Cryptocurrency as fiat
This week on Facebook: When I wrote Monday’s article in 2011 about fiat money I never had in mind the cryptocurrency in last week’s post, although I was certainly aware that the ravages created by the inflationary effects of fiat money did not protect wealth. Wealth protection only comes to those with the means of investing in things whose rarity increased their value. The rise in the value of cryptocurrency, particularly as a wealth protector (like that of gold), shouldn’t really have come as the surprise it did.
Digital currency has been in circulation for a long time with banks creating new money by extending credit (especially household debt in the form of a credit card). Banks also buy existing assets or make payments on their own account, which mostly involves expanding their assets, their ability to do this is only very weakly linked to the amount of reserves they hold at the central bank. The following statement recorded in Hansard and which I included in a previous post, still remains unchanged over 30 years later.
Is it not quite illogical, indeed indefensible, that the state should be so concerned to maintain its sovereignty in the issue of coins or notes that it allows this new form of money, used overwhelmingly today, to be created outside its control? Lord Beswick, HANSARD, 27 November 1985
The introduction of blockchain encryption, unlike the digital money form used by banks (and governments), has legitimised the value of cryptocurrency. Blockchain encryption and its uses are likely to be addressed (briefly) in a future post, it’s sufficient to say here that it has led to the current success in the rise of cryptocurrency. As I wrote last week, public administrations will use this blockchain technology to develop their own form of cryptocurrency and those of us who simply wish to live in a stable economy will find ourselves now living in a digitised and unstable fiat money world. A cashless society in which our public administration will have a monopoly on the cryptocurrency it will accept while it continues to inflate its way out of debt with digitised fiat.
While wealth can be measured in abstract terms it is better understood in terms of the material wealth that someone may — or may not — possess. Regardless of how it is measured, material wealth is an indication of someone’s nett worth when the total market value of all assets that can be realised are subtracting from all debts owed. Certainly any fiat money held as disposable or discretionary income, particularly in the times of an artificial low interest rate, leads to a constant reduction in nett worth.
As Monday’s article points out, the availability of a discretionary income is the key factor in the accumulation of wealth. Holding cryptocurrency can offset such income from the assured inflation of a fiat currency and offer better protection than fiat when it is a valued as a commodity on global currency markets. The article also uses the term credit rating and in world awash with debt a credit rating requires an ever increasing measure of disposable income. Cryptocurrency may well herald a new economic cycle but most will remain fettered by a cashless fiat currency and the vagaries of a public administration’s fiscal policy .
Monday 26/6/2017 Inflationary money – ‘let it be done’ (fiat) When the United States closed the commodity based link between gold and the dollar in 1971, the world entered a new age of fiat currency . Fiat money is supported by nothing more than people’s faith in their government’s issuance of banknotes and coinage and foreign investors having faith in a government’s sovereign credit rating. Post 1971, most of the major trading currencies became fiat money, which ‘floated’ in a market environment, this being in a world with a history of paper money defaults. Historically, no government has had the discipline to maintain its currency, fiat or commodity based, without resorting to the printing of money for political gain and financial loss.
Tuesday 27/6/2017 What Do Governments Want from Bitcoin? On January 20, 2016, People’s Bank of China (PBoC) released an announcement on its website about its digital currency conference. At the conference, the PBoC urged its digital currency team to speed up effort and release its own digital currency quickly. Similarly, Bank of England, Bank of Canada, and some other central banks also expressed similar intentions to or claimed that they had considered issuing their own digital currencies. Since its creation, Bitcoin and other digital currencies have inspired the issuance of many private-issued and denationalised digital currencies. Now, it looks like that the central bank-issued digital currency is also becoming a global trend.
Wednesday 28/6/2017 Understanding the evolving cryptocurrency market: For consumers, cryptocurrencies offer cheaper and faster peer-to-peer payment options than those offered by traditional money services businesses, without the need to provide personal details. While cryptocurrencies continue to gain some acceptance as a payment option, price volatility and the opportunity for speculative investments encourage consumers not to use cryptocurrency to purchase goods and services but rather to trade it.
Thursday 29/6/2017 The consequences of allowing a cryptocurrency takeover, or trying to head one off: The agreed protocols that govern Bitcoin are effectively its monetary policy. In exchange for expending computing power to verify the legitimacy of transactions and record them, Bitcoin “miners” get paid in Bitcoin. (This is roughly analogous to seigniorage income.) These rewards increase the supply of Bitcoin, but the growth of the Bitcoin money supply is constrained by the increasing difficulty of verifying transactions. More and more computing power is needed to verify each transaction and create new Bitcoin, which means that the total supply gradually approaches its limit of about 21 million. Our fiat money has its own protocols that give rise to a different monetary policy: appoint a bunch of clever people and tell them to stabilise inflation using interest rates and bond-buying. The money supply that results from all this is generally ignored.
Friday 30/6/2017 From Here To Where? Bitcoin And The Future Of Cryptocurrency: There’s a number of reasons why cryptocurrencies are so inherently popular. They are safe, anonymous and utterly decentralized. Unlike conventional currency, they are not controlled or regulated by some singular authority, their flow is determined entirely by market demand. They are also nigh impossible to counterfeit, thanks to the paranoidly complicated code system that encrypts each and every transfer, ensuring complete anonymity and utter safety to each and every user. They even make for a genuinely rewarding, if risky, investment endeavor, despite the fact that any financial advisor in their right mind will caution you against them. Therefore, despite the admittedly high stakes that this sort of dealing entails, not to mention the lack of any government agency to lend credence to them, cryptocurrencies can only thrive and multiply.
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