Travel back in time, to just over a decade ago in 2008. This is the year when the largest financial crisis after the big depression caused by distrust among bankers almost crumbled the Western civilization.
To this end, we can appreciate the significant role bankers have played in the evolution of money. While they helped the society embrace money, bankers have also taken advantage of weaknesses in the current financial system to enrich themselves and their friends at the expense of the ordinary citizen.
The 2008 Financial Crisis
For instance, do you know that the first tell-tale signs that the US economy was headed towards a cliff was in 2006 when housing prices began to fall. To understand the real cause and extent of this problem, we will have to leap back in time to the post-World War II financial world. The world brought out the best in people, and technology had taken a leap while each side was leveraging it to defeat the other.
After the war, there was a scramble for the Engineers of the War. With the 944 Bretton Woods agreement in place, most relocated to the United States and a few ended up at the Wall Street. These Engineers, relieved of the duty of building bridges, invested their knowledge in the financial market — creating money and dreams out of thin air. This is how such a product as a derivatives and credit default swaps came to exist.
When the prices of houses fell by over 30%, realtors were celebrating and bankers and their agents cashing in bonus checks. What they did not realize was that the prices of houses fell, not because of low demand, but because many new homeowners had questionable credit. Banks had figured out how to minimize their risks and even make money on these loans by selling mortgage-backed securities called derivatives to investors. As a result, there was constantly high demand for more and more mortgages to the point banks did not care whether or not a buyer can afford the house.
The bigger part of the problem is that financial institutions and hedge funds all over the world had bought these mortgage-backed securities. Since it is still money, investors had put them in mutual funds, pension funds, and corporate assets etc. This was possible because the banks sliced up bundles of mortgages then sold them in tranches, the whole product was so complex that it was difficult to price hence sold as ‘solid’ investments. Most investors believed they were protected by Credit Default Swaps sold by AIG insurance, so they had no qualms about paying whatever price the seller (banks) asked for. When the subprime mortgage crisis finally hit and collateralized debt obligations and other derivatives proven to be worthless, AIG was on the hook as it could not honor all the swaps it sold.
Banks began to panic when they realized the extent of the problem they had created because someone had to absorb the loss. The core cause of the crisis was that banks did not want to lend to each other with the CDOs as security anymore since no one wanted useless collateral. Inter-bank borrowing costs (called Libor) shot up, many investments pegged on the mortgage loans crashed with the banks that sold them. This is how the 2008 financial crisis revealed the biggest weakness in the current financial system. It was when The Federal Reserve had $182 billion in hand that it lent commercial banks to inject money into the economy and avert a total meltdown of the financial system. After all, that was the last thing they wanted.
The modern monetary system is made up of nationwide-legal but globally accepted currencies. These are single-type currencies whose monopoly nature is enforced by governments. The money is created by banks through loans and is attached to positive interest rates. The scarcity of modern money is ensured naturally by market forces, foreign exchange and artificially by governments. This money is called FIAT money — a currency without intrinsic value that has been established as money, often by government regulation. Fiat money does not have use value, and has value only because a government maintains its value, or because parties engaging in exchange agree on its value] It was introduced as an alternative to commodity money and representative money. Commodity money is created from a good, often a precious metal such as gold or silver, which has uses other than as a medium of exchange (such a good is called a commodity). Representative money is similar to fiat money, but it represents a claim on a commodity (which can be redeemed to a greater or lesser extent).
All these essential features that make money worthy of storing and transferring value also makes it very susceptible to manipulation and control by governments and banks for different reasons.
- The positive interest growth of money drives the short-term thinking that powers the world’s economic decisions.
- This kind of thinking and hyper-consumerism is a consequence of the relentless pressure exerted on individuals and communities to grow economically.
- The ever-growing inequities around the world, the rampant speculation, and the greed of individuals and corporations can all be blamed on the forms of money we use.
- The dynamics on which current money exists are responsible for the weakening of social ties as well as erosion of community values according to this publication.
- There is deliberate effort by governments and bank owners world over to keep people docile and ignorant of the inner working of financial systems to keep them oppressed.
Emergence of Cryptos: Bitcoin
The disillusionment that the people had in the financial systems in general and banks in particular after the 2008 crisis was one of the most motivating factors that resulted in the birth of this new kind of currency. After the failure of numerous investment and commercial banks in the US and around the world, and the loss of billions of dollars that governments used to bail out those financial institutions that survived, taxpayers around the world were a disgruntled lot.
This brought to surface the fragility of the financial system and revealed that the health of the civilization actually lay not in the governments we elect, but in the hands of faceless individuals and corporations that make money and controls its movement through banks. Bitcoin was a timely solution to the risks of failure of banks that have left many people living vulnerable to life conditions they have no control over.
Bitcoin was created in late 2008 as a reaction to the bank-caused financial crisis that almost destroyed the global civilization. An anonymous individual or groups of people using the pseudonym Satoshi Nakamoto announced Bitcoin as ‘a new type of peer-to-peer cash system’ that had one unique characteristic that made it truly free: unlike all other forms of money used in history so far, was decentralized and had a predetermined supply.. Using a new ‘Blockchain’ technology (also called a “Distributed Ledger Technology”), Bitcoin would distribute the process of verifying digital transactions to every participant in the payment network, thereby eliminating the risk of misappropriation of transactions and the need for an authority or third-party to enforce trust.
The Bitcoin arrived into a sophisticated and tech-savvy financial world and it did not take long for it to win over converts. The way blockchain is used to ensure that money is not spent twice is actually genius: a set of limited entries in an immutable database (contents cannot be altered or reverted) are inter-linked to form a series of distributed ledgers stored concurrently by all the nodes in the blockchain. The new digital cash system worked on an absolute consensus between peers, and because it is purely a mathematical formula, its value is purely dictated by the market.
Who is Satoshi Nakamoto?
Isn’t it interesting that Bitcoin has grown to become a multi-billion global currency yet no one really knows who is its creator, one Satoshi Nakamoto is? Satoshi built the Bitcoin platform and published it on Bitcoin.org in 2008, helped with development, structuring, and launch through 2009, then mailed it to a cryptographic mailing list and in 2010 he disappeared. While no one really knows who Satoshi is or whether it is a single person or a group of people, whomever he is, at least we know who he is not and a few other useful facts about him.
Australian Entrepreneur Craig Steven Wright is not Satoshi Nakamoto. In May 2016, Craig claimed in a BBC interview that he was the famous inventor but upon examination, he was unable to prove it. It has also been speculated that US computer scientist Nick Szabo may be the founder of Bitcoin, largely because of his technical know-how in digital currency and creating ‘Bit Gold’ before Bitcoin was invented. However, the hypothesis that Nick indeed is Satoshi has never been proven.
There have also been speculations that Hal Finney is Satoshi. Hal was a cryptographer even before bitcoin and was on the mailing list to which Satoshi sent the Bitcoin whitepaper. Hal has proven to have been communicating with Satoshi via email and some quarters even claim the two writing styles match. Interestingly, the first Bitcoin transaction was on Jan 12 2009 when Satoshi sent Bitcoin mined on the Genesis block on Jan 3 2009 to Hal. Hal has however denied being Satoshi.
Could Satoshi Nakamoto be a team of three developers: Neal King, Vladimir Oksman, and Charles Bry? Enthusiastic reporters, searching for the true identity of Satoshi Nakamoto, homed in on the three because they own a patent that used phrases that are a lot similar to those in the Bitcoin whitepapers, and the three have the capacity and skills to build a currency. They all deny being Satoshi Nakamoto.
Why is Satoshi Nakamoto anonymous?
We know why he is famous, but what effect does Satoshi Nakamoto being anonymous have on the Bitcoin currency? Whomever he is, Satoshi went to great lengths from the start to keep his or their identity secret. The dominant theory is that this was probably the best choice for the safety and sanity of the founders of the currency of the future, as well as the well-being of the Bitcoin currency. If Bitcoin had a face, it would be easier for governments and banks to get to them and usurp the evolution of the currency. This would also seriously risk the matter of decentralization that makes the cryptocurrency special.
By being anonymous, Nakamoto not only saves himself the pain of fame and constant scrutiny and worship from the media and the public, but also allow Bitcoin to grow and evolve on its own as shaped by the needs of the market and users. Moreover, would you reveal your identity if you were in possession of 1 mln Bitcoin in the first place?
What makes Bitcoin the Money of The Future?
Bitcoin has been accepted as mainstream currency in most countries around the world. WordPress became the first major company to accept Bitcoin payments back in 2012 and many others have joined the list. Perhaps the only major threat (apart from its volatility) to the global adoption of Bitcoin as a universal payment is the Chinese government which views the currency as a threat to its own fiat money.
It’s March 2019 and Bitcoin is thriving with a market cap of roughly $71 billion and transactions worth over $2 billion being recorded on the platform every day. Coinbase alone, the largest cryptocurrency exchange, has 15 million active users trading in Bitcoin and about 100,000 of these being strictly Bitcoin merchants. The price of Bitcoin on paper stands at over 3,800 but how long will this hold considering that it was almost $20,000 at one point in December 2017? Is the money stable now?
Here are some notable benefits of Bitcoin that makes it stand out as the currency of the future.
1. Bitcoin is the most popular cryptocurrency by a large margin and as a result has a great liquidity potential compared to other cryptocurrencies. This means that the coin retains most of its inherent value when converted to other currencies. In this regard, bitcoin is more like the traditional currency we are used to and it is the main reason most view it as the global currency of the future.
2. Bitcoin is increasingly being accepted as a payment method — even by its greatest adversaries; the banks. Thousands of merchants including financial heavyweights have hopped on board the Bitcoin train after years of denying its legibility to be used as currency. Today, it is possible to purchase virtually any digital or physical product and pay with Bitcoin.
3. Transactions conducted with Bitcoin generally attract very low transaction fees compared to other popular digital payment methods — credit cards, PayPal, and wire transfer and the likes. Although the fees vary, a typical Bitcoin transaction will not cost more than 1% of the value of transaction unlike other digital payments that can cost as high as 10%.
4. Another good reason that does the bidding for Bitcoin is its simplicity for use in international transactions. There is virtually no difference between cross-border international transactions and local transactions when it comes to Bitcoin because there are no red tapes or location-based banks to deal with. Since it is popular around the world, Bitcoin is best placed to become the currency of the future better than any other currency or cryptocurrency.
5. Some people will often refer to Bitcoin as the anonymous currency. This is so as you can send Bitcoins to another party without necessarily disclosing a lot of information. Achieving perfect anonymity is practically impossible today; however, Bitcoin offers partial anonymity which is one of the great selling points of the digital asset.
6. Bitcoin gives the power of money back to the people. Long time ago people were allowed to hold physical gold. It was until early XX century when US Government seized it all… by the law. Hence people should really be considering growing your Bitcoin portfolio as it may be their future.
7. Last but not least, Bitcoin has an in-built scarcity of 21 million. This means that only 21 million Bitcoins will ever be mined. This scarcity instills the currency with the value that made gold such a precious metal. Considering that most traditional money issued by governments is not scarce, and that some of the biggest financial problems arose because of over-production of money, Bitcoin is possibly the safest currency to adopt for the future. Hence the expression “Digital Gold”.
The downsides of Bitcoin
Bitcoin is not a perfect currency, despite all the benefits it has over fiat money we use today. As the first cryptocurrency, Bitcoin has had its share of scams, frauds, and hack attacks that have cost people money. It is still subject to manipulation. However, the currency has proven resilient in the face of such attacks and is still the most valued currency and most versatile payment platform in the world.
1. The use of Bitcoin in the black market may have tainted the reputation of the money, but in the end everyone knows that money is impartial and only those who spend it determine whether it is for good or bad. Bitcoin was an instant hit among criminals and grey and black market participants for the reason that no central body such as a government or bank controlled it.
2. Another problem with Bitcoin is that it is highly susceptible to sudden price volatility. While the currency itself is liquid and can easily be exchanged, small events can have a serious impact on its value such as when Mt. Gox collapsed and the value of Bitcoin took a 80% hit.
3. Some features of the current financial system cannot be carried over to be used in Bitcoin due to the nature of the payment system. For instance, chargebacks and refunds cannot be implemented in Bitcoin transactions because of its decentralized structure. This means that once money is sent from user X to Y, the transaction cannot be reversed regardless of the legitimacy of the transaction agreement. Some newer cryptocurrencies have this feature built into them but Bitcoin does not.
4. It is widely believed that Satoshi Nakamoto owns over 1 million Bitcoins, which translates to about $3.8 billion US at the time of writing this article (March 2019). Combined with the over 4 million bitcoin lost to the wind by forgetful users, this is a significant amount of Bitcoins which, contributes to the scarcity of the currency in the market. Everyone who knows how money works is right to be worried that one day, Satoshi may show up and dump all this money on the market, seriously upsetting the scales of value. However, the chances of this happening are very slim because usually such high volume transactions are made in OTC markets (Over-The-Counter).
5. Finally, there is always a chance that a new better currency may emerge in the future to replace Bitcoin. The spawning of thousands of cryptocurrencies over the past 5 years, some similar to Bitcoin and some with notable improvements, is a real reminder that technology is constantly evolving. This may not be a downside to Bitcoin per se, especially considering that the market will only adopt currency it perceives to be better than what is in use.
These are the major cons of Bitcoin and cryptocurrency in general. Do you think these are good enough reasons for them not to be the currencies of the future?
Money has come a long way from the time all it served was to exchange a goat for a bale of wheat. Today, it does a lot more than make payment of goods and services possible: it defines what our civilization is. As money evolves, and as it becomes clear that the future of humanity is rested in the evolution of blockchain and cryptocurrency, it is important now more than ever that everybody learns how money works, how it came to be, and what makes it special.
The age of opaque creation of money by the banks and manipulation of the global economy by a handful of faceless individuals is over. Many people around the world, even those who have not used cryptocurrencies to make payments yet, agree that the world needs a new form of payment that protects both parties involved — from each other and from third-parties. The time is ripe to incorporate real financial learning into our education systems to wake people up from trance-like docility against the present financial system that thrives on keeping them bound to credit.
All money in history has been a bubble, and so is Bitcoin and cryptocurrency. The only difference is that it is the turn of cryptocurrency to shine. These currencies are designed to be the perfect currency: they are frictionless, fast, secure, and almost anonymous — ask anyone who has had to suffer the incompetence or failure of a bank and you will understand why these features of money are very important. The blockchain system on which Bitcoin runs is a fool-proof system powered by trust, which means the most essential ingredient that makes money is already contained in the foundation of the cryptographic money.
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