Once my old friend had asked me if I believe in cryptocurrencies. I have answered this:
“My friend, one can believe in God, in the spouse and in the president of the country, where he lives. Cryptocurrency is a technology! So, one has to study it in details and make the decision to use it or not, only based on the level of his understanding, but not on trust or believe.”
Money in itself, in any form, regardless of whether they are fiat currency or crypto, play extremely important role in the life of each person. Obviously, ancient coins, as well as any modern currencies, their historical genesis and the way how they function and influence global economy and personal being is just a science. The deeper is the level of the individual’s understanding of this science, the better this knowledge can be used to improve the person’s life and to achieve individual goals.
There is quite a number of theories regarding the genesis and nature of money. All of these ideas have been developed by prominent philosophers and economists. The first known author of functional money theory was the Greek philosopher Aristotle, who already in the 4th century BC has explained five characteristics that define a functional and convenient money. According to Aristotle the money should be:
- durable for long enough time;
- portable;
- divisible;
- fungible – this means, that money should be exchangeable for any other publicly acceptable currency, without necessity to exchange it back to the original money;
- intrinsic value – this means, that money should represent/contain certain value and this inherent value should be independent of any other commodity or object.
Despite the wide variety of different modern theories of money, no one has yet contested most of the characteristics of "good" money given by Aristotle thousands of years ago. The only significant revision was done to understanding of the intrinsic value of the money. Modern thinkers no longer hold that the acceptance of money as a medium of exchange should rest on the intrinsic value possessed by money itself. It is this assumption that determined the difference between the concepts of money and (fiat) currency. Money is something that contains an intrinsic value, and currency is almost the same, but does not contain such value. Exactly this belief has justified the transition from “hard” currencies backed by the gold standard to (fiat) currencies, which are not based on the gold standard (Jamaica Accords, 1976-1978).
Despite the wide enough diversity of existing theories of money, for today there are only two fundamentally different approaches to this issue.
The first approach dogmaticizes the centralized nature of money, when the state acts as emission and regulatory monopoly. It is exactly this “centralized national currency”, without any intrinsic value (without golden standard), when the issuer of the currency (government or central bank) enjoys complete unaccountability, has led us to inflation, massive poverty and arbitrariness of the central government in relation to its people.
The second approach is based on the assertion that anything that possesses the basic classical characteristics of currency (durability, portability, divisibility and fungibility) and is recognized by society as a means of exchange, can be considered as currency. In fact, this second approach just denies the need of government’s monopoly on emission and regulations as necessary feature of “good” currency (e.g. Friedrich Hayek among others).
Was there a reliable technology thirty years ago that could create this "anything" that could be considered a currency? Approximately thirty years ago, mankind invented the technology of remote information exchange between computers - the Internet. The Internet revolutionized distanced informational exchange and formed a foundation for a lot of inventions, from Internet-trading (Amazon) to active distances communication (Skype, Viber, different messengers, etc.) and socializing (Facebook and other social networks).
We got an opportunity to exchange with each other texts, pictures, voice and video recordings and other information. But after sending the photo to one of your friends, it still remains in your possession and you can send it once more to another your friend. This is the equivalent of “double spending”. It is for this peculiarity of information exchange that only Internet technology itself does not allow us to exchange values.
Invented by the unknown character named Satoshi Nakamoto, blockchain technology successfully solved, among others, also this problem by securely eliminating the possibility of double spending. Among other obvious features of the created through blockchain Bitcoin, are its durability, portability and divisibility.
One of the Bitcoin’s very unique characteristic is the initial limit on the number of coins that can be created or ‘mined’ (limited emission). This feature offers very strong protection against inflation of the bitcoin’s value (not the exchange rate!).
Yet still, the Bitcoin’s (and other altcoins') most disputed property is its decentralized nature. In easy words, it is technically impossible to introduce centralized regulation to bitcoin, as well as to a number of other altcoins. This impossibility of centralization is simply included in the algorithm of bitcoin’s blockchain.
It is for this very reason that all discussions concerning the state regulations of bitcoin (and other cryptocurrencies) at the end are just a waste of time and effort. The only regulation which the government can effectively impose is control over exchange operations, where only income in fiat currency received from selling cryptocoin(s) could be controlled by government in one way or another. In fact, the state to some extent controls the turnover of the fiat currency because of its centralized nature.
Everyone can independently assess the real effectiveness of this control, simply by remembering scandals such as the leakage of documentation from Mossack Fonseca and later - the Panama Papers. Despite the almost complete destruction of the confidentiality of banking services, government agencies failed to prevent suspicious multibillion-dollar operations committed among others by prominent political leaders and senior government officials.
So, let’s see it clearly – the most “sensitive” and fundamental difference between fiat currency and crypto is the decentralized nature of the latter. And, the main argument led by apologists of the fiat currency is that no one regulates the crypto currency and no one guarantees its value! Firstly, the advantages of currency being regulated from some center that operates outside the control of society, are very doubtful. Secondly, for one to get an idea regarding the real “value” of fiat currency it is enough to analyze the statistics of purchasing power of, for example, of the US Dollar. Some data from 247wallst.com allows to estimate that in order to purchase in American store the same assortment and quantity of goods one had to spend 1.00 USD in 1975 and 3.98 USD in 2000. Should these economic data serve as sufficient confirmation of unconditional advantage of centralized fiat currency? The public is forced by centralized power to use a national currency, the regulation of which is completely monopolized by same central power. Also, the most obvious consequence of currency centralization and monopolization by any central power is inflation, which causes every user of this currency to simply lose their wealth (and freedom as well).
Beside obvious advantages of decentralized nature of the majority of cryptocurrencies, the fiat currency has also some benefits compared to crypto: fiat currencies are more widely accepted around the world; and purchasing power (the value) of main-stream fiat currencies is currently more stable than the same of crypto.
However, a deeper and more thoughtful analysis of these advantages is capable, if not completely destroy faith in them, then at least sway it strongly enough.
Certainly, at the present moment cryptocoins are not that generally accepted. The number of cryptocoin users is still just a fracture of all global market participants. But the entire history of crypto is just ten years old! Is it right to compare the results of the ten-year history of cryptocurrencies with the results of several thousand years of centralized money domination?
In short term (10 years) purchasing power of fiat currency is obviously much more stable, than the the same of cryptocoins. This statement is quite true, if you do not take into account that less than ten years ago (May, 2010) Mr. Laszlo Hanyecz has paid ten thousand bitcoins for two pizza with home delivery. Just how many pizza with home delivery can you buy today for the same amount? Definitely, the buying power of bitcoins is not stable! And the above example is the best confirmation of this.
In general, the volatility of cryptocurrencies is high. We have experienced really sharp changes of the exchange rate of cryptocurrencies against the fiat currencies. And what? This is just the economy! Most probably some people with huge assets in crypto are in a position to manipulate current rate of bitcoin on free market; in the same way, like some people with huge assets in fiat are in a position to manipulate the value of stock papers and rates on the Forex market. And, under given circumstances, each of them, who can, alone or together with others, will try to manipulate the market simply in order to put in his pocket the maximum possible profit. This kind of “pump-and-dump” hustle was performed, are being performed and will be performed as long, as the humans are on the market; using all kind of currencies, commodities, other available assets under the condition, that someone has managed to concentrate huge enough wealth in their hands. This is just a common type of human nature!
It is the same common property of human nature that makes a person who has managed to concentrate political power in his hands, steal money from the budget, take million amounts of bribes and easily commit other actions that he publicly condemns in words.
So, volatility because of manipulations is not solely and exclusively the feature of cryptocurrency. This is the consequence of human actions on the cryptocurrency market, as well as the same on other markets. By the by, some individuals prove to be clever and lucky enough to take their share of the cake even if they do not have considerable capital.
It is obvious, that cryptocurrency is not a fraud; it is simply a new form of something much beloved by many: money. The form, which is really more convenient, more easy to use and less dependent on centralized manipulations. Exactly this independence from centralized regulation is offering to the cryptocurrency users the opportunity to maintain their personal financial freedom and independence. And, finally, your only guarantee from not to fall a victim to scam, as always before, is your qualification, your knowledge, your personal non-avidity, non-greed and your individual immunity to the a dream to break a huge jackpot without much work and efforts.
-Author: Alex Alcazar
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