Warren Buffett once referred to financial derivatives as “weapons of mass destruction” . He warned that they are detrimental to the global economy and financial markets.
Cryptos have a way of creating something supposedly of intrinsic value out of nothing. This is as dangerous as propaganda that leads to conflict or promotes struggle.
They are backed up by a cloud of non-regulatory policies by states who themselves, still traditional monetary policy measures.
And this is despite their full understanding of the instruments of financial wizardry.
In economics, the term creative destruction, however, has a paradoxically positive meaning. It is perfectly suited to the new form of “crypto”- currency (Bitcoin) that is not as mystic as it seems.
A brief history
Money is a concept that probably also met up with resilience when it was first supposedly introduced by the Chinese. They started carrying folding money during the Tang Dynasty (A.D. 618-907).
The instability generated by uncontrolled usage and denomination, however, soon led to rapid inflation. This prompted the Chinese to drop it, only for it to be taken up again later when it got stabilized by the adoption and use by the West.
They developed paper money as an offshoot of the invention of block printing. Block printing is like stamping.
Ironically that very same term ‘block’ is the foundation behind the Bitcoin – which is generated using blockchains (digital public ledger).
We won’t get into the mechanics of Bitcoins. We will, however, attempt to increase awareness on why and how this new payment method could cause positive ripples in the financial global system.
What is Bitcoin?
As per Wikipedia, and as simple as it can get in terms of a description: Bitcoin is a cryptocurrency and a digital payment system.
It was supposedly invented by an unknown programmer, or a group of programmers, under the alias Satoshi Nakamoto in 2009.
Though the anonymity creates an element of distrust about the agenda of its creators, it is surprisingly more transparent than derivatives.
Cryptocurrency uses a system of cryptography (encryption) to control the creation of digital ‘coins’ and to verify millions of transactions.
These transactions include are a basic movement of funds between two digital wallets and get submitted to a public ledger and await confirmation through encryption.
This video is a great and simple way for you to understand the above because it is best understood when explained as a larger picture. Check out this useful and basic video on Bitcoins.
That is quite a feat worth acknowledging because 11 years of existence is nothing compared to gold’s multiple century reigns.
Now 2009 was not long ago considering the Bitcoin is now ‘worth’ well over $20 000 each (updated to 2021 levels).
For centuries, gold has been our standard of trade or backing of all types of currency until it was ‘uncoupled’ by Nixon in 1971.
The future of trade and commerce is in the digital sphere – are you in the know?
For something to become the standard measure or mode of trade it, however, needs to be stable. So, while the technology behind Bitcoin (the Blockchain) is relatively sound, its actual price needs to find its firm nesting.
Established currencies trade on markets via exchange rates with relatively minuscule increments of change in price and value. In comparison, Bitcoin can jump in value by $1000 within (minutes or seconds) – prompting skepticism about its stability.
Google Engineer Ray Kurzweil, who is revered as a “prophet” for his mysterious predictions, such inconsistency undermines the cryptocurrency’s value as a currency.
The aim is nevertheless to relieve our dependency on money or more so, the iron grip and often abusive control that some banking institutions have over consumers.
You could even argue that the recent surge in its price is being fuelled by agents of the traditional banking industry. They naturally feel threatened by the fact that they may not fully understand it and its inherent potential. So they (cash-flush) could inflate it for an inevitable ‘burst’.
But the currency though very volatile in its movement has remained buoyant. It has now held for well above $10 000 for sustained periods since its inception. Gold is now approx. $1,900.
Bitcoins provide more guarantee than financial derivatives especially because of their open-source approach to its existence and use.
The tricky part is simply getting to grips with the vastly abundant information about it and how you could even generate it.
It is still a great backup ‘of a backup’. We rely on technology and more specifically the Internet for transactions and the associated traffic for our daily lives.
A simultaneous crash of a few major servers, however, could send it all tumbling back into the digital abyss. But as with money and other forms of currencies, only time will tell.
Bitcoin will just have to further prove its resilience and stability in the long run.
It is certainly not a ‘fly by night’ thing because it has sparked the interests of both public and private institutions globally. China even made a bold move to block the Bitcoin market from trading within its borders at some stage.
China is notorious for blocking things that stem from the ‘West’ only to later introduce it under their own control to protect their financial sector.
So, we can be rest assured that the creator is not Chinese! Sweden has allegedly passed legislature to make it an accepted form of currency.
Currently, banks and governments are frantically creating their own sets of blockchains to ensure they are not caught off-guard.
Bitcoin also gets its collective strength (intrinsic value) from its limited quantity in circulation (19 million out of a finite 21 million).
Bitcoin has also paved the way for others such as Ethereum, (mostly used for smart contracts and by developers) which is also seeing good growth.
Then there is Litecoin, which was formed as part of a controversial yet civil split from the originators of Bitcoin to use ‘variant technologies’.
All these platforms (companies) now use the blockchain to create all types of cryptocurrencies to capitalize on the spoils of this digital revolution.
There are also several institutions that are offering late-comers a chance to benefit from the spoils of using and investing in digital currency.
Naturally, all these schemes with their investment packages would require a ‘buy-in’ and marketing to attract more takers.
Such Crypto ‘companies’ are likened to a pyramid scheme and subject to many investigations by fiscal and criminal authorities.
But that is how Bitcoin, its promoters, and the market were initially treated.