How cryptocurrencies will change the current economic structure (Final Part)
Alongside the continuity of the present monetary system, something new has appeared since 2009: cryptocurrencies. What do they represent? A discontinuity. Both these forces will eventually collide. What will come out, will represent a new paradigm within the economic environment. Cryptocurrencies, therefore, are nothing more than the free-market response to obsolescence that over time has been infesting the monetary system. It is the way in which the a priori of economics theorems reveals itself always true: laws in economics can be circumvented, but not violated. By virtue of this, a new industrial revolution could be at hand. From 3D printers to cryptocurrencies, the world as we know it could change in one or two generations at most.
And what the nineteenth-century industrial revolution mainly alleviated? Poverty. Take for example one of the latest ICOs: the Everex project, which considers financial inclusion an integral part of its mission. The company that has developed this project plans to provide microlending, remittances and merchant payments to all those individuals who can no longer turn to the commercial banking system. This suggests that there is no more need for the state to look after the poor, as the instinct of solidarity is present in all of us without the presence of third parties to redistribute personal income.
Not only that, but the philosophy behind cryptocurrencies is also bringing with it a change in mentality: a departure from socialist policies in favor of a vision more focused on freedom. As a completely decentralized payment mechanism, Bitcoin has shown us the power of markets to create valuable “digital assets” and limit the ability of governments to preclude its use. Moreover, by its nature Bitcoin is mathematically scarce in supply, shielding it from an arbitrary devaluation (something that even the commodity-money could not boast). Despite this, skepticism is still prevalent in regard to cryptocurrencies, mainly due to their “unorthodox” birth. The objections are two mainly: cryptocurrencies will never be money and cryptocurrencies are a bubble.
Let’s start with the first objection. Although cryptocurrencies do not violate the Misesian Regression Theorem, perplexities remain regarding its immateriality and widespread acceptance. Given the way in which a commodity spontaneously becomes money, and how it has a pre-existing value based on its “non-monetary” use, is it possible that cryptocurrencies can become widely accepted means of exchange? It is. People accept euros, dollars and yen because they know their pre-existing purchasing power. In other words, they have a point of reference for assessing fiat money today because they know what they could buy yesterday. Well, the same goes for cryptocurrencies: just look at what they can buy today compared to yesterday. Moreover, the list of companies that accept cryptocurrencies is getting larger day by day. Not only that, but consider also the employees who accept them as wage.
“Being money” does not mean crossing a threshold, rather it means that some goods are more salable than others and their continued adoption over time tends to reduce price volatility. And here comes Bitcoin: it is not the most popular commodity, but it is moving from not being money to being money. If we were to remain strictly in line with the definitions, then not even gold would be money, since nowadays almost nobody accepts it as a medium to buy other goods and services. Bitcoin is following this path because no one forces its use, instead it’s freely chosen by individuals. The more its adoption increases, the more the price will grow until it finally stabilizes. We can trace back its purchasing power until we reach the first transaction in which Bitcoin was used as a means of exchange. The reason why someone acted in this manner is irrelevant, what matters is that someone actually did it and in this way provided an objective point of reference so that the market as a whole could evaluate Bitcoin.
Regarding the second objection, recent price surge did not come out of nowhere but was the result of financial and technical improvements that encouraged the use of Bitcoin. Over time, more and more perplexities have grown over the scalability of the cryptocurrency invented by Nakamoto, with concerns about use and security. Fortunately, the network avoided a hard fork last November and instead chose a harmonious path. In August 2017, a change called “segregated witness” was activated. This would have increased Bitcoin speed without compromising security or decentralization; while in December, giant steps were taken to implement “lightning network”, an infrastructural development so that small transactions can be speeded up without running into high fees or slowing down the blockchain. Not to mention that at the end of last year two Bitcoin futures were launched on Wall Street.
In short we are practically witnessing a voluntary transition from a lower to a higher level currency, and its adoption is embodied by the individual actions of market players rather than imposed by a monopolist able to manipulate the system. In fact, from a theoretical point of view, the growth of Bitcoin can be analyzed according to the Metcalfe Law, that is, as the users network increase, its value increases. It is a reasoning applicable also to cryptocurrencies. On a normal chart it may actually look like a bubble, but if we set a logarithmic scale we can see that the peak has not been reached yet.
Finally, if we analyze the price of Bitcoin according to a Price to Metcalfe Value Ratio (similar method used for equities with the Price to Book Ratio), we will note that the price was more buoyant in 2013/14 rather than today.
The beauty of the world of cryptocurrencies is precisely the fact that it is all a becoming. Nothing is immutable, but all is in transformation. Then it is clear that we must carefully choose which cryptocurrency to trust. Not all are good, and not all are equal. Beyond the fluctuations of the quotations, it is the development of the technology that will decide which cryptocurrency will survive in the long term. From this point of view Bitcoin challengers are divided into two large categories.
On the one hand the coins that try to overcome the problems of scalability, i.e. the fact that the blockchain is becoming increasingly clogged and fees highly expensive, therefore proposing an evolved version. This is the case of Litecoin, which makes transactions less “hefty” and faster, or Bitcoin cash, a recent schism from the original Bitcoin. These technologies will help cryptocurrencies to establish themselves as an effective medium of exchange, a fundamental feature that has remained marginal until now.
On the other side there are other altcoins that are born with an autonomous blockchain and have different vocations. For example, Ethereum is a platform for the creation of smart contracts, which pays the use of its computing power with an unit of account called Ether. Cardano is a similar version born in Japan, while Neo was born in China. Ripple is different, since it is an evolved alternative to Swift. It hooks a virtual currency to its service that could be used to facilitate international trade. Not really a follower of Bitcoin, which arises as an alternative to the traditional banking system. Project similar to this, and designed for the banking world, is Waves. Moreover, for those worried about their privacy and believing that the anonymity of Bitcoin is not enough, there are alternatives like Monero and Zcash: the first creates false addresses to hide the recipient, while the second one encrypts it.
Among the other cryptocurrencies, those to be particularly looked after are: Lisk, following the example of Ethereum and aiming to create a decentralized application system, presenting itself as an alternative to services such as the Apple app store or Google Play. A system whereby developers can build apps, via SDK, and distribute them to the public without a centralized control system. Dash, a cryptocurrency whose project aims directly at a real use (i.e. from wine to rent) and the replacement of traditional fiat money. Another important detail is the fact that Dash uses a PoW-PoS hybrid system. Iota, a cryptocurrency with the potential to trigger global interoperability, and Decred, a cryptocurrency censorship-resistant anchored to a public proposal platform. Stratis, a BaaS (Blockchain as a Service) platform designed as a service for companies and professionals. Each user/client can create his own private blockchain to use as he sees fit (i.e. logistics management). It is more precisely a sidechain, bound to the main blockchain.
As we can see, the best developments are found in entropy. With cryptocurrencies, in fact, individual choice matters. And however unpredictable will be, it will always bring order.
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