Cryptocurrencies

Cryptocurrencies as an inspiration for an ideal monetary model? – Cryptocurrencies

Reading Between The Lines of Bitcoin

Cryptocurrencies differ quite markedly from traditional currencies. They make it possible to meet certain economic needs that traditional currencies do not provide. However, to the extent of their full economic application, cryptocurrencies would most certainly show major limitations. Either way, cryptocurrencies make it possible to advance the idea of ​​an ideal monetary model that traditional currencies do not allow today. This “crypto-currency” model could represent a real economic opportunity within 10 to 15 years if digitization and the loss of state sovereignty are confirmed.

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Free money market and free movement

Cryptocurrencies can be seen to some extent as the consecration of globalization. Almost anywhere in the world, you can trade with cryptocurrencies. In other words, cryptocurrencies do not depend on a state with national limits. The free movement of capital is therefore encouraged, which is a healthy process of competition. To this extent, we can consider that cryptocurrencies meet the (very partial today) need for global currency. No state supremacy, no open geopolitical conflict.

The other major innovation in cryptocurrency is that agents can freely choose their currency. Some will see it as an economic danger, others as a real opportunity. The free money market can be an economic limit as long as agents are not forced to use a single currency. Conversely, it is a real advantage for the economic freedom of individuals and free monetary competition. Agents will go to the currencies most recognized as safe.

Speed ​​and security

That’s the whole point behind blockchain. This decentralized system allows exchanges with fewer intermediaries, and with often greater security and speed. Traditional currencies, less digitalized and centralized, do not have such advantages. In an attempt to reduce competition from cryptocurrencies, central banks are trying to develop central bank digital currencies (MDBC). The main problem obviously remains that of the centralization of these currencies.

Beyond the security that the blockchain can provide, many investors have turned massively to cryptocurrencies in 2020 for their refuge character. Many managers (Stanley Druckenmiller, Rick Rieder of BlackRock, Paul Tudor Jones, etc.) have been very favorable to Bitcoin, in particular for its safe haven nature. The fact that the main cryptocurrencies are often limited in nature helps to ensure basic trust.

Central banks facing a major monetary problem

The massive interventionism of central banks is not a historical novelty. The very long-term effects of the monetary cycle are a natural economic drift. Historically, hyper-expansionary monetary periods last for around 3 decades. In addition, we are living in an age today where interventionism is reaching extreme levels. The main reason is that central banks buy back public debts that will never be repaid.

By buying public debts that cannot be repaid, monetary destruction in the balance sheet of central banks is no longer effective. This results in the irreversibility of monetary policies (inability to reduce their balance sheet in the long term), and an increase in the price of assets (available liquidity only increases).

Amounts of dollars in circulation (M2 $ L) and use of each unit of currency (M2V, velocity). Source: Gold and Silver Book, Thomas Andrieu.

This graph shows the velocity of the dollar (in black, measured on the left axis, this is the number of times the currency is used in a year) and the amount of dollars in circulation (dotted lines). The fact that the quantities of currencies in circulation are increasing almost exponentially shows the irreversible nature of monetary policies.

This leads to a gradual loss of confidence of the agents in political institutions (which find themselves constrained in the budget by gradual deficits) and in the currency. The extreme currency devaluation is a real economic problem these days, and central banks are forced to submit to it. Which is dangerous in the very long term and benefits cryptocurrencies.

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The other problem with traditional currencies: centralization

By definition, a currency depends on a state or a central bank with the corresponding legislation. The national or quasi-national character of traditional currencies can be a brake on the mobility of capital. As our last article explains, the twenty-first century is characterized by extreme mobility of people, capital and products. States are in competition with each other, and individuals can freely or almost freely choose the State of their choice, the one with the best quality / price ratio (standard of living / taxation). The fact of being able to freely choose one’s currency would only confirm the natural loss of sovereignty of States.

The centralization of traditional currencies in a few institutions (central banks, states, commercial banks) remains a major problem today. The high mobility of capital, products and people today requires a stronger need for competition and speed. This is not possible with traditional currencies which depend heavily on institutional uncertainties and central decisions.

An ideal currency: decentralized and international?

The international character of a currency is probably the character that best meets the economic needs of the twenty-first century. The possibility of using a currency, which does not depend on any state anywhere in the world, would be a strong monetary advance. In addition, the possibility for agents to freely choose their currency would allow some monetary competition, which can be considered a healthy process. However, the “free money market” can imply greater instability in the success or decline of currencies. But the possibility of exchanging several cryptocurrencies with speed and security would allow a certain smoothing of the cycles of emergence and decline of cryptocurrencies (mobility of currencies over time).

Moreover, the decentralized nature would allow major breakthrough in trade, by limiting the number of intermediaries, state takeovers, and insecurity. The use of the Blockchain would probably be the heart of this famous ideal monetary model. Central banks have grasped this concept and are looking to create their own cryptocurrencies. Full decentralization makes it possible to overcome external institutions and thus optimize exchanges.

Limits to avoid?

In view of the current economic context, a full application of cryptocurrencies could have certain limits. First, the establishment of a decentralized currency would not allow central banks to practice expansionist (as is the case today) or restrictive (as in the early 1980s) policies. In that the only real usefulness of the gold standard (limiting the quantities of currency) would be found with cryptos like Bitcoin.

There are thus two main economic limits (if any):

  1. The fact that cryptocurrencies are limited. In a world where debt is reaching extreme levels, and where the impact of expansionary policies reflects a systemic issue, cryptocurrencies would not fully correspond, by their limited nature, to the current equilibrium. We can indeed recall the fact that a restrictive monetary system often hinders economic development. However, expansionary policies do not last forever and are expected to change within 10 to 15 years. Which could translate an economic opportunity for a new monetary model (even restrictive).
  2. The fact that cryptocurrencies are non-national and digital. The lack of cash for a pro-crypto monetary model would be a limit today with aging, or weakly digitized, countries. The success of a “crypto-currency” model inevitably depends on the degree of digitization. Finally, the international character of cryptocurrencies can be the source of regulations, control, or abusive limitations for certain States. We live in an economic system where the state retains a providential role, unlike cryptocurrencies which appear to be a liberal innovation.

Finally, the use of cryptocurrencies as reserve and savings currencies would be at the origin ofincreased course progression and some price instability. Let us admit that 20% of asset portfolios of the main global managers (USA, EU, UK, Japan) are not in euros or dollars, but in Bitcoin (BTC) for example, this would be equivalent to an additional demand for $ 12,000bn of Bitcoins. That is, a monetary capitalization much greater than gold, and a capitalization 22 times greater than the capitalization of Bitcoin at the end of 2020.

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The 21st century begins with a loss of budgetary and monetary control. Which is dangerous. The hyper-expansionist policies carried out by central banks are likely to degrade the currency and the confidence of agents. Next to that, cryptocurrencies offer some major monetary innovations, especially when it comes to the fluidity of trade. Which is a considerable economic advantage. However, given the current economic balance, full use of cryptocurrencies would be inconsistent. The fact that the economic and monetary balance will inevitably change over the next 10 to 15 years may sharply reduce these limits and imply an opportunity for monetary change.

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