Is Crypto Sufficiently Robust To Be Valued In The Same Breath As Conventional Currency?

Is Crypto Sufficiently Robust To Be Valued In The Same Breath As Conventional Currency?

The earliest examples of currency collapse come from the Roman Empire. ‘At the beginning of the Roman Empire around 1 CE, the Denarius was made of pure silver. Fifty-four years later, the content of silver declined to 94 percent. By 100 CE, silver made up 85 percent of the coin. In 218 CE, the share of silver fell to 43 percent. In 244 CE, just 0.05 percent of the Denarius contained silver. By the time of the Roman collapse, the number fell to 0.02 percent.

The first ever official currency is believed to have been minted around 600 B.C.in the kingdom of Lydia which at its height controlled the whole of the Anatolian Peninsula and about 85% of modern day Turkey.  The coins were made from electrum, a naturally occurring mixture of silver and gold.

As nations and empires rose and fell in merchant stature, so too did the street value of their currency.  Gaps arose between the trading value of one nations currency relative to another. This created cross-border variances between the metal value in minted coins and the value of sovereign currency units in the marketplace.

This led to opportunist individuals profiting from cross border acquisition of coinage in nations experiencing relative depression, melting it, casting the precious metal content in bars and selling it at a profit to treasury officials in a country which was more fiscally buoyant. Sometimes these expeditions became state sponsored.

Centuries later, a similar ploy has been adopted in equity markets – what is known as a ‘Hostile Takeover’. When a company’s share value has fallen so low that traded equity is priced well below a company’s intrinsic value, a type of SPAC (Special Purpose Acquisition Company) or Private Equity firm will swoop into the market, buying all the equity, suspending trading,  and will then delist (re-privatize) the company.

Indeed, ‘asset stripping’ was happening to nations hundreds if not thousands of years before it was a phenomenon for listed companies.

This led to nations withdrawing all precious metals from circulation, and storing it in a national treasury. The nation would then circulate coins minted in 100% low value, high durability metal. This was the start of the ‘Gold Standard’ where physical currency in circulation did not have the intrinsic value itself, but was notionally linked to a representative proportion of the value of  treasury content.

XRP on the slide towards the end of 2020

This also gave rise to the incarnation of the ‘Bank Note’.

The oldest surviving banknotes are examples of the “Da Ming tongxing baochao” (Great Ming Circulating Treasure Note), which were first printed during the reign of the Hongwu Emperor (1368–1398); China.

Banknotes began in the global era of ‘Absolute Monarchy’ and typically contained a phrase roughly equivalent to ‘I promise to pay the bearer the sum of <denomination>’ in the nations official language. This meant the note was an ‘instrument’ which had a claim on a representative proportion of  treasury content. It usually had an illustration of the Monarch or Emperor, and a printed facsimile of their signature. Notes evolved over time to reflect the evolution of sovereign nations and to combat counterfeiting challenges. In modern times, many banknotes carry the signature of one or more leading officers of the nation’s Central Bank.

The oldest banknote

Banknotes in ‘The Americas’ are thought to have been first operated as ‘promissory notes’ issued by colonial merchant bankers that were the pioneers in ‘investment and loan’ business in the ‘new world’, rather than sovereign states.

The ‘Gold Standard’ has been dropped by many modern democracies and instead replaced with a notional concept of sovereign net worth with the ‘guarantee of value’ being a claim on the government of the day.

With no easily measurable link between actual value backed by assets, it may be perceived the currency value would disintegrate, but in practice, the currency of some of the nations that dropped the Gold Standard have some of the most stable currencies in the world, case in point, the British Pound.  There therefore has to be something else, perhaps the sentiment around governance that is perceived as stable, and survived a political evolution process over hundreds of years.

And here we come to Cryptocurrency. The most successful and highly valued cryptocurrency, Bitcoin, not only doesn’t have an asset backing, it doesn’t have a sovereign authority offering any guarantees either. It’s perceived value is in the security of its block chain architecture, and the fluidity with which it can move globally, particularly through nations without a ‘hard currency’ i.e. there is a divergence of the value of their  ‘flat money’ issued by their Central Bank, between ‘official’ and ‘parallel’ (or sometimes called black) markets.

Over  11 % of Nigeria’s Internet subscribers are involved in crypto, Nigeria has been ranked 5th in the world by Arcade Research.

Several cryptocurrencies have seen an overall appreciation in value over time, the question though, is will continued appreciation prove inevitable?

There are risk factors which suggest this may be less likely for the future

Mining becoming easier, quicker and more automated.

Cryptocurrency is considered more efficient and cost effective compared to flat money sovereign currencies to manage because of its virtual nature, and, in some cases, a peer support community. In the case of Bitcoin for example, this community includes ‘miners’ who perform complex calculations adding transaction records to Bitcoin’s public ledger of past transactions or blockchain. There are outcomes which provide bitcoin reward.

However, as we move towards increasingly more mass computing power, and even the possibility of power approaching that of quantum computing becoming affordable for single individuals, these calculations will become increasingly more easily and more simply done, industrializing new coin generation. This may change the value of cryptocurrencies on the bitcoin model in the same way Henry Ford’s ‘Model T’ changed affordability of automobiles forever. The only limiter would be transaction availability.

The spectre of spread betting.

Online spread betting platforms permit gambling on the changing value of different instruments such as equities, commodities or currencies in relation to a currency of choice without owning or investing in them.

The value of any instrument can change as a result of market reaction to new information. How this information is received is called ‘sentiment’. Sentiment can often be subjective. For the first time, spread betting offered the opportunity to gamble on the relative value of an instrument going down.

The availability of spread betting introduced for the first time, the possibility to profit from negative sentiment.  Speculators could make money from bear as well as bull markets.

Currently spread betting on a cryptocurrency is in its infancy, so the incentive for self proclaimed pundits is weighted in favour of talking up rather than talking down a specific cryptocurrency. This means on balance, more  positive rather than negative sentiment is generated. The noise in cryptocurrency discussion fora is an up-talk echo chamber speaking alternative truths. Should spread ‘down’ betting take hold as it has for other instruments, this may change forever.

No ‘stablity’ formula for a new crypto product.

Some cryptocurrencies have been released with asset backing, but there doesn’t seem to be any predictable association between its success potential and the nature of its asset security.

Venezuela launched an ‘oil reserve backed’ cryptocurrency, the ‘petro’ in 2018 as a way out of US economic sanctions on Venezuela. However, subsequent developments have revealed that the cryptocurrency is still to gain mainstream and international traction.

‘Not all cryptocurrencies have a coin that has a clear-cut use or enhances the value of its underlying blockchain. This is why valuing cryptocurrencies often proves difficult.’ – The Motley Fool

‘Because cryptocurrencies are largely unstable, a person holding them can be very rich while suffering huge losses.’ – Cryptonerds

Then came the shock. On the 26th of last month, four key Crypto Platforms:  Bitstamp, OSL, Beaxy Exchange and CrossTower, all dropped support of XRP, at the time, the 4th leading  cryptocurrency in the world

Two days later, Paul Grewal, Chief Legal Officer announced:

‘In light of the SEC’s lawsuit against Ripple Labs, Inc, we have made the decision to suspend the XRP trading pairs on our platform. Trading will move into limit only starting December 28, 2020 at 2:30 PM PST, and will be fully suspended on Tuesday, January 19, 2021 at 10 a.m. Pacific Standard Time

How a Bitcoin is minted [illustration]

So what is a sensible approach to crypto moving forward?

Well when cryptocurrency debuted, pundits heralded that currency as we know it, would never be the same again. I am not convinced crypto is giving flat sovereign currency the nudge just yet.

The first cryptocurrency Bitcoin started as a business in 2008, though transactions didn’t start in any real sense until 2010 and rival crypto didn’t appear until the next year. So what we are seeing is the 4th leading cryptocurrency crash and burn only ten years into the availability of this relatively new instrument type.
You have to go all the way back to the 1940’s to the ‘fall of the Third Reich’ to the then German Mark, to find a flat sovereign currency of comparable stature that experienced such melt down.
XRP however, cannot excuse its guardians demise, by way of a collapse of a sovereign empire or the loss of a world war!

So does this mean we should revise our approach to crypto to the point of treating it like the plague? No!

The first Bitcoin was created through the blockchain architecture with the aim to eliminate intermediaries and avoid unnecessary transactional charges.

‘The root problem with conventional currencies is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of flat currencies is full of breaches of that trust – Satoshi Nakamoto (Bitcoin Founder)

Cryptocurrency was created as a ‘transactional’ tool. It ignores sovereign boundaries, the nature of flat sovereign currencies and exhibits immunity to trade and value exchange barriers of many political regimes.

The main purpose of a commercial endeavour is to generate profit from its activities. It makes sense to make revenue collection as simple and easy as possible, and part of that is by broadening remittance options for customers and patrons. While businesses can adopt their own policy on liquid asset management, the potential for loss resulting from instrument depreciation in short transactional windows is extremely low.

Especially in any business where the profit component of unit revenue builds at scale,  [as sales volume tends to infinity, unit service cost tends to zero], such as online network services, online content access services, platform access virtual products, etc; even for that matter, the services of Tekedia Institute – the adoption of such additional virtual payment media is a no brainer.

Cryptocurrency – Use as a transactional tool liberally and enthusiastically. As an investment tool or speculative tool ? The jury is still out!

Citations, referenced articles and additional reading:

  • visiontimes.com – A history of flat currency and why we need to be worried. https://tinyurl.com/y2hcwgqr
  • blockchain.info – The fall of XRP crypto-token https://tinyurl.com/y5jfqf7d
  • McKinsey – The six types of successful acquisitions https://tinyurl.com/ybpmxs45
  • Investopedia.com – roots of money https://tinyurl.com/c483nja                  
  • Wikipedia – Asset stripping. https://tinyurl.com/y5xgtvor
  • Guinness World Records – The oldest banknote https://tinyurl.com/yxmdxoqf
  • Motley Fool – Cryptocurrencies explained in plain English https://tinyurl.com/yyvnazd4
  • CryptoNerds – What is cryptocurrency backed by? https://tinyurl.com/y36px89h
  • Venezuela launches Ethereum-based cryptocurrency called Petro https://youtu.be/r5PSWvaIJ6g
  • Investopedia.com – Hard Currency https://tinyurl.com/yxkdahkk
  • The rise and rise of Bitcoin – https://youtu.be/qk4gZrBR9CU
  • African Crypto News – Cryptocurrency in Nigeria https://tinyurl.com/y69uvsdf
  • Quote Fancy – – Satoshi Nakamoto Quotes  https://tinyurl.com/y45geelq
  • Investopedia.com – Why Venezuelas Petro failed https://tinyurl.com/y48hvlyz

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