While the emergence of the Bitcoin is nothing new, its exceptional surge in value and fame is something unprecedented, therefore the world of finance is still in the process of adaptation, and while the seemingly never-ending climb of the cryptocurrency is a tempting opportunity, it would be wise to familiarise yourself with the risks and the implications, states Thomas Hughes.
At the moment, there is a great amount of hype around cryptocurrency trading. It is quite likely that you may have seen people on social media newsfeeds claiming that it is currently the only thing worth investing into, but before you put half of your life savings into a piece of code that represents an amount of money seemingly inflating without end, consider its longevity and what does it have in store for the future of the economy. Admittedly, the bitcoin and its contemporaries are an alluring way to flip some quick money, perhaps even in very large amounts, but their role in the economy goes well beyond personal profit. The development of blockchain technology and the introduction of cryptocurrency into the global economy will most certainly change the world in ways that history has never seen before and we must be prepared to face the consequences of such a drastic disruption.
The first factor to consider is that everyone will want a piece of this brand new cake, including sovereign governments, institutional investors and central banks. The concept of an untraceable, anonymous currency has prompted the world's financial superpowers to acquire new territory and now, many institutions across the globe are seizing the opportunity. Major banks like Barclays, Credit Suisse, Canadian Imperial Bank of Commerce, HSBC, MUFG and State Street have joined UBS, BNY Mellon, Deutsche Bank, Santander, NEX and blockchain startup Clearmatics in a project to create a “utility settlement coin” – a blockchain based currency that seeks to facilitate settlements between banks.
In the West, JP Morgan and The Bank of America have both already filed for blockchain-related patents. In the East, Russian president Vladimir Putin has authorised the creation of the CryptoRuble, while China's Guiyang Blockchain Financial has launched the Asset Collect Chain in May 2017 with the intention of achieving global asset digitisation. Even Venezuela, in the midst of a devastating crisis, has undertaken to introduce its digital currency 'Petro' while the Bolivar Fuerte is experiencing devastating hyperinflation. As the world’s governments and major financial institutions make their move on the realm of cryptocurrency, two potential outcomes are most likely to occur and must be carefully studied by anyone who intends to take part in the cryptocurrency rush.
ASSET BACKED CRYPTOCURRENCIES
On one hand, we have the possibility of the world adopting the Bitcoin, Ethereum, Iota, Ripple and other currencies as part of its essential arsenal. At the moment, those units are backed by nothing more than computer code and the power of supply and demand. Their value, in its incredible grandeur, continues to surge mainly because of speculation - save for the highly questionable wonders of the dark web, users largely buy and sell bitcoin for the profit of trading.
What happens when financial giants decide to back the cryptocurrency with physical assets, such precious metals, or oil? The current financial system is built around the dominance of fiat currencies – money based on debt, but not supported by any physical commodity. In this regard, cryptocurrencies are not that much different, seeing as their value is based on the relationship between supply and demand, even though they are not controlled by a national government like other fiat money. Intrinsically decentralised, the essence of cryptocurrencies is to follow the activities of their users based on the protocols that define them and the decisions of their miners, without any actual tangible worth.
However, unlike fiat currencies that central banks can produce indefinitely, cryptocurrencies have their ceiling. Bitcoin, for instance, is capped at 21 million and is expected to be reached by 2140, with the reward of a new block halved every 210,000 blocks. Just like gold, there is a finite quantity of it, thus the two can naturally complete one another: while cryptocurrency comes with risks such as value volatility and the lack of liquidity, gold provides a stable foundation to compensate for it, and in exchange, the data security and independence of cryptocurrency opens the doors to the freedom of financial transaction that currencies like the Euro and the USD do not allow for. If the gold, or other physical assets, came from an independent source, governments would thus lose the power to exert their control over the personal finances of users within their jurisdiction.
On the other hand, this whole scenario may just as well take the opposite route. For instance, Wall Street futures trading have now enabled speculation in this field, which could potentially lead Bitcoin’s swelling bubble to a devastating burst. Recently, the Chicago Mercantile Exchange and the Chicago Board of Exchange have both launched Bitcoin futures trading, and with the Nasdaq expected to follow suit, it has carved a corner for the Bitcoin within the realm of mainstream finance. This will indubitably accrue the price of the cryptocurrency, however it will also pave the way for more scrutiny and regulations which could eventually fetter its growth and potentially bring it down altogether, not only in the U.S., but also in the rest of the world, as both Hong Kong and Korea’s financial regulators have already communicated warnings that limit securities firms in the endeavours of Bitcoin futures.
THE GREAT RISK OF CENTRALISATION
So, while the hype around Bitcoin seems to suggest that it could be legitimised by the futures market, all it really does is inflate its bubble. If there is anything to be learned from the world’s history of economics, it is that most things that soar too high too fast, crash even harder and faster. Within a year, the Bitcoin went from $798.98 on December 20, 2016 to $18,791.08 on December 19, 2017, according to CoinDesk. Despite the seemingly promising climb in price, the cryptocurrency’s lack of intrinsic value turns investment into a gamble, with a future that is left at the mercy of speculation, sugarcoated as sustainability by the hype of the crypto community.
Whether the aforementioned burst will occur or not, another substantial risk to the introduction of cryptocurrency under the control of governments and major financial institutions is the end of its decentralised privacy in favour of ultimate control at the hand of central banks.
Considering the fact that endeavours such as the Asset Collect Chain already seek to digitise assets on a global scale, it should not come as a surprise that in a world where the war on cash and personal wealth is an ongoing reality, the potential of blockchain technology falling into the wrong hands would mean not only the eradication of cash, but also the end of financial privacy altogether. If the bubble of the currently anonymous and untraceable Bitcoin were to burst and the fall of the crypto giant would give way for the rise of an institutionalised digital currency that governments and banks across the globe already actively strive to solidify, the benefits of this technology could easily turn into the biggest attack on private wealth in human history.
DEADLY IN THE WRONG HANDS
The advantages of Bitcoin include its open source software development, with no counter-party risk and the flexibility to use funds discreetly anywhere – it is, perhaps even more than what mp3 and Napster were to compact disc – a significant disruptor to the otherwise heavily controlled market of currency. It allows the users to detach their wealth from institutional scrutiny and regulation, and to relocate their balance from a bank to their personal computer or phone. However, akin to a Trojan horse, those “gifts” promote very appealing solutions, yet could bear devastating consequences much like fractional reserve banking, negative interest rates and quantitative easing, all of which have been presented as sound techniques to assist the economy, but in the end have proven to be nothing more than tools for private wealth confiscation.
If the blockchain technology fell into the wrong hands (a label that central banks most certainly qualify for, given their track record), in the event and aftermath of a complete systemic collapse of our monetary system and loss of faith in physical money, digital currency would offer institutions complete totalitarian control of our medium of exchange and consequently, our personal wealth. If the world loses confidence in the entire notion of physical money, be it gold, silver, gems or even fiat cash, the emergence of central bank controlled digital currency would mean no end to wealth confiscation, scrutiny of financial activity, tracking of individuals, and it may even become impossible to buy, sell, or engage in commerce without
complying to the restrictions of such technology. Ultimately, cryptocurrency investors should consider all of these fundamental issues when investing in the blockchain. EG