Cryptocurrencies are the stars of today's financial system. Huge returns can be achieved in a virtually unregulated market. The hype, ...
Cryptocurrencies are the stars of today's financial system. Huge returns can be achieved in a virtually unregulated market.
The hype, the fashionability is understandable beyond the outstanding returns. The formal financial system, controlled by governments, suffers from a lack of trust and credibility because it is easily manipulated artificially. There is an elementary social need for reliable money, independent of the influence of political power, which, in addition to its function as an instrument of exchange, is also a safe reserve system that holds value.
In addition to its role as a universal instrument of exchange and reserve system, the other fundamental function of money used by purpose is to regulate the economy. Therefore a necessary requirement and the characteristic of money is the necessity for social governance and governmental control. However, governmental control that is useful for the economy also often implies political interests and political influence and leads to the consequence of social distrust. The economic-financial shocks of recent decades and the governmental-political-financial responses to them have fundamentally challenged trust in the centrally controlled financial system. The need has created what appears to be the solution to the problem: the cryptocurrencies, decentralized money, a kind of money without a center, and therefore, which cannot be artificially manipulated.
The primary goal of the cryptocurrency system is to decentralize the financial system and thereby reduce the ability of money as an instrument of exchange to be influenced artificially. Cryptocurrencies have given money a community character and thus (apparently) a natural self-regulating function.
While the idea of cryptocurrencies was motivated by the social need for a trustworthy financial system, the tool was created by computer science, without any real and direct economic background or economic consideration. Cryptocurrencies are entirely digital, i.e. exist only virtual.
Traditional currencies are also mostly virtual in appearance. This is also true for printed money, as there is virtually no physical limit to the amount that can be printed. However, traditional money is linked to the real economy in many ways. Although conventional money has lost its basis of direct value a long time ago (such as its attachment to gold), its value is mostly influenced by real economic processes, and in addition, it is centrally managed, and it is, therefore, more able to function as a real measure of value.
In contrast, cryptocurrencies operate in the complete absence of any direct economic background, are entirely virtual currencies and their value is therefore entirely based on society's judgment. And society's opinion can be manipulated as least to the same extent as the centrally controlled system of conventional money. This can be clearly seen in the fluctuations in the value of cryptocurrencies and the reasons for their rise and fall. A typical response to this criticism of cryptocurrencies is that this is only because the cryptocurrency market is very new and not yet mature enough. The reality is that the value of cryptocurrencies - due to the lack of centralization and direct economical background - will always be determined by society's perception, which is fundamentally subjective.
Although cryptocurrencies were born of the need for decentralization and thus freedom from influence, they are not free from manipulation because of their virtuality, lack of control, and lack of economic considerations of their operation.
The positive and negative characteristics of current cryptocurrencies make them an ambivalent measure of value. However, the virtual nature of cryptocurrencies makes them an unpredictable but perfect instrument for regulating the real economy. It is a particularly suitable buffer instrument in the traditional financial system.
The money-based capitalist economic governance system, which operates in practically all countries, is capable of managing socio-economic processes on an evolutionary basis. In the capitalist economic governance model, money takes on the character of energy in the operation of the economic system, functioning as the energy that operates the society. Using this energy character of money, the governance of society injects extra (virtually unsecured) money into the economy in the event of economic shocks, i.e. artificially pump energy into the system to help it overcome economic crises. The method seems to work, but the extra money usually remains in the system after the crisis has ended (because it is politically and economically difficult to withdraw it), causing unnecessary negative consequences.
The biggest disadvantage of extra, excess money in the system is that it creates inflation, which has a negative impact on most of society. Inflation causes social tension, which political leaders usually try to avoid.
When general inflation is not a viable method to eliminate excess money, or not a quick enough solution, various asset-price bubbles provide a place to absorb extra money in the financial-economic system. Political leadership usually tolerates, often supports, or even induces the absorption of extra money in the economy in the form of asset-price bubbles. Asset-price bubbles have a secondary "benefit". The well-informed, those who are close to the actual political power, those who are close to the financial system, those who have social influence, can make extra profits in the process. However, asset-price bubbles obviously only work as long as the extra money is present in the economy. When the extra money ceases, the realization of profit causes a sudden and significant fall in prices, a loss of value, and at the end of this process, the financial system becomes rid of the excess money. This is the essence of the asset-price bubble in monetary economics.
However, asset-price bubbles always cause a significant increase and impairment in the value of some real, existing assets. This is true even if the process is purely stockmarket-driven since stockmarket shares represent concrete existing companies. The positive effect of asset-price bubbles, the elimination of excess money, would occur in the long run, but in the short run, as real assets fall in value during a downturn, an economic crisis could arise again, which policymakers would probably try to solve by injecting more energy, more money into the monetary system, which could create a new asset-price bubble cycle.
It is worth noting that asset-price bubbles are the primary cause of increasing social polarisation, as the financial-economic rollercoaster makes the wealthiest, narrow social class become wealthier while the middle class becomes more impoverished. Political leadership in society could solve this problem, but is mostly reluctant to do so.
The most convenient way to drain excess money out of the economy is through asset-price bubbles. The negative impact of asset-price bubbles with economic downturns is mainly due to the real, physical nature of the asset. For example, when stock market prices fall, companies often react by cutting production or downsizing, which leads to unemployment, or when real estate prices fall, many people lose the houses they live in due to an increase in the risk of loans.
Asset-price bubbles have a negative impact on the economy because of the real, existing nature of assets. If an actual instrument could suck excess money out of the economy by raising and lowering its prices and had no physical nature, it would be the ideal instrument to remove money pumped into the economy that have already become excess for resolving economic crises, with the least negative impact. Such a tool could be the cryptocurrencies. It is the increase and decrease in the price of cryptocurrencies that will cause the least economic shock.
The most useful global financial function of cryptocurrencies is that they serve as a buffer in the financial system. The least disadvantageous method, the most suitable instrument of playing the role of money liquidator in asset-price bubbles is the asset-price bubble of cryptocurrencies.
We are still testing what cryptocurrencies can be used for. We can see that there is a real societal need for a community-based, society-runed, secure and robust global exchange tool. However, as long as cryptocurrencies are created purely and simply as computational products, without economic considerations, they are not suitable for their function as a stable medium of exchange. However, until a community-operated cryptocurrency with a direct economic link, and with economic considerations is created and the perfect medium of exchange will be born, existing cryptocurrencies are the most suitable products of eliminating excess money in the existing financial system.
Perhaps this is happening right now.
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