13 Oct 2020 | Uncategorized
Multiply this many times over, then add in rapidly and evolving crypto and other interacting ecosystems, and it becomes clear that there are no short-cuts to understanding; either to grasping the mechanics, nature, potential, or danger of cryptocurrencies. Elsewhere we have noted the soundness of the fundamental idea, but without an equally sound and exhaustive understanding of the ecosystem, investors are going to be lost at sea. Continuing that metaphor, our need is for a thorough understanding of weather systems; the fundamentals that separate good sailing prospects from the bad.
To facilitate this journey of understanding we previously set out six questions and answered two of them; defining then listing the characteristics of a cryptocurrency. We now move on to tackling the remaining four:
Inherent Value in Fiat Currencies
In an era where printing presses are running overtime, it might surprise the reader that fiat currencies not only possess inherent value but that this value is nothing less than astronomical (which explains why the global banking sector is so large). This value is not in the paper per se, but the payments system infrastructure that surrounds it. Most of the time it is unnoticed and innocuous, but, for example, use some kind of payment-friend app to send money out of the country and find the recipient only receives around 80% of the total; losing a considerable slice to exchange rate and transactions fees.
Alternatively, you can send fiat abroad via your bank, but there are still fees and even bigger costs in time. If you are a domestic business you pay a fee every time you receive a payment through a card, smartphone pay, or cash. In Economic terms, we cite these as examples of seigniorage (though not in the traditional sense) and arbitrage.
At this juncture, two things become very clear. Firstly, there is a lot of money to be made in money. Secondly, if a way can be found to replicate what money does but without fiat and the fiat infrastructure, the result would be a win-win situation. Less drag would be placed on commercial efficiencies benefiting the global economy as a whole. Best of all, the most disadvantaged under the current system would benefit the most.
Global GDP could grow at several percentage points higher, almost in perpetuity. Over a generation, this would make a considerable difference both by opening up opportunities to new forms of commerce in mature economies and in enabling the developing world to participate more fully in global commerce, benefiting everyone.
Cryptocurrency as the Next Step in Finance
This, of course, is the potential of cryptocurrencies as a best-case scenario. It is not, however, the only one. Previous articles have made references to digital fiat and other tokens and to the centralized blockchain, all of which will facilitate commercial and Central Bank fight-back. While there is a lot we could explore at this juncture, only four critical points need to be made:
What these points do is obviate risk by defining parameters. One additional point now needs to be made; the market is immature and unproven. As with any infant, the dangers are those of emotional volatility, failure of discipline, irrationality, and lack of moral compass.
Those who can exhaustively describe the mechanics and characteristics involved in this infancy are best equipped to engage in the more lucrative, but risky, cryptocurrency investment opportunities. For others, these are pathways to explore and learn, and so build foundations from which take advantage of future opportunities. Such ambitions may sound overwhelming, but in the end, everything distills into supply and demand, and the factors that shape them.
This all having been said, there is one defining characteristic totally outside market forces that can change everything; government legislation.
The Three Trajectories of Crypto Adoption
In conclusion, we map out some potential longer-term cryptocurrency trajectories:
All three scenarios are actually being played out. The fundamental factors driving them have been increasingly in play since 2008, but a combination of COVID-19, supply chain weaknesses, the move away from globalization to new geopolitical realities, together with the rise of bilateralism, have all provided a coalescence and an impetus hard to exaggerate.
The good news for unseasoned investors is that this is a learning time for everyone, which, in part, levels the playing field. The successful investment will largely depend on how much FOMO can be set aside in favor of developing critical strategies and tactics. It is this that separates the investor from the fly-by-night speculator. In parallel, it also separates the sound opportunity from the modern-day Ponzi scheme.
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