system, they would surely be able to use their genius to also enhance the system to ensure that checks and balances are in place to prevent misuse of Bitcoins. For if that is not done right, governments around the world would surely seize on this flaw in their quest to stem out this threat to their current fiscal system.
The Devil or the Deep Blue Sea
Should we leave our finances in the hands of governments for them to manipulate or should we as citizens of the world embrace a more transparent system where the market decides? The solution to one extreme, is definitely not the other extreme end!
I reckon the dominant issue for Bitcoins is that the ability to trade Bitcoins in an open market could work against the good intents of the system and this could be its undoing.
In recent times, the wild fluctuation of its value means that if I had 10 Bitcoins worth US$2,500 today, it could be worth only US$1,500 some 6 months down the road. Sure, the value of Bitcoins may go either way; that value could be worth even US$5,000 in time, but that would be a gamble and I would then have to time my transactions in line with the wild fluctuations of the Bitcoin market in order to maximize my gain.
Despite this, many evangelists still propagate that this is the new currency of the future. In the last year, Bitcoin found its way to “legitimacy” with backing from some of the who’s who in Silicon Valley. Peter Thiel, founder of PayPal who invested $2 million dollars in Bitpay,; Fred Wilson, Union Square Ventures, who backed Tumbler and Foursquare, forked over $5 million to Coinbase; and the Facebook twins own one percent of all Bitcoin. They had elected to put their money in a mathematical framework that is free of politics and human error, but still subject to the wild fluctuations of the market. Are these investors just capitalizing on the volatility of Bitcoins and not acting for the social good of the community? Will they turn out like all the other traders and bankers on Wall Street who relentlessly use money to make more money? The fact that these investors are setting up parallel structures like ETFs, Exchanges and Funds to trade Bitcoin is cause for suspicion. Should we again entrust our hard earned cash in the hands of these “wanna be” bankers and traders who can cause wild fluctuations in the value of Bitcoin? On the same note, should computer whizzes be awarded free Bitcoins simply because of their programming prowess and the size of their CPU?
These questions erodes some trust we can put in Bitcoins. Another point of contention would be that Bitcoin is not yet widely accepted by the merchant community. Even its online presence leaves much to be desired. But perhaps it could be that the wildly volatile valuations of Bitcoins makes it tough for a merchant to accept. It’s like a gamble, for one day, the 100 Bitcoins you charge for a project could be worth anything between $15,000 and $25,000 when you receive payment upon completion of the project. So what pricing mechanism should merchants undertake in their bid for stability? Will a Bitcoin that cannot buy you even a candy bar serve our society any social good?
It is not that Bitcoin is a bad proposition, it is rather that Bitcoin should address these issues if they ever want to take on the world and do good for society. The case for an online currency that would serve the social good for citizens of the world is there, but perhaps Bitcoin has not yet found the formula to do this right. And perhaps that is why we citizens of the world have yet to embrace this new found transparency and stability.
Most technological advances have the potential to serve the social good of the
community. However, the same technological advances have sometimes seen advancement to the detriment of society. Don’t get me wrong, the idea behind Bitcoin is a good one and one that could indeed serve the social good. I am all for an online currency, but I will not put my money on some strings of digits just yet. Call me a wet blanket, but I cannot fathom why we should be mining money from some mathematical framework and allow wild fluctuations that would again threaten to erode the value of our hard earned money. Or worse, have the potential to cause another financial tsunami like the economic crisis of 2008. What we need for an online currency to work is 1) to ensure the adoption of the currency by a wide group of merchants; 2) to enable the ease of transactions and conversion between traditional currencies and the online currency; and 3) to peg the value of the online currency to a basket of essential goods in every country that does not fluctuate wildly in value over time. For all it takes for a currency to gain trust is for it to be 1) widely accepted; 2) Easily transacted and converted; and 3) hold its value. And no mining of Bitcoins required, only exchange transactions between currencies, so we can just put that energy wasted to better use. Only then can we say that there is social good in such a cause, and definitely a leap for mankind.
But then again I am a computer idiot and thus mining numbers from the system seems like an impossibility which serves only to benefit computer whizzes and waste precious energy resources. I am all for transparency and stability of a new online currency that would be for the betterment of the economic system, just not one where the value is mined from numbers and created out of thin air, wasting precious resources in the process. Not one where there is potential also for traders and funds to create uncertainty in the underlying values; where we are again at the mercy of someone or some organization. And certainly not one if it cannot buy me my candy bar or pretty much anything else. So until this genius tweaks his Bitcoin system or another genius comes up with a new online currency to fulfil the above 3 criterion, my money remains snugly in the bank, denominated in traditional currencies – dwindling in value with each passing day.
PS (2019): since this article was written in 2013, we had indeed seen wild fluctuations of the bitcoin value. Trading as high as USD18,000 per bitcoin at one stage. But as long as it is open to manipulation and not widely accepted, bitcoin would forever remain as a store of value and little more.
In recent times, we have also seen trade wars, in particular, between China and the US. Not surprising as we all know the trade imbalances. Whilst China is working hard to produce what the world and US needs in terms of electronic gadgets, toys, household equipment…. US is stuck largely trading “paper” that they deem to hold value. They package debt, companies’ financials and resell these on paper to others. I personally question the value add of such services that wall street provides. They do nothing more than enrich the rich, and nary anything to serve humanity. It is time the US does some real work. Don’t get me wrong though, they have built a good country with good fundamentals. But they are exporting little that is of value to mankind except for the few corporate Giants who have pushed the boundaries far beyond what we can conceive. The key reason why they are afloat is because trade still takes place in USD and they have a weapons trade to prop them as well. Take that away and US has to do some real work producing goods and services that would benefit mankind.
Not that I want to see the downfall of the US, but I would prefer to see a revitalised US contributing productively like how Apple, Google, Facebook has done well. And with these giants, US can do even more to help the world and mankind.
The introduction of a new crypto currency would only help expedite that revitalisation process for the US and bring more stability to the world. This new currency should be legislated by a neutral government who has ties with the world and whose economy will be no threat to any other economy in the world. A peace loving country whose main purpose is diplomacy. A possible nation to administer such a currency would be Singapore. With its cosmopolitan nature, neutral stance, Singapore would do well to abide by principles, be friends with all countries according to principles and work through to administer a new trading currency. Singapore’s economy is after all too small to cause a dent in the world. It is neither an economic or a military threat. It has no ambition to conquer the world given its size, and it’s lack of natural resources mean that it would have to depend on every one else for trade. Additionally, it has a cosmopolitan culture with a large base of foreigners from all over the world speaking different languages. This makes Singapore quite an obvious choice. But it must maintain its neutrality Based on principles.
And importantly, this new currency must be administered
1) to ensure the adoption of the currency by a wide group of merchants;
2) to enable the ease of transactions and conversion between traditional currencies and the online currency; and
3) to peg the value of the online currency to a basket of essential goods in every country that does not fluctuate wildly in value over time. Hence if a big mac costs USD$5 in US and 1 Chinese Yuan in China, the currency exchange should be pegged at B$X = 1 Chinese Yuan and B$X = USD$5. You get the drift….
That said, it would not stop countries from printing fiat monies for their own consumption. The holy grail then is for a single currency to be adopted across the world. Only then, can every transaction be tracked and trade imbalances kept in check and nipped in the butt. The ledger could be open to the world in total transparency so that discrepancies and irregularities can be tracked by both people and AI.
Till then, a neutral trading currency backed by the blockchain, administered by a trusted, neutral country may serve it’s purpose in calling out discrepancies and injustices in the economy, smoothening out the trade and power balance across the world, and especially between China and the US.
Additionally, with jobs now going online, a single currency system will ensure that jobs pay equitable salaries which are not affected by the cost of living in certain countries. Admittedly, third world countries whose cost of living is very low, and whose currency exchange rate is low, will be able to offer their services for a much cheaper price compared to those living in 1st world countries where the cost of living is extremely high.
Moreover, if the holy grail of a single currency backed by the blockchain is implemented, the world will be a safer place since all transactions can be tracked and traced.
1) AI could monitor large transactions Transactions for nefarious purposes could be more easily called out and culprits called to justice.
2) corruption can be minimised through the use of AI to flag seemingly innocent but unrelated and unnecessary transactions.
3) recovery of misappropriated monies can easily be traced thru the ledger and perpetrators shamed and called to justice
4) transactions of persons holding large sums of monies could be monitored closely to ensure transactions are not for nefarious purposes.
5) a universal basic income could be more easily administered to ensure that the monies reached the intended recipient.
6) companies would not be able to cook their books or engage in creative accounting. Ensuring that companies are behaving in a socially responsible manner. Governments, organisations or corporates would have transparency in where their funding goes hence preventing any lobbying or nefarious funding programmes.
Greed and corruption would hopefully be stemmed if people are aware that transactions are being tracked and that they would be called out on irregular transactions. And hopefully all we are left with would be petty crimes that everyone can live with.
On the flip side, printing of dollars does not seem so bad if done responsibly and with the right intent. Printing money to give the homeless a home, provide all invalid with artificial limbs, to provide food for the hungry, provide a home for the homeless….. if everyone is engaged meaningfully and paid a decent sum for the world to function and countries do their part in contributing their fair share to the world and economy, I can’t quite see the downsides. In fact, if people were spending more money, businesses would thrive, more jobs would be created and the economy will be oiled well and good! In fact, giving money to the poor will ensure that money is spent, thus creating more jobs and meaning in people’s lives. There is only so much the rich can spend on anyways… and giving money to the poor does not make the rich any poorer, for after all, money is infinite, only controlled by those in power and inscribed a value that enables an exchange of goods. By putting money in the hands of people who need it and will put it to use, we can then ensure that money is working as it was intended – as a means of exchange to enable the world to function in a meaningful manner where money just goes round.
Except if done irresponsibly or if the countries disagree on who does more or what, then it could lead to dire consequences…. food for thought, perhaps.
A cryptocurrency on an app in the phone, tagged to a phone number and ID, would be the best way to enable this. Moreover, it would be the simplest way to effect a UBI and track nefarious transactions…
Perhaps a world governmentcould coordinate this effort….
Perhaps it would lead us to a utopian economy….