Cryptocurrency has existed since the creation of the first Crypto coin Bitcoin in January 2009. In this latest op-ed, Jonathan Riley discusses whether crypto currency is feasible long-term, as it is increasingly valued as an investment due to the ongoing demand for digital currency within the global market.
The underpinning technology of crypto is viable, but as a currency, it is unstable. It exists within the current geopolitical and economic circumstances from the last 77 years so, there must be a division between the practical, the political and social modern-day fads as investors, and particularly new investors, may have no idea what crypto is, or what a currency is. This is mainly because our advanced developed economy no longer adheres to old rules (due to the hyper-specialisation and the integration of global markets - particularly China - into the global economy), changing how people invest.
The Technology of Crypto and How it Works and What it Truly is
Crypto technology can be broken into two categories: the actual technology, which has existed for over two decades since the launching of bitcoin in 2009, and the currency aspect of crypto. What investors need to remember or, more likely, need to understand, is what currency is; a means of exchange that is not a bartering system, but also a measurement of the nation’s stability and value. For example, the US is the global currency because that nation’s stability guarantees global currency as a means of exchange due to its geopolitical location. However, digital currencies are linked to no nations and therefore are not connected to any means of exchange, like oil, or the old gold standard for dollars.
The technology that underpins the existence of an electronic currency, the crypto, is currently being developed by the USA to create the crypto dollar. Other nations are also likely to pursue this avenue of money, but now, the cash will be linked to some form of political and real value, unlike crypto. Coinage like Bitcoin, Deutscher Coin and other cryptocurrencies are not connected to any real value, so what currently gives the coinage value is investors’ hopeful thinking and belief that crypto is of real importance. Unfortunately, hope is not a great investment strategy. The crypto coinage is purely digital and stored in databases, so there is little concern about if the technology works, but still, there is a pyramid scheme aspect of investing and buying these currencies, as people buy crypto and believe in the currencies, causing the value to massively fluctuate within the currency exchanges.
The Current Investing Climate and the Availability of Capital
The enablement of the development of modern technologies in the 20th-century was clearly only made possible through the creation of globalisation after World War II. International trade had existed for millennia (just think of the Silk Road between the Roman, Persian and Chinese empires, and the development of international trade from the 16th century onwards), however, these global markets were protectionist, and worked on mercantilism principles that meant the empires only traded within the imperial blocks due to control over the markets they had captured through colonisation, conquest and land acquisition. This geopolitical environment meant that if the nation needed access to iron ores, coal and other materials essential for industrialisation or did not take these materials, that nation would not industrialise, such as imperial Japan.
After the Second World War, the United States were able to garner the trust, the means and the political will to patrol the world’s oceans, as well as protect the global trade which enabled the economies of scale and the abilities of each nation to specialise in products or services, which was the vision of capitalism and the invisible market promoted by the Economist and philosopher Adam Smith. The big problem is now that this age of prosperity as we know it is coming to an end, and that’s why crypto as we know it will be coming to an end.
Boomers and Globalisation
The establishment of globalisation has allowed all nations to be part of the American-led alliance. The globalisation project began the process of industrialisation and specialisation, which led to the prosperity that exists today across the globe. The long-term consequences of industrialisation are declining birth rates and populations going below replacement levels, which means that the investing climate currently exists due to the Boomer generation, born from the end of World War II until 1960, being the largest generation the globe has ever seen. Due to there being so many Boomers, this meant the price of capital, that is, the money that can be invested in companies and international development projects, meant investing became cheap, which enabled crypto to become so successful within the current investment climate due to the volume of capital that is currently available. Cheap capital as we know it will be coming to an end, and won’t be back for quite some time because only France, the United States and New Zealand, according to the geopolitical strategist and author Peter Zeihan, have a big enough millennial generation to replacement the Boomer generation and properly fulfil the demands of the workforce.
The End of The Crypto Dream
The cryptocurrency was always, according to Peter Zeihan, “a dumpster fire” that has only become possible in the current cheap capital environment. Currency is fundamentally political and therefore no nation-state and its central banks would allow the money to be beyond their taxation. As the old saying goes, "Render unto Caesar the things that are Caesar's”. As crypto becomes more regulated, companies that control crypto will need assets and other liabilities to back up the value of independent currencies that will no longer be independent. The dream of crypto to be an independent monetary exchange that was beyond the influence of tax collectors and big government is sadly unattainable, because currencies and the value of money are tied to physical resources and a nation's stability, which is why the US is the world’s global currency, and countries like China’s Yuan are still not trusted as a means of international exchange.
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