In recent weeks cryptocurrencies like Bitcoin and Litecoin have risen in value considerably. Bitcoin’s dollar price reached $2600 from around $1000. There are several possible causes, one of which is the adoption and acceptance of Bitcoin as a currency (in Japan), the other it is the currency for the randsom payment of WannaCry, another is pump and dump buying and selling behaviour.
Cryptocurrencies are for all intends and purposes comparable to a tangible asset of limited supply. Unlike Dollars and Euro’s that can easily be created agains a loan with the (Central) bank, you can not bring cryptocurrencies in existence as they are needed or usefull. Bitcoin have to be mined, something that is still becoming increasingly hard. When bitcoin started many hackers could mine it, but now it requires such hardware and energy investment that it is out of reach of the common man. If you want to believe banks handle a limited amount of credit then a cryptocurrency is a currency system in which there are many banks. The reason being that some accounts will hold a gigantic amount of bitcoin, but selling those coins is only possible at the rate of the demand, and selling it under the going price will do little buy crash the value. This makes virtual currencies different from Euro’s and Dollars.
BlockChain : A serially encrypted string of data blocks containing transaction records for bitcoins, because the encryption is nested older blocks can not be changed (so transactions corrupted) without it having an immediate effect on the validity of current blocks.
When a currency trader wants to sell Dollars and buy Euro’s, there is usually a market for that transaction, meaning there’s a place where one can observe prices of other similar transactions. However these markets are run for profit, and they (because they are run by banks) can create money to close a transaction even if there is nobody buying. This is called ‘market making’. You arrive with 1000 USD, the market buys it at the going price, holds it until someone comes along that wants them. This is done with all kinds of tradable goods, from stocks to commodities like wheat and oil. The oil is sold by someone that doesn’t have it, who hopes to buy the oil before you come to collect it.
The above market making has two effects : 1. It allows quick entry and exit from a currency position. 2. It creates fake prices, because at times the price of a currency will be zero, when nobody is interested in buying any. At other times it should be infinite, when demand is greater than can be met by those that offer to sell. We don’t see that price behaviour exactly because the owners of the market like to create trust in the currencies, they like to profit unobserved from the ‘spread’ (the difference in the price they pay to buy and of what they pay to sell their reserves). There are high speed trading algorithms that can use the ability to sell and buy without reserves to control the price, think the computer telling the market “I offer $4.000.000”, so a seller thinks “Wow! there’s already $4.000.000 for sale, I better drop the price”, and then the computer retracting the offer.
Cryptocurrencies are different in the sense that you can’t fake them. The blockchain (which keeps check of everyones crypto balance) IS the currency, the correct administration of positions is its core. If you fake Bitcoin in the Bitcoin blockchain, all peers will reject your block, the blockchain is fundamentally a mechanism to correct errors and disallow fraud, which is why Bitcoin is usefull as a currency.
After the 2008 crash many banks spend months ‘reconciling their positions’, meaning their clients traded in shares, stocks, while the bank didn’t own any of them for real. They now had to go look for them.
If a bitcoin owner wants to sell Bitcoin for Litecoin or Dollar, he has to wait in line, usually in a bitcoin marketplace. Not until someone pops up that wants to buy your Bitcoin (at a price you accept) can you sell them. If trading volume is high this may be instant, if it is low you will have to wait. A market can still accept your Bitcoin, but it takes a serious risk. It can not sell you any Bitcoin it doesn’t have. As a result prices are more volatile, and for some cryptocurrencies there may be no price at times. A sale of Bitcoin starts as an attempt to transact, and the Bitcoin mechanism has to run for some time (on all global peers) until you can see your transaction reflected in the Blockchain.
A flash crash in Ethereum actually happened (after this was written) due to a ‘multi million dollar sell order’
This ‘sensitivity’ also creates some opportunities. If I sell 100 Bitcoin for 1000 dollar the value of the coin could be considered 10 dollar. The price of the Bitcoin then becomes 10 dollar. But if I sell 1 Bitcoin for 10 Dollar the effect is the same. Also if I sell 0.001 Bitcoin for 0.0001 Dollar. This means I can create a price by making a number of losing trades. If I agree to do 1000 transactions in which the ‘price’ of the Bitcoin is 10 dollar, It can be that I only ‘spend’ 0.1 Bitcoin to create that illusion. The next trader doesn’t know, so he sees the new price in the market. This is exactly what happens in the real banking system, but in Cryptocurrencies it is usually fully transparent.
Cryptocurrency prices can be manipulated, but their blockchains will show it immediately
But Bitcoin has in recent years become an established crypto currency, even though the underlying code has flaws and has been improved on in other currencies like Lisk or Ethereum, Bytecoin etc. The use case for Bitcoin is varied. The basic property is that you can trust the numbers add up.
- Replace Euro, Dollar, Yen in your internal accounting with bitcoin (at a fraction of the value equivalent, say 1/100th). This is usefull for big companies or conglomerates.
- Use it to transact with low banking fees, buy Bitcoin, send them, let the other side cash locally. This does cause problems (for others) which will be discussed below.
- Use it as currency. This is only possible if all your suppliers accept it. Usually the gas station or energy company do not accept bitcoin as they are the reason we have the Euro, Dollar etc.
- Speculate on its value. So buy low, wait, cash in. This is a reason for people to create price illusions. To sell you have to be close to a buyer, some owners of cryptocurrencies are closer than others.
- To save. In the case of Bitcoin some people really made a fortune, even thoug cashing in can be a slow process.
- A professional community, or a specific functionality is offered only in return for a specific cryptocurrency, therefore creating solid demand for it. Ethereum is an example, if you want to use the ether smart contracts you have to pay for transactions in Ether. Equivalently all PHP coders can decide they need to be payed in PHPcoin only, and so the demand for that coin follows the demand for PHP coders.
The job of our current financial system is to manage and facilitate the consumption of resources, primarily fossil fuels. Therefore no crypto currency is likely to be accepted to buy fossil fuels, unless its price can be controlled by the fossil banking system (through the fact they own a lot) and the trade is closely tied with the existing currencies. This is more or less what happened to Bitcoin. Not all cryptocurrencies will be given this opportunity, and banks have no problem creating their own.
The cryptofinancial system however can enable renewables based local economies, and there are many examples where the need to get ‘real’ currencies to administrate exchanges of products and services is a big restriction. So a local village can organize work by asking and paying f.i. Ether (the currency of the Ethereum mechanism), and all those involved can be sure they do not work for nothing. The more local the resources are the more fit for a local currency a market is. As renewables and the local economic resilliance (against fossil fuel price volatility, including entire countries ‘economies’) grows, the adoption of crypto currencies will also grow. We have written about the Euro, the Auro and the Joule also because alternative currency systems are the best solution to managing an economy with heterogenous value creation mechanisms.
Now let’s say all bakers decide they will only accept bakercoin, and all farmers that supply them with eggs and wheat and biogass to bake will also accept that coin, and sell it to all the people who need bread. A small economic island forms that doesn’t need Euros or Dollars. Those Euro’s and Dollars stay in circulation however and thus cause inflation of anything bought with them. Banks will see a reduced need to extend credit, and so a reduced control, for sure they don’t control what the bakers and the farmers do anymore.
[Cryptocurrencies already cause problems because a person that buys currency in the US and uses it to buy something in China replaces a Dollar cashflow that would be available in China to buy fossil fuels from the world market, thus starving China from it’s ability to produce.]
Extend the above thought and every time people adopt cryptocurrencies for one of the reasons listed above banks see more money in circulation than they anticipate, and inflation will occur. All Euro’s Dollars etc will eventually be absorbed by debts and energy cost, but even this process will slow because of the adoption of more renewables which lower the price of energy. Thus the introduction of cryptocurrencies can cause ‘traditional’ currency inflation.
Renewables are a key to the full functionality of cryptocurrencies as was intended, as an alternative to banking. This is because the fossil fuel sector has a deal with banks on which currency to sell their assets in, at least per power block. We used to have the petrodollar all around the globe, now oil is sold in other currencies, but only when the government that issues the currency also owns the fossil fuel wells. Where markets are denominated in Dollars the US basically owns them. Our currency systems are ‘carbon-credit’ systems, or energy credit systems, where the primary purpose of the currency is to distribute and allocate fossil resources, from the fuel powering the chainsaw in the forrest of Kalimantan to the gasoline in Trumps limosine to the oil used to make plastic or gas used to make fertilizer.
Because these days humans create most value with the help of some machine or chemical process, the driver for that process has to be attainable with the currency. If we can’t buy gas with Euro’s we can’t bake bread and sell them for Euro’s. Renewables will be the driver that will bring value to cryptocurrencies, and which can allow spawning arbitrary numbers of local cryptcurrencies that are used in local renewables driven production chains. The wind turbine owner sells Windcoins, so the baker can buy wind electricity to bake in his electric oven. The solar thermal heat storage service sells SolarthermalCoin, which is used to heat greenhouses or homes, in which case the occupants of those homes will have to work or do something to earn the SolarthermalCoin, or maybe they work for PHP coin which the issuer of SolarthermalCoin will gladly trade his coins for, knowing demand is reliable (for now).
#cryptoinflation is inflation of value of traditional currencies because economic activities are conducted increasingly using cryptocurrencies.
in this ‘Roboeconomic’ system the role of banks is once again to store real assets and to apply them when there is an opportunity to increase the wealth creation capacity. Right now they are basically shopwindows for fossil fuel access, where the metric is the amount of fossil cashflow generated (which determins the banks fees and salaries), not the amount of wealth. Banks will lose this privileged ‘niche’ to owners of renewable energy sources. The process will cause a surplus and miscalculation in the requirement of traditional currencies, which is one of the reasons banks want to see smartmeters in every home, so they can accurately price renewables to protect their business (sometimes pricing it negatively!).
The role of politics, our role is to prevent any obstruction to truely free trade amongst local and regional communities. We also need to prevent regulation of the crypto currencies, the more recent ones have in build decision making mechanisms that ensures that any change that may affect the value (for instance making it easier to create new coins) is made with the consent of a majority of currency holders. This opens a perspective of truely democratic management of local value chains, as opposed to current ‘flash cash’ sensitive markets. Governments are making local banking systems and businesses more resilient against a sudden influx of (foreign) cash, cryptocurrencies can certainly assist with that.
One thing is sure, the Roboeconomy (where robots running on renewables create most of the wealth and restore the ecology) will do away with fossil credit banks, financial markets as we know them and it will be a vast improvement.