Someone once expressed in a book the idea that the love of money is the root of all evil. If this is true then politicians, central bankers and, before them, monarchs must have proven themselves virtuous beyond measure through their acts of monetary debasement.
The spectacular rise of cryptocurrencies compels us to ask the question “What is money?”. I wonder how many people reflect on the purpose of money and its true nature. I do so frequently because I consider money to be one of the most fundamentally vital elements in our society. It is truly the lifeblood of any nation because it enables commerce and enterprise.
According to conventional wisdom, money has three primary functions, each of which is universally understood. It serves as a medium of exchange, a store of value and a unit of account. In order to deliver these services, money must have certain attributes. The most important of these are stability, because that is the bedrock on which trust is built and universal acceptance, which flows from that trust.
On the face of it, fiat currencies are stable and universally accepted while cryptocurrencies are not. But if you take a longer term view it is clear that pounds, dollars, yen and euros lose their purchasing power over time through the corrupt operations of those we have elected as their custodians. By contrast, it is notable that the bitcoin, of which five thousand were required a few years ago to buy a pizza, are now worth a thousand pizza’s each.
The emergence of cryptocurrencies is being driven by two powerful forces – firstly the betrayal of trust by the operators, driven by greed, of the world’s banking systems and secondly the accelerating juggernaut of technology, which refuses to abandon Moore’s Law.
The volatility of cryptocurrencies and their low level of acceptance prevent them from serving the purpose of money at present. But this will gradually change as more people develop an awareness of the power of the blockchain and understand the advantages that it can provide in the areas of security, reliability, efficiency and cost effectiveness. Banks and other influential institutions are already taking tentative steps to invest in the new technology.
It remains to be seen whether one or more cryptocurrencies will replace the form of money that is widely used today, which is controlled by governments, banks and the other intermediaries who muddy the waters of finance. The infrastructure is still early in its development and the altcoin markets are a long way from shedding their wild west image.
The Knot Garden believes that people will ultimately prefer money that is digitally “mined” in strictly limited quantities to that which is spewed out in torrents from the printing press at the whim of bankers. The replacement of fiat currencies by their cryptographic equivalents will result from a long term shift in faith from the powerful authorities who manipulate our money supply to the distributed networks of private enterprises that operate the blockchain.