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A common refrain you hear about cryptocurrencies, at least from ordinary people, is that it is too “complicated”, “difficult to understand”, “opaque”. On a technical level, this view is understandable, but it ignores the fact that what cryptocurrencies are intended to replace / supplement, fiat currencies, are also a bit complicated, difficult to understand, and opaque.
Sure, everyone knows how to spend a dollar or a euro, but very few people understand how the monetary system that underlies the cash in their wallets actually works. One of the clearest examples of this comes from a 2014 survey conducted in the UK, which found that only 10% of MPs (i.e. the people responsible for making laws) knew that most of the money they create is commercial banks when issuing loans or credits, with 71% think that only the government or the central bank has the power to issue new cash.
This highlights that compared to the fiat monetary system, crypto is not as difficult to understand as you might think (at least not economically). And according to a number of experts speaking to Cryptonews.com, fiat currency and cryptocurrencies are comparable in at least one other way: Fiat currency has no more ‘fundamental’ value than bitcoin (BTC) or other cryptocurrencies, and the value of both depend on demand and trust in equal parts.
Different types of complexity
You have certainly come across some variation of the ‘Bitcoin / crypto is too complicated’ argument. Even seemingly sympathetic observers like Mark Cuban and John McAfee have succeeded in recent years, arguing that such excess complexity would prevent cryptocurrencies from gaining widespread adoption.
However, most proponents of this view combine two different aspects of Bitcoin and cryptocurrency. That is, they look at the technical complexity (that is, the cryptographic, blockchain-based aspect) of Bitcoin and other currencies, and they assume that such complexity carries over to their macroeconomics as well.
However, this view is incorrect, as explained by Hanna Halaburda, associate professor of technology, operations and statistics at the NYU Stern School of Business .
“Cryptocurrencies and fiat money are complex in different ways. Fiat cash is easy to use (at least the modern kind) because you see what you have and what you spend, ”he tells Cryptonews.com.
“On the contrary, cryptocurrencies are mostly very simple in their monetary policy (issuance of new currencies). But they are more complex to use, for example, you need to remember your wallet passwords; If you copy the recipient’s address wrong, the money may disappear and there is no one to call to fix it, ”he adds.
In fact, Bitcoin’s monetary system is extraordinarily easy to understand: a new BTC is issued with each new block (at a decreasing rate) until it reaches its maximum supply limit of 21 million mined bitcoins. That’s it, while monetary policy in the United States or any other country or region is not only constantly changing, but is made up of multiple layers of complexity (for example, M0, M1, M2, and other types of money).
At the same time, most industry participants are confident that the seemingly complex user interfaces and experiences of cryptocurrencies will become less complex over time.
“Just as technology evolved to make the Internet so user-friendly that it became mainstream, crypto technology is evolving, on its way to mainstream adoption,” says Lou Kerner, Partner at Blockchain Coinvestors and Head Crypto Analyst at Quantum Economics .
Kerner also points out that due to the openness and immutability of blockchain technology, cryptocurrency is extraordinarily transparent, as we know exactly how many bitcoins have been minted so far. “We have no idea how much money was printed yesterday,” he adds.
Philip Gradwell, Chief Economist of Chainalysis , agrees on this point.
“It is a common misconception that cryptocurrency is opaque. In fact, it operates on public blockchain ledgers and is one of the most transparent forms of value transfer, ”he tells Cryptonews.com, while adding that it is the very transparency of the cryptocurrency that allows companies to research like Chainalysis exist in the first place. .
It’s also worth noting that just because something is difficult to understand (at least on a technical level), it doesn’t mean that people can’t or don’t want to use it.
“The legacy monetary system is incredibly difficult to understand. Most people have no idea how it works. But you don’t need to understand how a Toyota to drive it, and the same goes for a dollar bill or a yen bank note or a deposit in a pound, ”says crypto economist JP Koning.
Core value?
Another common complaint about cryptocurrencies is that they lack fundamental value. This may be true, but the same could be said for fiat currencies.
“Fiat money, by its very name, has no underlying fundamental value. It is “backed” by the policies of the government that issues it. And that has been an effective strategy for many fiat currencies, ”says Hanna Halaburda.
Halaburda adds that fiat currencies are considered to have fundamental value because they are necessary to pay taxes in a given country, so there will always be demand, at least during the tax payment period. But “other than that, fiat money has value only because people believe that other people will believe in the near future that it has value,” he adds.
Halaburda refers to bitcoin as the “ultimate fiat money (in the literal meaning of the phrase)” but disagrees with the people who claim that it has no fundamental value.
“Bitcoin and other cryptocurrencies provide a service that was not available before them: almost anonymous online transactions. In my opinion, this is the fundamental value of Bitcoin, ”he says.
Lou Kerner also suggests that cryptocurrencies have at least as much fundamental value as fiat currencies, which in his opinion is precisely none.
“The value of fiat and bitcoin is decided based on supply and demand. There is also no backup, “he says.
However, in the case of fiat currencies, the absence of a fundamental base of value is what will cause at least some of them to lose all of their value.
“Because they create more fiat money until people decide that it no longer has value. That’s what bitcoin solves, ”says Kerner.
For Domenico Lombardia, director of the Department of Global Economy of the Center for International Governance Innovation In Canada, fiat currencies lack intrinsic value because they depend entirely on trust in the central bank and / or the government that issues them.
“Different central banks generate different degrees of trust. The latter is the highest in those systems where the rule of law and the broader institutional framework in which a central bank operates meet the strictest standards, ”he tells Cryptonews.com.
Lombardia argues that, for any cryptocurrency to compete with a fiat currency, it has to develop a framework capable of generating trust in the common user. “Without some form of regulation and supervision, that cannot be achieved,” he says.
But not everyone in crypto agrees that fiat currencies lack fundamental value, and JP Koning notes that the typical central bank generally buys assets when it issues new money.
“You can use those assets to buy back every unit of currency you have issued, thereby reinforcing the value of the currency. And if it requires additional help, the central bank can ask the national government for an injection of fiscal revenue to increase the coffers of the central bank, ”he says.
Of course, this only covers base money (M0, or money held and issued by central banks), and the Bank of England noted in 2014 that bank deposits account for 97% of money in circulation. He also pointed out that “bank deposits are created mostly by commercial banks themselves” in the form of loans, which implies that the only thing that supports that money is the obligation of the debt to repay it.
User interfaces
The fact that very few people are aware of this, that commercial banks create the majority of a nation’s money supply, should reinforce the understanding that the fiat monetary system is at least as mysterious and as opaque as cryptocurrencies.
Sure, cryptocurrencies are technically complicated, but so are the backend systems that support ATMs, mobile banking apps, etc. Such complexity does not prevent fiat currencies from being used, and it will also not prevent cryptocurrencies from being used in turn, at least as soon as their user interfaces are easier to navigate.
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Learn more:
– Solving these 7 challenges would accelerate the adoption of Bitcoin
– People tell Cryptoverse to fix these things to achieve mass adoption of Bitcoin
– Bitcoin is more ‘public’ money than central bank issued fiat currencies
– Prepare for the ‘uncertain future of money’ – US Intelligence Center
– The Fiat Money ‘Goes BRRR’ Printer, Is It Time To Sell All Cash For Bitcoin?
– European Money Printer Goes Brrr The program runs on a problem
– British money printer goes to BRRR: the bank will buy 125,000 million dollars in bonds
– Knowledge of cryptocurrencies on the rise, encouraging investment – Survey
– Honesty and education will help Bitcoin build trust – Survey
– The IMF says higher rates could reduce risk appetite. And Bitcoin?
– How the international trust fund hurts countries with liquidity problems (FYI, El Salvador)
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