Of decentralisation, money, and the need for cryptocurrencies
In March 2018, I started on a personal project — to write a book about cryptocurrencies and investing in them.
Over the past three months, I have worked through four different content outlines, read more about money, economics and distributed ledgers, written and rewritten the same stuff about cryptocurrency. Medium has also given me a platform to pen and consolidate these thoughts.
Well, the content is not exactly the same because it gets clearer, so here are my key insights regarding cryptocurrencies, for now.
i. ‘Decentralisation’ is the most important attribute of cryptocurrencies.
Most people talk about the ‘decentralised’, ‘distributed’, ‘secure’, and ‘immutable’ nature of cryptocurrencies and blockchain technology. However if we were to think critically about what these traits meant, we will see that ‘security’ and ‘immutability’ are not exactly problems with today’s fiat money. For most people, their fiat currencies are relatively stable and usable.
On another hand, ‘distribution’ only becomes more relevant when we are talking about a digital society. That is when we require networks and systems to be distributed so as to maintain a constant uptime, and that there will not be a single point of failure. Whilst ‘distribution’ has become increasingly important as our payment systems are shifting online, it is not exactly a problem as service providers have their servers spread around globally.
Decentralisation was one of the main drivers that led to the rise of Bitcoin. It was the period after the global financial crisis when investing sentiments were poor. Property prices were at a low, investment banks as big as Lehman Brothers went bankrupt, and the commodities and securities market plummeted.
Bitcoin thus came about, as an alternative store of value and an alternative form of money — one which is not owned or governed by any institution.
ii. Money is just a unit of measurement.
The reason why distributed ledgers can replace money is because money is just a method of accounting. It tells you how much one person has, how much he owes, and the world’s money can be somewhat tabulated, at least for the clean, traceable money.
Just like you use metres to measure length, grams to measure weight, seconds to measure time, dollars is just a measure of someone’s worth. The dollar gives a standardised unit so that people can value, and subsequently put a price on their work, services, products, and assets. The dollar is a standardised unit for the purpose of value transfer.
While cryptocurrency offers the same function of money in being a standardised unit of measurement, it currently offers no significant benefit over fiat currency. That is why I argue that cryptocurrencies will not displace money, at least not anytime soon.
iii. Most people obsess over cryptocurrency as a form of money, but they do not really need this form of money.
Cryptocurrencies today serve other functions besides helping to transact money from one person to another. Ethereum is a smart contract that bridges trust between two parties. Golem ties together a network of computing power. Predictive systems and oracles are also becoming more salient.
However, most of the hype still surround the likes of Bitcoin, Litecoin, Ripple, Monero, ZCash, Bitcoin Cash, Dash, Nano, who aim to be a better form of money. The media touts blockchain and cryptocurrencies as the future of money, possibly so because cryptocurrencies as a form of money is the easiest function for the layperson to understand.
“The remittance industry is huge.”
“An asset that is better than gold.”
“You can transact securely and anonymously.”
You probably will hear some version of these, but really, do most people need this alternative form of money or store of value? If there is no need, then what is all the hype about?
After the countless reading, writing, and thinking, I am positive that cryptocurrencies and blockchain technology will play an important role in our lives in future. However, the biggest disruption may not be in the form of money or an alternative store of value.
The reason for all the hype around a digital, secure, anonymous, immutable, decentralised money is because it has made many early adopters rich. People do not want to miss out on the next piece of action to get rich, and rightfully so because majority of the population still do not get what the distributed ledger technology is about anyway.
In the coming months, we are expecting a boom in the market, a surge to new all-time highs. Your Uber driver or even the granny next door may become a blockchain enthusiast and crypto advocate.
I will be worried when that happens. For now, these are just my opinions, and I am confident that they will change, because they have over the past year.
Besides writing about the impact of cryptocurrencies, I also write about investing in them like this experimental strategy, or this qualitative piece, which will be further discussed in my book. Sign up for my mailing list if you want to be the first to read the book, or follow me for more of such articles. Thank you!