Why Cryptocurrencies Are Here To Stay
I first learned of Bitcoin in 2010, when a friend of mine tried to base a startup on it. At the time, the concept of dethroning the financial system with imaginary currency seemed ludicrous to me. A lot has changed since then, both with people's perceptions of cryptocurrency as well as the financial system itself.
Today almost everyone knows of Bitcoin, even if few people own it. You may love it or hate it, but with a market cap of 1 trillion dollars and billions already invested by large financial institutions, Bitcoin is here to stay. Bitcoin is more broadly classified as a cryptocurrency, and there are many more like it (Ethereum , Litecoin, and Chainlink, to name a few). Each offers a unique set of advantages and the industry has formed a completely new asset class over the last few years. To understand what makes cryptocurrency an attractive investment, we'll first examine the problems with the existing financial system.
Until recently, dollar has been the defacto standard of value preservation in the world. This is due in part to the Bretton Woods Agreement that established US Dollar equal to the price of gold back in 1944 (I should also note that US itself was already on the gold standard since 1933, 1944 was simply the year when other countries agreed to recognize dollar's value as well). US was able to dictate the rules because it controlled two thirds of the world's gold supply at the time and because its economy wasn't damaged by World War 2, like many European nations who were part of this agreement.
Despite severing ties between the dollar and gold in 1971, the perception stayed, since there was no better store of value. Residents of other countries suffering heavy inflation would often convert their assets to dollars. This is how many Russians survived the default of 1998, and how the middle class in many other countries such as China, India, Venezuela store their savings to this day. Today, more than 61% of all foreign bank reserves and nearly 40% of the world's debt is in dollars.
Despite tremendous trust the world has put into US dollar, our government has been betraying that trust for decades, and more recently at an accelerating pace. The Fed (Federal Reserve Board) has been inflating our life savings away at an alarming rate by minting new currency. It feels good to get a stimulus check, or to get an increase in minimum wage, until you realize that all the prices have increased as a result as well. This is why I have been investing in real estate, it's one of the few asset classes to benefit from inflation. However, the rest of the world has been waking up to this scam. The Fed has been running a giant Ponzi Scheme and it's just a matter of time until the value of dollar collapses, along with your savings.
Governments have proven over and over that they can't be trusted with managing our monetary supply, regardless of their promises. Not even the US government is free of this corruption. A famous Latin phrase "Quis custodiet ipsos custodes?" comes to mind (Who watches the watchmen?). Over and over again, when times get tough, governments think it's OK for them to bend the very rules they've been appointed to enforce. 23.6% of all US dollars in circulation were created in 2020, and we're not even done yet with the "stimulus". If you've read my last post on Mathematics of Inflation, you should understand the implications. So do millions of others who started to transition their savings into cryptocurrencies, an asset class that can't be inflated away.
Indeed, the main selling point of Bitcoin is its deflationary nature. Like gold, its supply is constant, no one can mint more Bitcoin. And while the critics claim that Bitcoin's value is imaginary, so is the value of US dollar (or any other fiat currency). The question boils down to whom you trust more, billions of other people who are in the same boat as you and have their own life savings in Bitcoin as well, or The Fed who has a clear conflict of interest with your goal of preserving your savings, has betrayed your trust multiple times in the past and is still betraying it to this day. US dollar is a sinking ship.
Janet Yellen recently scoffed at Bitcoin due to its energy use, and in doing so showed complete lack of understanding of the crypto ecosystem. Yes, Bitcoin is inefficient for everyday transactions, but it's still more efficient than the minting methods The Fed uses. Moreover, Bitcoin's purpose is a store of value, like gold. We don't transact with bars of gold, so why would one do the same with Bitcoin. What Yellen fails to understand is that there is an entire ecosystem of cryptocurrencies, including Ethereum, Cardano, Polkadot, Litecoin and many more that are designed to scale better.
Each crypto is designed for its own purpose. Some, like Litecoin, are designed to cut transaction costs (making Yellen's comment irrelevant). Others, like Monero, are designed to preserve the users' anonymity, and are popular in developing nations with corrupt governments. Moreover, all of these cryptocurrencies are interchangeable and can be instantly transferred anywhere in the world without having to pay the middleman (like Western Union) hefty fees for doing so. Bitcoin is simply the gateway into the financial system of 21st century. It's a financial system that solves the very problems The Fed has created. Yellen is uncomfortable with Bitcoin for the same reason taxi drivers are uncomfortable with Uber. But whether The Fed likes it or not, cryptocurrencies are here to stay. They will become part of our everyday life, powering our everyday transactions, real estate purchases, and contracts. Businesses and governments that don't embrace crypto risk becoming irrelevant.