Hansel

@h.ansel

Cryptocurrencies Will Not Displace Money

At least not anytime soon…

The other day, I chanced upon Felix Martin’s Money: The Unauthorised Biography, and he presented an alternative view about money.

“They are simply tokens to keep track of the underlying and ever fluctuating balances of millions upon millions of credit and debit relationships.” — Felix Martin

That is to say, money is just a standardised unit of measurement that is recognised by everyone.

How Money Came About

Picture today’s world happening without money. You go to work and you expect some form of reward. This reward can be exchanged for food, your necessities, and your luxury items.

But hold on, the people who are providing you the food, necessities and your wants need something in return. Like you, they are offering a product, a service, their time and effort, so that they can support their livelihood. So you have to distribute to them a fraction of your ‘reward’ from work, but how?

In the old days, that would be barter trades. You exchange your eggs for their crops, or your cow for a piece of land. The problem with barter trade is that it is hard to quantify whether a piece of land is worth a cow, 100 chickens, or a year supply of corn.

That is the problem that money solved. We now have a standardised unit of measurement.

You trade your work, assets, belongings for what you think it is worth, and you use that same measure (money) to acquire your needs and wants.

Photo by Jeremy Dorrough, Unsplash.

Comparing Money With Cryptocurrencies

The idea of money is that it is a measure for who owns what, how much of it he owns, and what is his worth. With what he owns, what can he exchange them for?

Each time there is a transaction, someone is debited a sum while another person is credited a sum. That is to say, money exists mainly to account for the many “credit and debit relationships” between people.

Money is just an accounting concept.

Cryptocurrencies in essence, are tokens built on top of the blockchain technology. Blockchain technology is simply an alternative method of storing data such that the ledgers are openly distributed to anyone.

The key difference is that money as we know and trust it, is provided and supported by a central institution (the bank, or the government). On the other hand, cryptocurrencies are not owned or supported by such an institution (which is also why it is decentralised).

Without jumping into the merits (or the downsides) of decentralisation, the fact is that fiat money (money issued by a government) is recognised and accepted widely. Cryptocurrencies on the other hand has not hit that scale of adoption, and many people are skeptical of it.

Can Cryptocurrency Be The Future Money?

Like money, cryptocurrency can be a standardised unit for transactions, but that does not make it unique. History has shown us that there are many other examples of money, like how the Chinese used shells, bronze and copper coins, silver and gold ingots, while gold was once adopted as a standard in Europe and in the United States.

In today’s increasingly cashless societies, we are also crediting and debiting money into and out of our account, without actually using the physical coins or notes. The need for having physical money has declined, although it does not hurt to hold physical money since its value does not diminish, and you can still use it.

Today, it is hard to imagine going back to the barter trade days. Why would we? That would be regressing towards the primeval age of survival. How about moving towards “the future money”?

As digitalised transactions are increasing and physical transactions of cash are decreasing, can you imagine if your digital money is not backed by the bank or the government? That is cryptocurrency.

What? How? How will I know that its value will be there? How will the seller trust that my money is legitimate?

That is the challenge for cryptocurrencies if it were to become the money of the future. It is not simply about throwing the words of ‘decentralised’, ‘distributed’, ‘secure’ and ‘immutable’, and saying that these traits make cryptocurrencies better than fiat money.

The challenge is that cryptocurrency requires a change in paradigm — that money not provided or supported by an institution is reliable.

Photo by Caroline Attwood, Unsplash.

Imagine asking a farmer if he would trade his buffalo for a piece of gold. Would he give up the buffalo that helps him plough his field so that he can grow his crops, for a piece of stone that he has no clue what it can get him?

It may get him a house or more land (so that he can be a landlord), but he would probably not see that. Instead he would consider how giving up the buffalo can cost his livelihood. You may even have better luck offering him a cow rather than gold, so that he can milk cows for a living instead.

Similarly, can you imagine asking someone to give up his fiat money today for cryptocurrencies? Fiat money can pay for his food, his bills, his car and his house, while no one can say for sure what cryptocurrency can get him. Even if cryptocurrency has some value today, it is so volatile that it may get him a car or it may just get him peanuts some 10 years later.

Can cryptocurrencies displace fiat money? Plausible.

Like money, it can be a unit of measurement, but until people recognise and accept the value of decentralisation, they will probably stick will fiat.

As I am working on a book on investments in cryptocurrencies, I find that writing about some of these sub-topics on Medium clears my mind and consolidates my thoughts. If you would like to read more of such articles, feel free to follow me, or sign up for my mailing list if you want to be the first to read the book. Thank you!

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