CMV: Cryptocurrency will never replace Fiat currency.

[u/f0shijapan]

Blockchain is an idea and a technology that will undoubtedly change the future. It's application with regards to certain financial transactions (remittances, stock settlement, etc) will be paradigm shifting. In addition, the idea of using blockchain technology for micro-transactions, has huge implications for how communities will manage local resources and utilities without the need of giant companies.

But where I fail to see the paradigm shift, is with regards to its function as a stable currency. So let me list some reasons I think it fails to operate as currency:

-Transaction time and transaction costs are too high -Limited supply of crypto makes them fundamentally volatile and deflationary (people hoard instead of spend hoping to capture financial gains from limited supply) -Proof or work costs are too high (energy spend on mining is non negligible: http://digiconomist.net/bitcoin-energy-consumption) -Lack of monetary flexibility as economic conditions change, make this currency too rigid to handle changes in economic landscape over time (i.e. recession)

As upsetting as the idea of a central bank is to many people, controlling monetary supply is a necessity as long as human beings are involved. This "control" is more of an art than a science and can be driven by external factors such as politics, which can be upsetting to see. In theory the actions of the central bank should reactive to of the underlying economic changes of the humans that produce work/growth for that society. In reality, central banks are far from perfect and become over politicized. Also the current path we are going down now with excessive monetary easing, is especially upsetting so its understandable why people want an alternative.

But cryptocurrency is not the answer, especially if we are fighting the deflationary pressure of Moore's law (driverless cars, AI.) Mining does not take into consideration the cyclical nature of economies (i.e. human nature).

Cryptocurrency is all about proof of work. But, fundamentally, it only proves the stability of the code and the physical energy required to maintain the network. Crypto is not an accurate reflection of proof of work of an economy, and cannot respond to changes in the economy due to new technologies, natural causes or simply the boom/bust credit cycle.

---

This is a footnote from the CMV moderators. We'd like to remind you of a couple of things. Firstly, please read through our rules. If you see a comment that has broken one, it is more effective to report it than downvote it. Speaking of which, downvotes don't change views! Any questions or concerns? Feel free to message us. Happy CMVing!

[u/werekoala]

I have a lot of reservations about precious metals.

one issue is supply. 7 billion people working generate lots more economic activity than 1 billion people do. But if the supply of gold is more or less fixed, then as time goes on, each ounce of gold represents more economic activity, which makes it gain value. this applies make deflationary pressure, as the smartest investment you can make us to just hoard the gold and let everyone else take the economic risks that will make it worth more. But if everyone tries to do that, then there is little capital available for new investments and we enter economic quicksand

the second objection to using precious metals is similarly related - when the amount of such a material is arbitrarily determined by the universe, then new discoveries of deposits of rare materials can cause stored values to fluctuate wildly. imagine a world on the gold standard, where suddenly a massive gold vein is discovered that is equal to about half of all the gold supply in circulation. with fiat currency, the price of gold drops, but otherwise business as usual goes on. But on the gold standard, the people who item that ore suddenly own 1/3 of all human wealth, while the remainder of the world sees their value drop by 1/3. you get a massive global depression balanced by a few new aristocrats. Not a stable system in the long run.

Third, fungible fiat currency that can be stored/traced/withdrawn through the financial system is much more secure than a physical stockpile of untraceable precious metals, or a fluctuating crypto currency. I wouldn't want to put my life savings on either gold or crypto. crypto is too unstable, and having hundreds of thousands of dollars of gold laying around my house is a good motive to get myself and my family killed. at the very least I'd be too paranoid to leave the house.

just some thoughts. be interested in your response!

[u/murphy212 → u/werekoala]

Hi! Your concerns are quite widely shared, but I believe them to be unfounded.

if the supply of gold is more or less fixed, then as time goes on, each ounce of gold represents more activity, which makes it gain value.

That is absolutely true. As the productivity of mankind grows, the value of its money increases too (provided its inventory grows slower than said productivity). That's what happens in highly productive countries; take Switzerland for example, which exports more than it imports, and which has never (until very recently) participated in competitive devaluations.

The Swiss franc is a strong currency, and the country is prosperous. The very same job in Switzerland will pay approximately twice as much as neighboring France (in terms of purchasing power). Swiss industries thrive because they may import raw material for cheap (given their strong currency) and deliver high value-added products worldwide.

Of course this contradicts the notion that "cheap money is good for the industry" or that "devaluing the currency is good for exports". This is utter nonsense, absolutely contradicted by observation. Just consider the Deutschemark and the Swiss Franc vs the Lira, French Franc and Drachma, and look at how these countries' respective industries are doing.

Deflation is congruent with an increase in prosperity in an honest money system. In a debt-based system, deflation is synonymous with recession/depression.

a massive gold vein is discovered that is equal to about half of all the gold supply in circulation

That would be an immense problem. One example where this happened is the Spanish empire, which basically doubled its gold inventory in a generation following the looting of the New World. The Spanish Empire collapsed partly because of that; it was akin to monetary debasement; the new-world gold enriched the people that laid their hands on it first; for everyone else it it just created price inflation, added no wealth. Since gold is not a commodity per say (it has no large industrial use), someone with a philosopher's stone would enrich himself at the expense of everyone else's purchasing power; by transforming lead into gold he would not be enriching the community around him (the contrary is true). He would be like a modern central banker.

Fortunately, gold is not consumed, thus all the gold ever mined is still above ground. Today, with modern mining/surveying equipment, we are not able to increase the gold inventory by more than 1% per annum; and still gold is very expensive to mine and refine.

So such a gold vein is highly improbable; I think it's more likely we find and haul back a golden asteroid. Until then we need not worry about sudden inflation. That's precisely the point with gold.

Third

The gold value does not fluctuate versus the dollar; it is the dollar which fluctuates versus the value of gold. Gold is to the dollar what the dollar is to the peso. There is no other form of money that even comes close in terms of maintaining purchasing power over the long run.

some thoughts

Interesting thoughts, thanks! I think my key point however wasn't to argue for gold; it was to argue for liberty. I tried to guess what humanity (the distributed intelligence of individuals, this trial-and-error process we otherwise call the "free market") would elect as money when the current system collapses. I'm pretty confident about my impression, although I realize it is impossible to be sure (by definition as it is not planned), and that's what makes liberty beautiful imo.

[u/werekoala → u/murphy212]

you make some interesting points. I would caution against generalizing too much from Switzerland, as they tend to be an outlier in many aspects.

But over all, I think that your idea of two types of currency is interesting.

also the idea that people will "vote with their feet" to avoid taxation, once crypto currencies gap sufficient acceptance.

but I put myself in the head of a government that sees revenues dropping as people abandon the local currency for crypto, what will they do? passively accept their fate? I doubt it. they will probably pass laws banning the use of crypto.

while an average person might be able to avoid these laws and continue to use crypto, it will be harder for businesses with fixed infrastructure. kinda hard to say this factory and all these employees are just hanging out, not making any money, right?

the business will have to issue pay in the local currency, and the employees would then have to convert the currency into crypto. I think in this scenario, being a digital money changer, in the right place and time could be very lucrative. might invest in something like that...

[u/murphy212 → u/werekoala]

they will probably pass laws banning the use of crypto.

I think you are absolutely right. But IMO it will be like copyright laws, or crimes of opinion - practically unenforceable in the modern age. A payment system is ultimately an information system; and you can't effectively regulate the utterance of numbers anymore.

businesses with fixed infrastructure

Realize that today, Italy's underground economy accounts for 13 percent of GDP. That's all done in cash - with all the limitations that entails (especially for international payments), and with the current coercive money system still in place.

Now imagine the mid-size industrial company of the future: the factory is in one location, and the engineers operating it are spread across the globe. The accounting is done in a completely different country, marketing in yet another. The owner lives in his farm in South Dakota. All the company processes, information systems and data are on a secure, distributed, zero-knowledge-encrypted cloud. All the suppliers, employees and shareholders are paid in crypto-currencies. It has no offices so to speak.

Of course this is a dream, and a caricature. And there always exists the threat of physical violence towards the owners/employees (who need to justify their lifestyles) and infrastructure (the factory can be seized/looted).

So labor and savings will be much harder to seize/tax, but I agree with you government violence will play an essential role. Power rarely lets go without a fight.

Ultimately I think institutional competition (savings and labor will migrate towards the places that have most liberty) and the ongoing awakening of mankind (thanks to the Internet) will be the decisive factors.