Considering that the hype regarding cryptocurrencies is at an all-time high, with no intention of stopping, I felt compelled to write to you directly regarding your activities. Also, I haven’t written anything in a really long time, so it’s been past due for a new post. This blog post may confuse many of you, and feel free to reach out if you need further explanations, because I plan to use existing financial concepts to try to explain a new financial concept. These comparisons will not be analogous. As children grow up, they learn things, most importantly, they learn new concepts; many of which are reifications of society designed to make our social interactions less cumbersome. One of those reifications is money, in its current form. Another is trusts/equitable rights. Another is intellectual property. There are many others. None of these things actually exist, but we as a society treat them as they do; they are coded into our laws; to make our lives easier. You cannot see, or touch any of them. We were strolling along, poking each other, but something extraordinary happened. A new concept was created. We, today, find ourselves in the midst of the creation of a totally new concept: virtual currencies.
The best and most succinct definition of “virtual currencies” that I’ve come across is in the proposed amendment of the EU Directive 2015/849, which states: “(18) ‘virtual currencies’ means a digital representation of value that is neither issued by a central bank or a public authority, nor necessarily attached to a fiat currency, but is accepted by natural or legal persons as a means of payment and can be transferred, stored or traded electronically.” I will help you out, and tell you that the key word in that definition is ‘value’. We as people create and define value. What may be valuable to me, may not be valuable to you. The greatest achievement in our evolution, in my opinion, is the concept of the exchange of value. That is the greatest revolution to mankind, and it may have been the reason why we climbed on top of the food chain. We can speculate that before fire existed, two people (or whatever they were then), decided to exchange something, i.e. one gave the other rice, in exchange for corn. That, we may safely assume, led to greater cooperation between people, and larger enterprises in development. Since then, societies have only gotten more efficient in the exchange of value. Efficiency reached a peak, when currencies were created (metal coins). Then the exchange of value became even more efficient with the creation of paper money. Currently, it is in its most efficient form, where we have digital representations of money. Vast enterprises have been built to further expand this. Central Banks, SWIFT, Visa and Mastercard, the IMF, all represent some of the world’s best endeavours in the movement and regulation of money. Money as a concept is an extremely efficient method of representing and exchanging value. However, it is influenced by politics.
As you may be well aware, people have decided to divide themselves into countries. Because of their cultural differences, whether induced by geography, language, religion, or something more absurd, countries were formed with the intention to govern a set of people more efficiently. Then, on that level, currencies were created. Each country created its own representation of value, backed by the whole output of the country. Then those countries also controlled the value of those currencies in relation to other currencies by tweaking its supply. If you have never heard of the Romeo and Juliet of economics, also known as Supply and Demand, here is a quick recap:
In a free market, the price is determined by the supply of something and the demand for it. If a lot of people want tomatoes, but there aren’t that many tomatoes for sale, then people are willing to pay more for those juicy tomatoes. If on the other hand nobody wants tomatoes, then sellers will sell those juicy tomatoes for less, instead of letting them rot.
Therefore, when it comes to the currency of countries, central banks have the task of controlling the supply of it, so that inflation is kept steady. There are many other factors to take into consideration, but this blog post is not about economics. We’re about to go into the actual point of this blog post, so … here we go.
Virtual currencies are a new concept. They are not a new manifestation of an existing concept. They are something completely new. I will go ahead and be bold, and say that anyone that attempts to treat virtual currencies as something similar to something else, is wrong. People grow up, and form worldviews, then in comes something new that attempts to disrupt those views, of course, there is going to be some resistance. A few paragraphs back when I was talking about countries, I forgot to mention that most countries are organized in a representative democracy. Why? I can assume it’s about fairness and efficiency. The way that representative democracies are supposed to work is, you vote for someone to represent you when it comes to matters of the country. You vote for a person, to represent your interests in an assembly, and decisions are made. Usually, a large percentage of these people that are voted to represent their constituents are old. Old people did not have internet when they grew up. Do not expect them to understand virtual currencies. Yet, they are the ones making the important decisions regarding the legality of the ways of uses of virtual currencies. Hence, the tendency to try and fit the concept of virtual currencies into an existing bracket. They try to equate it with a fiat currency, or an ‘investment’, but it is neither. It is a digital representation of value issued by someone.
Virtual currencies represent value, because the users and holders say so. Some virtual currencies are independent (such as BitCoin), some have an authority that regulates it. Just like a central bank, that authority can decide to emit more virtual currencies. Some are hard coded to emit new currency at a periodically set amount. Whatever the case, they represent value, because you say you do. If I have a bitcoin, I can say that its value is €2.2M, and if someone gives me that much money for it, then we can say that it is worth that much. If I have a piece of land somewhere, and I demand €800 for it, if someone is willing to buy it for that much, then that is its price. Why would I demand €2.2M or €800? Well, I’m going to gauge the market and see how much I can sell it for. If my BitCoin does not sell at €2.2M, but someone else sells her BitCoin for €10k, then we can say that the price for a BitCoin is €10k. If one juicy tomato sells for €89,550 then that is the price. It is simply the model of supply and demand.
This is great! Finally, something that the whole world can use without any borders, exchange rates, costly transfer rates, or any other hindrance, totally based on the market! We can exchange anything and everything all over the world with these things! Why would these old regulators be averse to such a great thing they don’t understand? Well, there are drawbacks (and the recently increased hype is not helping at all). All countries in the world have criminal codes, which do not condone criminal acts. One such act is money laundering and finance of terrorism. If someone steals money, thus stealing someone’s value, criminal systems try to set the system straight and put value to its rightful owners. Virtual currencies currently make it extremely easy to launder money. Why is money laundering such a big deal? Because of fairness. If someone works all her life, creating value, and stores it, then someone comes and just ‘takes’ it, it is unfair, right? If you don’t think so, I wish you all the best in your endeavours in creating a new anarchist country. All of us wanting legitimate uses of virtual currencies in our lives have to also think about the potential criminal aspect. A large part of the concept of virtual currencies is based on its anonymous use. Eight years ago when BitCoin’s price started climbing seriously for the first time, and then reaching over $1,000 for the first time was due to black markets, and mainly Ross Ulbricht. You could buy, drugs, guns, hire hitmen, on Silk Road very easily. Many, if not all, activities on that site were not legal. Therefore, value was unrightfully taken illegitimately. Virtual Currencies helped and still do in that enterprise. You could do the same thing with cash, though with much more effort. It is difficult to move cash around, especially large sums. You could put €2.2M in a bag, and hand it to someone, but you would have to physically meet the person, or have a courier send it to the person. It is much more difficult than a few clicks on a phone or computer. You can make it easier, and do the same transaction with valuable diamonds. However, if you wanted to sell those diamonds, or deposit that much cash in a bank account, you will have an extremely difficult time. A long series of questions are going to be asked, regarding the source of so much wealth. Most financial institutions have a €10k limit regarding deposits, specifically aimed at preventing money laundering and financing terrorism. Considering all of this, and how easy virtual currencies make these transactions, then you can probably rationalise the decisions that those old geezers are making regarding their resistance to the legitimisation of virtual currencies. What they do not understand though, is something else: virtual currencies can be NOT anonymous. Just like money can be. If I make a bank transfer of €2.2M to one of my friends, the bank is not going to ask him questions at all. Therefore, finding a delicate common ground in regulating or rather allowing the use of virtual currencies is going to be a tricky act. However, I still believe that the first step in that direction to be made, is to treat virtual currencies as a new concept.
Now, regarding what is currently happening, with the hype of virtual currencies a.k.a. cryptocurrencies, is unsightly. People are treating virtual currencies as ‘investments’, and are exchanging their money, their created value, for some piece of digital code, with the hopes of it passively increasing in value, thus creating more value for them. Virtual Currencies, again, are not investment vehicles or instruments. The way that ‘investment’ works is, someone has an idea, the will, and the time to create value. That someone usually needs some value, to create more value. That someone goes and borrows some value, and uses it to create more value than it borrowed, thus giving some of that “more value” to the lender. The lender ‘invests’ money by giving it to the borrower. That is the sport of passive investing. You lend your money to someone to turn it into more money. You can also invest in different countries’ currencies. The way that investment happens, is that you believe that a country will increase its output, thus creating more value, and representing that value by using its monetary policies to reflect it in its currency. What you, dear virtual currency trader are doing, is not that. Virtual currencies are not fiat currencies. They are totally market-based.
What is happening now, because of the hype, is everyone is exchanging their currently legally accepted instrument of value exchange, with one that is virtual/digital. You pay someone €10k to buy one BitCoin, and the value of that BitCoin, is set by the users and holders of BitCoin. Have you wondered what is the actual use of BitCoin? Have you pondered what is the use of Zcash, or Ethereum, or Ripple, or Wager, or the hundreds of new virtual currencies that spring up every year? The USD is a currency backed by the government of the United States of America. The EURO is a currency backed by the governments of the Eurozone countries. The Riyal is a currency issued by Qatar. They are used every day, to facilitate the exchange of value between people. Ethereum is a computing platform i.e. a world computer. Do not treat all virtual currencies as mediums of value exchange. They are not all the same. BitCoin may have been created for such purpose, but not all others have. Do you want to know when virtual currencies will actually be worth what they are really worth? When they reach their full potential. When they are used for what they were designed to be used.
The virtual currency hype has created a vicious cycle that is very detrimental to the whole concept of virtual currencies. People are trading virtual currencies as if they are public company stocks. Remember, that these virtual currencies and their value are 100% market based: supply and demand. They’re not based on the performance of a public company. If one virtual currency is hyped, then expect an increase in price. What is happening now, with the huge influx of money in virtual currencies is similar to a poker tournament. Everyone entered the tournament with their own fiat currency, and everyone is either winning or losing money to each other. There is no new money coming in. The end result is still 0. It is going to remain such as long as virtual currencies are hyped about, and used as ‘investments’, rather than used as they are designed to be used. There is no sane person in the world who believes that you can passively invest and achieve returns of +20% per year. If you want to create value, you have to work. The harder you work, the more value you will create. That concept is never going to change. Even the richest angel investors go through a lengthy due diligence process before they sprinkle their money on startups. There are only two ways that you can get (or get promised) absurd returns by your passive investments: you can become involved in a Ponzi scheme, or you can get lucky. For the former, talk to Bernie, and for the latter, visit your nearest casino.
If you really want to “invest” in virtual currencies, then begin using them. As a business owner, start accepting payments with them. Start making payments with them. Use them as their intended use. Create smart contracts with Ethereum. Pay for your VPN with BitCoin. If everyone uses it as a medium for the exchange of value, then your “investment” will pay off, and it won’t be ‘hype’ affecting its value, but the actual use. If you’re reading whitepapers and ‘investing’ (i.e. buying that virtual currency, with the intention to HODL until it increases in value) in extremely cheap virtual currencies, and consider that as an investment, then, that is the same as you investing in Qatar’s Riyal before Qatar even existed, before anyone even knew that it had oil underneath. If you’re just buying it, because everyone seems to be buying it, then consider your money lost. So, buy virtual currencies, and do not hype them, but actually use them, if you want it to reflect its actual value.
I really hope I’ve shed some light on this currently tumultuous world. I do not use virtual currencies, because I have no real world need for them. Instead of ‘investing’ in virtual currencies, I prefer to invest in actual stocks, such as VGT (which has been performing superbly these past 5 years). What I want to see happen with virtual currencies is something that liberates investing all over the world. I want to have an app that enables me to invest in all the world’s stock markets, without any fee, similar to what Robinhood is doing in the US. Then I would invest. I would also like to have one medium of exchange, whether it is BitCoin, Zcash, Ripple, or whatever confirms my transaction in a matter of milliseconds, that I can use anywhere, and everywhere, just like they use Ecoin in Mr. Robot. That’s the future I want to live in. SWIFT is incredible, and it is well worth the €25 per transaction, but with this new concept of virtual currencies, it needs to become obsolete.