Is This the Future of Money?

Popular investor Jim Grant is not a big fan of cryptos.

As he recently told The Australian Financial Review (AFR), their only quality is that they make fiat currencies look legitimate.

As he continued:

It must have come as personal wound to Janet Yellen [and the Federal Reserve] that someone is willing to pay $US10,000 for a digital thing undefined and prone to theft, uninsurable, and has no airline miles points attached to it.

‘More people will begin to ask “what is money?”

Bitcoin’s current market cap is US$170 billion.

Impressive if you consider that the market didn’t exist until 2009. Though still small when compared to other assets like the US dollar, which is at US$3.8 trillion and gold at US$7.5 trillion.

Or even compared to US companies like Apple, valued at almost US$900 billion.

Bitcoin price has had an amazing run

Bitcoin has had an amazing run since last year, with gains at around 700%. But its fast rise has divided the financial community.

Is bitcoin in a bubble? Or is it a new investment class?

Your guess is as good as mine.

Bitcoin has had incredible growth, but it is not the only reason why people are diving into cryptocurrencies.

To me, the interesting thing about bitcoin is that it is making people question what money is.

It is no coincidence that bitcoin came about in the aftermath of the Global Financial Crisis.

There is a bit of text written on the genesis block. That is, the first block — block 0 — of the chain. It said: ‘The Times, 03/Jan/09, Chancellor on brink of second bailout for banks.

This was the headline of The Times on the day the genesis block was created. It is most likely there as a time stamp…and to remark on the instability created by central banks.

The 2007–8 market crash shook the belief in the system.

It shattered several illusions.

Like the one that banks are a safe place to keep your money.

Or the one that you can never lose when investing in property…well, that one is still very much alive here in Australia.

The ‘recovery’ has included more of the sickness. That is, more debt and money printing. All to start up the economy.

Assets for the three major central banks — the US Fed, the European Central Bank and the Bank of Japan — have ballooned since 2008. They have added US$11 trillion in assets since 2008, as you can see in the chart below.

Major Central Banks - Total Assets 12-03-2018

Source: Yardani Research
[Click to enlarge]

In the same period, the US has doubled its total public debt and global debt has ballooned. It now stands at 325% of the global GDP.

Where are we going with all this debt?

Again, your guess is as good as mine…if your guess is not a rosy picture.

The Fed is trying to return the economy back to normal. Mainly by increasing interest rates and unwinding their balance sheet.

But debt levels are high. If they raise interest rates too fast, we could see how fragile our ‘recovery’ really is.

The Bank of International Settlements General Manager recently gave a lecture in Germany. During the lecture, he admitted that the rise of cryptocurrencies is also making central bankers think about what money is.

The main point of his lecture was (unsurprisingly) that for something to be money, it needs institutional backup.

As he said, (emphasis mine):

[A]t the end of the day, money is an indispensable social convention backed by an accountable institution within the State that enjoys public trust.

‘Laissez-faire [that is, leave things to progress on their own without interfering] is not a good approach in banking or in the issuance of money. Indeed, the paradigm of strict bank regulation and supervision and central banks overseeing the financial and monetary system that has emerged over the last century or so has proven to be the most effective way to avoid the instability and high economic costs associated with the proliferation of private and public monies.

Private digital tokens posing as currencies, such as bitcoin and other crypto-assets that have mushroomed of late, must not endanger this trust in the fundamental value and nature of money.

The thing is, bitcoin and cryptocurrencies have come about because of mistrust in those institutions.

When people start to question what money is, it is because they feel that something isn’t right. There is already a loss of trust in the system.

In a system based on trust, that’s not good…it says a lot that people are flocking to ‘a digital thing undefined and prone to theft’.

At the same time, we have seen the war on cash step up.

India has gone through a large demonetisation. Venezuela has also banned large notes from circulation. Europe is looking to eliminate the €500 bill. Australia may ban the $100 note…

The reason? Only criminals use big bills…

But, restricting cash will only make money manipulation easier.

During a crisis, the first thing that happens is your access to your money gets restricted…to contain the loss of trust.

Just look at the banking crisis suffered in Argentina or Cyprus. Banks closed…ATM’s rationed cash.

In a crisis, cash is king.

But with physical cash disappearing, we are losing control over our own money.

Cryptos, being outside of the system, could give you another option to access cash to buy necessities or move money in a time of crisis.

But, don’t get me wrong.

Cryptos ARE RISKY.

That’s why we always recommend you don’t invest more than what you can afford to lose.

They have high volatility…they are vulnerable to theft, and governments could ban them at any time.

The technology behind bitcoin may develop exciting applications…or go up in flames.

Your investment could turn to nothing in a matter of seconds.

But, we are living a money revolution…

…and the discussion of ‘what is money’ is only starting.

Kind regards,

Selva Freigedo,
Editor, Markets & Money

PS: There is a lot of money flocking into the cryptocurrency space.

But, there is a lot of risk out there also. As our crypto expert Sam Volkering says, ‘throwing your money at any old crypto is the fastest way to lose your shirt.

That’s why Sam has developed a step-by-step guide to help you learn everything you need to potentially profit from the digital currency explosion.

To find out more, click here.

Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the ravaging effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is lead Editor at the daily e-letter Markets & Money. And every week, she goes through each report and research note produced by our global network of trusted advisors to find the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.

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