Thoughts on how cryptocurrency has the potential to build foundations for a stable global economy.

It’s easy to fear what you don’t understand. Many people fear crypto. However, I’m going to outline for you today why the advent of digital currencies to our world markets, national economies, money exchanges, and wallets, is truly a positive thing.

Let’s begin…

First of all, how can a country’s economy be stable?

When a country focuses on fostering the factors that help develop their economy whilst successfully controlling the factors that have a negative impact, that’s when the economy grows. The more consistency in maintaining this balance, the more stable the economy.

It sounds simple… but it’s not.

In fact, one of the important traits of economic growth is that it is almost never uniform, or the same, in all sectors of an economy.

Wait, what?

So what then are the factors that influence economic growth?

There are four key factors:

1) Human resource/Workforce,

2) Physical capital/Infrastructure,

3) Natural resources, and

4) Technological advancement.

(Note — These are kind of self-explanatory yes, but if you want to quickly take a deeper look at them, this write-up should help.)

Now let’s look at the factors that negatively impact economic stability. In other words, factors that may cause an economic slump. What are they?

1. Hyperinflation: When monetary devaluation happens so rapidly that inflation exceeds 50 per cent per month or 100 per cent over three years.

Don’t think that’s possible? Just look to history…

Children using bundles of banknotes as building blocks. Image Source

After World War I, the German government (then, Weimar Republic) experienced the worst possible hyperinflation (1922–1923) in pursuit of war debt repayment by printing more money. In 1914, the exchange rate of the German ‘mark’ to the American dollar was about 4.2 to one. Nine years later, it was 4.2 trillion to one!

Almost a century later, Venezuela is now in similar conditions. As of April 2019, the inflation rate there is 282,972.80%. It started in 2016 and kept going up ever since!

2. Stagflation: This is persistent high inflation combined with high unemployment (which could be caused by a recession) and stagnant demand in a country’s economy.

3. Stock Market Crash: A sudden, dramatic decline of stock prices across a significant cross-section of a stock market, resulting in a significant loss of paper wealth. The 1929 stock market crash led to the Great Depression (1929–1939), the deepest and longest-lasting economic downturn in the history of the Western industrialised world at that time.

The influence on a country’s economic growth, or the size of the slump, is not necessarily restricted only to the aforesaid macroeconomic factors. There could be several other aspects, for example — a government’s judgement and schemes, foreign-trade policies, legislation, a socio-political situation, etc.

It’s worth mentioning here that the value of money (paper currencies) or fiat is derived from the amount of money available in an economy (money-supply) vis-à-vis its demand and the stability of the issuing government.

Fiat currencies don’t have any intrinsic value, unlike gold, silver or petrol; moreover, fiat currencies are controlled by centralised authorities. Their circulation is regulated by the central bank (which is backed by the government).

We’ll come back to this later. But now it’s time to explore crypto-economies…

What is a crypto-economy exactly? And how does it work?

By definition, a crypto-economy creates alternative economic relations that though they comply with regulations, are not mediated by a government/state directly; thus opening up possibilities for economic organisations that do not comply with the state’s theory of economic harmony.

Meaning, a crypto economy is an alternative economy which is not controlled and run by a government. Rather, cryptocurrencies have challenged the historical proposition that only the state can provide a basis of trust in symbolic tokens-as-money.

But how does an alternative economy work then? Is it efficient? If it’s not governed by the state, can it be trusted?

Let me tell you a story and address these questions with an analogy, which indeed is a real-life experience from my own life.

When I was young, the concept of pocket-money/monthly allowance wasn’t very popular. We (my sister and I) would generally get money to buy lunch at school and sometimes earn a bunch of coins that didn’t have space in my father’s wallet.

So, if we wanted to buy something that we fancied, like a comic book, or a toy car, we would have to ask our parents for money, and logically justify why we needed to have that thing. As you can expect, most of the time we couldn’t justify our demand.

On the other hand, some of our friends would get a monthly allowance from their parents and could afford all the things that were popular among us kids! This caused us to revolt and as a peace offering mother bought us a giant piggy bank.

The deal was, we would save whatever we could from the lunch money and put it into the piggy bank. Our parents would also top it up, time-to-time.

My sister and I were in complete control of that fund. But at the same time, we couldn’t trust each other. So, our mother came up with a solution. She put two locks there. One key would stay with me, and the other with my sister. So, anyone could put in as much money as they wanted through the slit, but the only way to access the funds was to get both my sister and I to unlock the box!

Problem solved.

There was no need to trust each other with the funds and at the same time we respected each other’s control equally. (My mother was a genius!)

What soon happened was absolute magic.

We forgot about buying comic books and toy cars. Since this was our fund, managed and controlled by us, we started saving every single penny that we could save from our lunch money. With help from our parents, we soon filled our decent-sized piggy bank.

We then bought a new one and followed the same process. We also came up with an income scheme. Sometimes when father was out of cash or lower-denomination currencies, he would turn to us (otherwise he would have to spend hours in the bank — ATMs weren’t a thing then.) So we took advantage of the situation by charging him a dollar for every $10 that we lent.

After a few years, when my father was suddenly hospitalised and we needed liquid cash immediately, our piggy banks (there were five by then) helped us significantly. (True story.)

But can you see what I’m getting at?

Our parents managed and controlled money (my father’s salary).

They took all the economic decisions in the household.

If our house was a country, our parents were the government; my sister and I were the citizens. Later, thanks to our mother, we created an alternative economy within the household.

It wasn’t governed by our parents; rather, we were in control (self-reliant). It was transparent. My sister and I, both had absolute visibility on the funds.

It was running on a consensus. Whenever we needed to buy something, or lend our father some cash, we made the decisions together and set the rules together. It strengthened the overall economic situation of our household and gave us a boost of liquidity.

This, in a way, is the crypto economy! This self-governing economy is powered by the blockchain tech, which through its distributed ledger and nodes, brings transparency and consensus to the complete network.

Now then, let’s go back to the factors influencing economies to evaluate how the alternative, crypto economy ushers in economic development…

A huge industry has been built around cryptocurrencies and blockchain.

As of July 2019, the total market size in terms of yearly revenues for the crypto market is around US$20 billion.

And it’s headed to a US$60 billion globally by 2024!

What does this mean?

More employment opportunities, thus a higher skilled workforce; better infrastructure, meaning better productivity; and technological advancement, meaning better R&D facilities and the like, to alleviate the outlying challenges and keep the growth curve moving upward.

These factors collectively result in a thriving global economy, all thanks to the alternative economy that is crypto.

Okay, growth is cool...

But what then about the bad stuff?

Can the crypto economy help problems like hyperinflation? Or bring more stability to the global economy? Let’s see…

The two major problems with fiat currencies are: 1) they don’t have an intrinsic value, and 2) the money-supply is controlled by a few political elites (centralised governance) like I mentioned earlier.

So the value of fiat money depends completely on our ‘faith’ in the government and their ‘relative’ stability, which can never lead to a stable, sustained currency value. One wrong move by the authorities, the economy comes crumbling down, and the general public suffers. Like it happened for the Weimar government; it’s still happening — be it in the name of ‘Brexit’, ‘Demonetization’, or something else.

This is where the crypto economy stands ahead of the status quo.

Firstly, like my childhood piggy bank, it’s a transparent and decentralised system. Rules around the money-supply (here, token-supply) are built into the network code. So it can be monitored by the average population. They don’t need to blindly trust the system.

(When systems are see-through, it’s much less difficult to differentiate between the good and the bad, and then to eliminate the bad ones.)

Secondly, most cryptocurrencies are designed to have a fixed supply. Moreover, since rules around the token supply are built into the network code, it’s very hard to tamper with them, thanks to its consensus mechanism.

Fiat currencies on the other hand, have no cap on their supply and so the government can introduce a large quantity of money as a last resort, in order to spur specific economic outputs.

What’s more, Cryptocurrencies can also help the poorly banked countries by giving them ease of access and ease of use. Crypto is also ideal for cross-border transactions due to its lower remittance fees (as it eliminates the centralised parties from facilitating and controlling the process). We have witnessed this during the Zimbabwean hyperinflation.

To sum it up, the crypto economy doesn’t only influence the key growth factors in fiat-based economies, but also helps rectify certain loop-holes in the state-led, centralised economies by bringing in transparency, shared consensus and self-reliance.

The world has already started showing its faith in crypto.

In difficult socio-economic situations, countries have turned to cryptocurrency in order to find stability, be it Venezuela, Zimbabwe, Iran or Hong Kong.

So maybe it’s time to open our minds a little further. Perhaps then we can embrace an efficient parallel economy, one that has the potential to simultaneously benefit what already exists…

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