First of all, thank you for the opportunity to share my views on the evolving landscape of crypto currencies and how I believe crypto currencies are going to be deeply embedded in the future of all commercial transactions along with fiat money. In my 20+ years of working in several cities in India, USA, Canada and Singapore dealing with many currencies, my investment experiences across various asset classes and my learning through several economics courses in b-school, I can state that I well appreciate the role of money, the role of Central Banks and to a fair extent how various investments and asset classes work or more often fail to work.
Before I start on Crypto currencies, let me share the story of one of my relatives, let us call him Uncle K, who in the early 1990s took an early voluntary retirement from a large public sector company in India. India was just entering the era of liberalization and Uncle K walked out with a high six figure sum in rupees, an amount that was considered quite large then and enough to last his retired life. Or so he thought even after burning a good sum for a grand wedding of his only daughter. Over the years, India’s economic growth scorched ahead, and BRICS became a well-known acronym. I started my career in the early 2000s and after a few years of working overseas, I met Uncle K. He was now in his mid-sixties but far worse was his economic situation as he had just moved back to live with his daughter and son-in-law as his dwindling retirement savings were absolutely not going to support his rentals and monthly bills just 15 years after his early retirement. Uncle K passed away last year without much to leave for his daughter and family. He had literally nothing to boot in the end especially considering he had a highly rewarding career in his days.
Uncle K’s savings were brought down primarily because his lifetime savings were in fiat cash and an inflation based high growth market made prices spiral out of control and eventually he was left with nothing. Yes, it is a huge mistake that he didn’t make any investments in other assets but you cannot blame a guy from that era who thought he can hold on to his savings and live a content retired life after getting his daughter married. And what can you ask a Government whose policies including devaluing the currency, opening the economy and raising the interest rates all had an overall positive effect for a young country minus some people like Uncle K.
Currency as in Cash or Fiat cash is denominated in each country and we know them as the Dollar, the Euro, the Yen or the Rupee and currencies were once upon a time denominated by Gold (meaning every unit of currency had the backing of a physical asset). But we don’t live in that era anymore. Currencies are not backed by Gold anymore and are completely regulated by Central Banks in every country. Now Central Banks are managed by economic and financial experts but they are never insulated from the idiosyncrasies of government and administration.
This is why currencies like the US Dollar or the Singapore Dollar with either strong and independent Central banks or very stable governments have managed to keep their strength over many years and also managed to protect the purchasing power of their fiat currencies over a reasonably long period of time. But unfortunately, no system remains perfect forever. With the pandemic in 2020, some of the actions initiated by the US Government and supported by the Federal Reserve are simply unprecedented. For one, in 2020 alone the US printed $3.38 trillion dollars and that is roughly one-fifth of all dollars created in the US in just one year. And just in March 2021 we got the news of the new administration giving another $1.9 Trillion stimulus. Now what do these things mean? the US Government and Fed are literally printing dollars to kick-start the economy. Well it could probably work to a good extent and will put people back on their feet as we start gradually easing movement restrictions. But what we should not forget is that higher the supply of money, the real value of money will drop meaning this will lead to higher inflation.
Now inflation in the US Dollar and a corresponding devaluation is something every country in the world should be worried about. Governments across the world hold their forex reserves in US Dollars or in US Dollar denominated instruments. When the actual inflation and the value of the dollar starts declining you can start seeing major valuation changes across currencies of the world. And, if you track this space more closely you will find news items talking about the many efforts in the US to redefine inflation calculations and report lower numbers. But we all know that markets are unforgiving and a structural revaluation of the US Dollar and other currencies around the world is an eventuality.
Now the market experts will tell us that this is exactly how things should work and how the real economic and market forces should work and help us get the correct value of fiat currencies around the world. But my question is not about the markets: what about the many Uncle K’s (and Auntie K’s too) who are stepping out of the workforce. What about the billions who will retire this decade and the billions more who all do not keep all their savings as assets and whose government backed retirement savings are all denominated in fiat cash of their respective countries? And what about whatever amount of cash we have in your bank accounts? Are we not staking too much in the balance. Well let us now keep this in mind as I shift our conversation now towards Crypto Currency, the key topic we are discussing today.
The evolution of Crypto currencies is something we all need to understand very clearly. Much before the currently popular decentralized crypto currencies like bitcoin came into existence, David Chaum an American cryptographer and computer scientist first created eCash, a crypto graphic electronic money in 1983 and later in 1995 he created DigiCash a model of electronic payments but all of these efforts in the pre-internet era largely remained within small academic circles until Satoshi Nakamoto, a pseudonymous developer, published his 2008 paper titled “Bitcoin: A peer-to-peer electronic cash system”. He then went on to launch Bitcoin in 2009. Now Crypto currencies work without any central agencies and have an underlying technology which is now popularly known as a blockchain. Within a cryptocurrency system, the safety, integrity and balance of ledgers is maintained by a community of mutually distrustful parties referred to as miners: who use their computers to help validate and timestamp transactions, adding them to the ledger in accordance with a particular timestamping scheme. I can go to great depths on how this works but let me simply summarize this by saying that the "independent and distrustful actors" within a crypto currency system create the trust in the ownership of the currency units and the trust in maintaining a ledger of every timestamped transaction. This distributed consensus is what makes it trustworthy and makes it so much reliable as an indicator of value (in contrast to the value of fiat money which has a value based on the country’s economy, governance and central banks in respective markets).
Now inherently, the blockchain technology supported by distributed computing and decentralized consensus have truly proved its value over the last decade and a steady stream of crypto currencies ranging from Ethereum, Cardano, Litecoin and a thousand other implementations with their own currencies and tokens are available and are getting traded in Crypto currency exchanges across the world. It is really mindboggling to understand how reliably these systems work even if you are one of the stakeholders as a “node” in the system, you can leave and rejoin at will because you can reliably accept the proof-of-work chain in the network when you were gone.
Over the years, makers of crypto currencies have been building support for their technology and approach and they have not gone without takers. And slowly as the market of crypto currency owners grew speculative interest in the currency (or tokens as they are called) increased and a number of crypto currency exchanges also opened around the world helping convert fiat money in to crypto currencies and facilitate buying, selling and swapping crypto currencies. All of this is backed by the highly reliable decentralized consensus built on distributed computing. Today if you have a couple of thousand dollars and some programming know-how you can become a crypto miner and take your clear steps towards mining and validating the crypto currency transactions across the world. Crypto miners are also rewarded in crypto currencies and this ecosystem of millions of investors continues to grow in leaps and bounds.
Governments across the world have started responding to crypto currencies cautiously and legal status and tax treatment from gains/losses varies substantially from country to country. In the United States, bitcoin is treated equivalent to property by the Internal Revenue Services (IRS) which means bitcoin is subject to capital gains tax.
Overall, the reception to crypto currencies has been varied with the speculative entry and exit of investors who do not understand the inner workings adding to some confusion. Some leading economists and investors have even responded very harshly calling crypto currencies as ponzi schemes or economic bubbles. You cannot blame them as distributed computing and blockchains are neither easy to understand nor do they have the symbolic emblems of governments attached to them. The big crash in crypto currencies in 2017 added fuel to argument that crypto currencies are nothing but unfounded fads.
The negative press has not dissuaded Crypto currency developers and miners to continue doing their work. The opensource blockchain technology Ethereum and its pseudonymous token (ETH) have provided this technology for many crypto currencies. The technology is so good that today Ethereum based software and networks are apparently being implemented and tested by companies like Microsoft, IBM, JPMorgan Chase, Deloitte, Barclays, UBS, Credit Suisse, Amazon. It was hard for anyone to miss the latest news on digital art selling through Non-Fungible-Tokens (NFTs) and these NFTs are built on Ethereum technology.
In late 2020, a new wave of institutional interest resumed again in Bitcoin, Ethereum and other crypto currencies and several institutions and large publicly listed corporations have transferred significant amount of cash in their balance sheets into crypto currencies. From an overall market capitalization of just over $3 billion in 2015 to over $400 billion in the peak of 2017 crypto currencies currently have an overall market capitalization of $1.85 trillion with Bitcoin alone holding $1.1 trillion and Ethereum holding over $200 billion with this capital raised on the back of a highly reliable technology, infrastructure, partnerships and convertibility.
Fiat currencies have ruled society for hundreds of years and they have proved their worth by serving as the lubricant for transactions across all parts of the world over such a long period of time. As crypto currencies gain vogue and as more doubts and sentiments emerge around how government triggered or natural calamity triggered currency valuation changes can happen, more and more institutions and investors are flocking towards parking at least a part of their “fiat cash” savings into crypto currencies. Governments across the world are adapting their approaches and increasingly many are starting to take favorable positions. I believe that as the demand for crypto currencies increases and as the investor base increases and as crypto currencies get increasingly accepted for mainstream transactions as equivalent to money, the speculative nature of crypto currency valuation will decline.
Let me tell you that till we reach that state, the valuation of crypto currencies will see a lot more fluctuations and price discovery and if you have understood me until this point and if you don’t want to be a future Uncle K, you will certainly want to keep some part of your cash savings or some part of your investments allocated to crypto currencies right away.
Thank you for the opportunity to share my views to you. I wish you all the success in saving, investing and building a secure financial future for yourself.
PS: The above is a speech draft prepared as a part of my coursework on "The Art of Persuasive Writing and Public Speaking" on HarvardX
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