Friedrich August von Hayek (1899–1992), winner of the Nobel Prize for Economics in 1974 and pupil of Ludwig von Mises (1881–1973), calls for the end of the state monopoly on money supply and the privatization of the money system in his book Denationalization of Money (1976). He is in favor of a competition of currencies.

The beginning of the denationalization of money

With the development of Bitcoin and the underlying blockchain technology made it possible for the first time in history to generate decentralized digital money without relying on financial intermediaries such as central banks and commercial banks.

While conventional fiat currencies such as the euro or the US dollar are managed centrally by central banks, the informed financial market participant can today choose from a large number of cryptocurrencies with different characteristics, which in some cases perform much better as money and as a unit of account. The meteoric rise of cryptocurrencies such as Bitcoin can be understood as a phenomenon of a global trend, which opposes the general centralization efforts. This counter movement is not only reflected on the political level, for example in Brexit, the US presidential election or the rise of anti-EU parties such as the SVP in Switzerland or the AfD in the federal elections, but also on monetary policy level.

The socio-political developments of our time testify to a yearning for more individual freedom, autonomy and less dependence on centralist structures. Cryptocurrencies in this context have the potential to satisfy the longing for denationalized money. Perhaps we are just experiencing the manifestation of an idea by Friedrich August von Hayek, which he described in his book “The denationalization of money”?

“We will never be able to prevent inflation unless we take away from the government the monopoly on spending money. Governments have never given us good money, yes, the rationale for governments’ monopoly on spending money was not even that they would give us good money, but only those who needed it for funding purposes. The result was that for two thousand years we had a monopoly that nobody questioned. So if we want to maintain a free society, we have to rebuild democracy and take the money monopoly on the government.“ [1]

The blockchain technology and cryptocurrencies can hardly be underestimated in their social significance. As in the early years of the Internet, similar criticisms are cited: data protection and security concerns (what is stored on the blockchain is permanently available there), misuse for criminal purposes (money laundering and means of payment on black markets). Blockchain technology is also reminiscent of the Internet in a positive sense: both make information accessible to everyone, giving the individual control over important areas of life and reducing dependence on the government and centralized structures.

The blockchain technology itself is far more revolutionary than just a specific cryptocurrency. It allows not only the decentralization of money but also contracts and entire capital markets, as ICOs (Initial Coin Offering) have already shown impressive: According to the research firm Smith + Crown in the year 2017 cumulatively almost 6, 8 billion dollars collected by ICOs.

Current challenges

However, there are also some technological and regulatory risks that can hamper the dissemination of groundbreaking technology. Basically, every blockchain technology — as well as the Internet — relies on the availability of electricity. Apart from the excessive power consumption that is currently required to process Bitcoin transactions (called “mining”), a global power outage would have devastating consequences for the functionality of the transactional database. A currently much more pressing problem is the scaling problems that stand in the way of unprecedented growth in the crypto sector. High transaction fees and latency in the Bitcoin network severely limit usability. In both the Bitcoin and the Ethereum networks, the transaction fees are currently too high to allow small sums to be transferred economically. Although costs have now been significantly reduced, the average transaction fee rose to over $ 40 during the Bitcoin all-time high in December 2017.

Meanwhile, various proposals have been introduced into the scaling debate, which promise a speedy resolution of the problem. Since there is fierce competition and constant innovation unlike conventional fiat currencies in cryptocurrencies, a speedy solution to the scaling problem can be expected. During the Bitcoin all-time high in December 2017, the average transaction fee is over $ 40.

Financial analysts and economists are beginning to think that Bitcoin and the cryptocurrencies market are in a general bubble. In 2017 alone, the Bitcoin price rose from around $ 1,000 to $ 20,000. At the same time it is alleged that there are no areas of application for Bitcoin that would justify the market price — in contrast to fiat currencies, where you have to pay your taxes. There are also serious concerns about price manipulation. Leading exchanges like Bitfinex are being accused of artificially inflating crypto currencies. Moreover, if you believe the estimates of Bloomberg, only 1,000 wallets in total contain over 40% of the world’s Bitcoin holdings. Undoubtedly, most cryptocurrencies will disappear from the market again, as happened to most stock companies following the Internet bubble in the year 2000 in the tech markets. However, the dream of a decentralized and private medium of exchange persists and will employ resourceful developers until it is fulfilled.

The crypto revolution and gold

Of course, government regulation and interventions pose a risk to the crypto-currency market that should not be underestimated. To date, the legal status of Bitcoin and Co. is unclear in many countries. While cryptocurrencies are tolerated or even supported in most Western countries, a significant number of countries have not yet made a binding statement on the subject. Government intervention will most likely not stop the development, but only slow it down. This regulatory uncertainty, coupled with the extreme volatility of the entire sector and the various security issues, prevents Bitcoin and other cryptocurrencies from serving as reliable means of value retention.

Finally, the question remains whether Gold might one day run out of rank. The currently about six times higher volatility of the Bitcoin price makes it undoubtedly a much riskier asset than gold. On closer inspection, Bitcoin and the rise of the crypto sector are neither a threat nor a competitor to precious metals, and gold in particular, as some authors claim. They serve different needs and fulfill different functions. While cryptocurrencies have the potential to become efficient and decentralized means of payment, physical gold becomes ours as preserved for thousands of years as value store. With the physical world of the digital underlying, gold will once again assert itself as the most stable and liquid “hard money” and enjoy a large following.

[1] Friedrich August von Hayek, interview film “Inside the Hayek Equation”, World Research Inc., San Diego, Cal. 1979