“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” — Bitcoin Genesis Block
The Great Recession of 2008 brought the world’s economies to a screeching halt, but amidst the economic hardships the world’s first cryptocurrency, Bitcoin, was born. The world watched as governments bailed out the financial institutions responsible for the recession as unemployment continued to rise. Bitcoin was born to give individuals freedom from a system that values the few over the many by functioning as a currency governed by the people. This ensures that supply and demand are the only things affecting price.
The response to the Covid-19 pandemic by central governments has exhibited similar characteristics to the Great Recession relief. Corporate America received $500 billion in loans as the rest of the country struggles to meet ends meet. Cryptocurrency aims to empower individuals through decentralized financial instruments.
The lack of public discourse on cryptocurrencies concerning topics other than the purchase of black market goods, funding of terrorist groups, or money laundering has caused the public to be skeptical on cryptocurrencies. On the contrary, the innovation and volatility in the space give individuals the chance to find better returns and more lucrative investments than traditional markets. Cryptocurrency is the asset of choice for individuals who enjoy their privacy, and want to take back control of their money.
What Is A Cryptocurrency?
Cryptocurrencies use blockchain technology to act as a distributed ledger of transactions. Since everyone has access to the blockchain, everyone can view transactions between wallets. A wallet is simply an address individuals use to store, send, and receive cryptocurrencies. Individuals can only see the address of your wallet, but not your personal information when viewing transactions on the blockchain. Wallets can be digital or physical.
The blockchain is a type of database that chains blocks of data together in chronological order. Furthermore, the blocks in the chain can not be changed after being added to the block. Bitcoin’s blockchain keeps track of transactions, but a blockchain can keep track of every form of data. Miners or validators in the Bitcoin blockchain use their computers to solve math equations to keep the integrity of every transaction by ensuring coins are not double spent. Blockchain technology has use cases in almost every sector from banks, healthcare, and voting applications.
Alt-Coins Vs. Bitcoin
Bitcoin’s only use case as a currency is a store of value. The second most popular cryptocurrency, Ethereum, acts as an ecosystem that allows other crypto currencies to build on the Ethereum blockchain. Ethereum uses “smart contracts” that are built into the blockchain to facilitate agreements between users once the right conditions have been met. Smart contracts do not require trust between parties because the contract will automatically be executed. Smart contracts also require Ethereum to be executed similar to how gas is needed for a car to run. Crypto-enthusiasts imagine a world where Decentralized Autonomous Organizations that are built using smart contracts can exist.
Alt-coins are cryptocurrencies that are not Bitcoin, Ethereum, or Litecoin. Alt-coins that specialize in Decentralized Finance (DeFi) offer users financial products like lending services and decentralized exchanges. Individuals can gain interest on their coins by letting other users borrow their coins. At the time of writing, one of the most popular lending protocols, Compound, offers an annual percent yield of 6.48%. Individuals can jump between lending protocols for the purpose of gaining the highest annual percent yield possible. This process is called yield farming. Most savings bank accounts offer an annual percent yield of 0.01%.
There are also stable coins that are always pegged to the U.S. dollar. For example, the stable coin, United States Dollar Coin (USDC), will always be 1:1 with the U.S. dollar. Therefore, with 50 U.S. dollars you can buy 50 USDC and vice versa. Stables coins allow individuals to transfer money without worrying about their transaction losing value. It also allows them to “exit” the markets without exchanging cryptocurrency for fiat currency if no particular coin is appealing to them.
The False Narrative Surrounding Cryptocurrencies.
Many individuals are distrustful of centralized authorities for various reasons. Decentralized exchanges allow users to buy cryptocurrency without relying on centralized exchanges such as Coinbase or Binance. Decentralized exchanges work by using liquidity pools. Users send their coins to the liquidity pool to be traded by other users. The individuals who funded the liquidity pool with their coins make money from trading fees that are collected every time a trade is placed.
The relative infancy of the crypto space means that cryptocurrency investors are early. Investing in projects is cheap, but very lucrative because the majority of the public sphere do not yet understand the innovative space. Although the public sphere is warming up to crypto despite the negative connotations surrounding the space, “it is estimated only 1.1% of cryptocurrency transactions are illicit” according to Forbes magazine. The United Nations reports that anywhere from $800 billion to $2 trillion is laundered every year.
The anonymity of cryptocurrency may lead individuals to believe that cryptocurrency is the choice currency for criminals, but the publicly accessible blockchain makes it impossible for individuals to move money in secret. Banks facilitate the gross amount of money laundering by clearing the private transactions without the fear of rebuke from the public or the government. The banks simply have to notify federal authorities that they suspect money laundering is taking place while simultaneously making money for processing the transaction. 90% of money laundering that takes place today goes undetected.
Cryptocurrencies instead are the choice asset for acquiring financial freedom especially with little capital. The high volatility of the assets combined with cheap prices makes it easy to accumulate capital. Risk comes with investing in any market, and the cryptocurrency markets are no different. When risk management is exercised properly, volatility is your friend. Bitcoin is up 860% since this time last year. The apparent Bull Market that Bitcoin finds itself in is due to the Bitcoin Halving.
Bitcoin, A Decentralized, Hard-Capped Deflationary Currency.
The Bitcoin halving is a programmed event that occurs about every four years that reduces the mining reward in half. Only 21 million Bitcoin will ever go into circulation. Unlike fiat currencies such as the United States dollar or the Euro, Bitcoin is a deflationary currency. The Federal Reserve can continue to print the dollar bill as they see fit which causes inflation. Many pundits worry that the printing of the dollar bill by the Federal Reserve to aid the Covid-19 relief effort will have negative effects in coming years because of inflation. Bitcoin actively acts as a hedge against world economies.
The logic behind Bitcoin’s deflationary model is that every four years the amount of Bitcoin being supplied is reduced, but the demand for Bitcoin stays the same. Therefore, the price is expected to rise after every halving. The first halving saw the price rise from $12 to around $1250, while the second halving saw the price move 3000% from $650 to $20000.
The most recent Bitcoin halving happened on May 11, 2020. The price of Bitcoin was $8600. Bitcoin made a new all time high at $63900 less than a year later. Wealthy investors from Mark Cuban to financial institutions like JP Morgan have backed Bitcoin as the price is expected to rise.
How Can Cryptocurrencies Empower Individuals?
With basic understanding of crypto, individuals’ eyes are opened to an innovative space that presents endless possibilities. According to a 2019 survey conducted by the Federal Deposit Insurance Corporation, 5.4% of all American households were unbanked. In 2019, this was approximately 7.1 million households. The majority of households stated that they were unbanked because they did not have enough money to deposit. Bitcoin can be denominated up to 0.000000001 of a Bitcoin in any cryptocurrency wallet, this unit is called a Satoshi.
Furthermore, small amounts of capital in a brick and mortar savings account will not passively generate a significant amount of money in the short term. On the contrary, many cryptocurrency protocols will offer individuals APYs that are far superior to the rates offered by traditional savings bank accounts. Cryptocurrency not only gives disadvantaged persons the opportunity to take control of their money by storing it securely on a blockchain backed network, but can also protect them from inflation.
The CARES Act and other initiatives that were designed to stimulate the economy will eventually result in inflation. The United States dollar is an inflationary currency whilst BTC and other cryptocurrencies are deflationary. Hence, the Federal Reserve’s (a centralized agency) efforts to stimulate the economy by continuously printing more money will ultimately cause inflation. Thus, hurting the American people they were trying to help. Lower income individuals will be affected the most because their wages will most likely not be raised to account for inflation.
The Consumer Price Index, an index that measures the price of goods, saw a monthly gain of 0.8% (0.6% above the expected monthly gain, whilst the annual rate rose 4.2% in the last year. The largest annual increase in the CPI since September of 2008 when the United States was in the middle of the global financial crisis.
Cryptocurrencies empower the individual by giving them an escape from inflation. As long as your money is sitting in a bank or in cash, you are vulnerable to inflation. The high volatility of crypto gives individuals an easy way to multiply their money whilst avoiding the effects of inflation. Furthermore, a cryptocurrency user’s ability to access their funds 24/7 is especially imperative for individuals who might need the funds at any given notice. Receiving funds from liquidating stocks may take up to three days, and will only be processed when the stock markets are open. The stock markets are closed from 4PM to 9:30, holidays, and on the weekends. Cryptocurrency transactions can take place at any time on any day of the week.
Despite the somewhat seemingly grim narrative surrounding cryptocurrencies, there is money to be made. Bitcoin started as a currency deemed only for the technologically savvy or criminals, but currently sees itself on the verge of becoming mainstream. World superpowers recognize the power of digital currencies which is evident as reports have emerged that the United States and China look to develop a digital dollar and Yuan. Bitcoin and cryptocurrencies are not only here to stay, but can be instrumental in generating capital for disadvantaged communities.
Cryptocurrencies Are Here To Stay.
There are an abundance of cryptocurrencies with genuine use values that can push an investor or trader further along the path to financial freedom at quicker rates and cheaper prices than the stock market ever could. The rise in popularity of cryptocurrencies such as Dogecoin will give traders and investors alike a taste of the cryptocurrency space that will hook them forever. Unlike Dogecoin, a plethora of cryptocurrencies have real world use cases, and the price for these coins are relatively low. The markets are truly free and decentralized. The path to financial freedom could never be closer.