The rise of Bitcoin and fall of the US Dollar
The evolution of cryptocurrencies has been remarkable considering their relatively short lifespan. What started out as simple digital ‘money’ is quickly becoming one of the most revolutionary technologies in the last decade.
The importance of understanding Bitcoin
Bitcoin was born in 2009 from the failure of our monetary system, more specifically the financial crisis of 2008. The banking system was and is still flawed; the money we deposit into the bank is not merely stored in cold hard cash; it is used by the banks to fund external projects and offers loans. Why? Because it is profitable.
People often forget that banks are a business and use enticing ‘offers’ to encourage customers to deposit money and take out high-risk loans. Besides investments and trading, banks make most of their money through the interest rates on the loans they make available, and it is your money being used as leverage to provide loans to other customers.
This is especially visible with high-risk mortgages, which, without a shadow of a doubt, played a significant role in the financial crisis of 2008. What followed from these high-risk loans was a default rate. Many banks had to close their doors and file for bankruptcy, as customers failed to pay back their debts, and even worse, the bank lost customers' money, money that customers trusted the bank to keep secure.
This is where the government stepped into action with the strategy labeled quantitative easing. This is the process of printing more money in circulation to bail out the banks and did not help much; in fact, it also devalued the currency (USD) that was already in circulation. The centralized authority was not trustworthy enough with the public’s money, and a better alternative was needed.
Introducing Bitcoin
Bitcoin is a digital, decentralized currency created by an anonymous figure named ‘Satoshi Nakamoto’, with a specific capped number of 21 million in circulation and open source code for full public transparency. The purpose behind this was to work opposite to the model our monetary system could not sustain.
Bitcoin is run on a network called the blockchain. It is like digital gold, gold that can be sent over the internet, that is censorship resistant, meaning you can send money to anyone, anywhere at any time. No political powers can stop you from doing that. It is also available to everyone, and you can have your Bitcoin wallet regardless of nationality, age, language, and so on. It is important to remember that there is not enough Bitcoin for everyone in the world to own one, there are more than seven billion people at a maximum supply of 21 million Bitcoin.
Owning one Bitcoin immediately puts you in a category of your own. It is unique in that it cannot be created out of thin air. Dollars, Euro’s, Pounds, these can all be created out of thin air by people who have permission to do so, which is generally a central bank. Bitcoin cannot be created out of thin air, it is a scarce digital asset, unlike the banking system we currently use where bureaucrats meet behind closed doors to determine and regulate the supply of a currency. Mathematics and cryptography are used to adjust the creation of new Bitcoin’s.
The performance of Bitcoin
If you look at the Bitcoin chart year after year, ignore the noise, you ignore the highs and the lows, it continues to climb, despite the critics. There is a lot less trust in the traditional system, and it’s no secret that $1 now will get you less than it would 100 years ago.
To calculate how much the dollar has depreciated over the years, we use the Consumer Price Index for All Urban Consumers, which represents the changes in prices for consumer goods and services purchased by urban households. $100 in 1913 would only be worth about $3.87 today. In terms of Bitcoin, an investment of $100 ten years ago would be worth over $9M today. If this is any indication of future value, we can expect to see Bitcoin become a more prominent asset class for investors seeking to maintain or appreciate the amount of their money.
Investors are in the game to make money. They chase yield around the world, looking for ways to generate higher returns than everyone else. It turns out, even with the stock market rising to all-time highs and Bitcoin suffering pullbacks, investing in cryptocurrency was and is still a brilliant strategy. Banks have primarily been against cryptocurrencies, often citing the volatility and the ability to be used for money laundering. This is a bit of an ironic criticism coming from banks that are seemingly paying massive sums of money regularly to settle allegations of money laundering or other financial crimes. The real answer to why the banks dislike cryptocurrencies is most likely that they feel threatened.
The rise of cryptocurrencies has exceeded all expectations and, while the concept is still young, it does have the potential to shake up the aging fiat system. Therefore, investors have taken more of an interest in investing in alternative assets, which gives a higher return than traditional assets, as cryptocurrencies have a low relationship with other assets, and they may be viewed as a safe-haven asset as well.
Another thing to take into consideration is that the Austrian business cycle theory predicts another massive shock to the financial system in terms of a credit contraction or a credit liquidation cycle. These happen on a regular basis because of central banking and fractional reserve banking. One needs to figure out what is at the tip of the liquidity pyramid, which is the safest, and the most liquid asset. Is it US dollars, is it gold, or is it something else like Bitcoin?
After the financial crisis of 2008, many financial firms recognized the importance of asset allocation and the need to diversify portfolios. Alternative investments are defined as “non-correlated assets,” meaning that their performance does not follow that of more traditional asset classes such as stocks and bonds. The adage “no pain, no gain” is appropriate here. While Bitcoin is seen by some as risky, without risk, there can be no reward. Bitcoin is a new currency at the forefront of a real digital revolution.
About Vertex
Vertex.Market is a peer-to-peer cryptocurrency marketplace available in more than 200 countries. We support a wide variety of payment methods including Paypal, Revolut, SEPA transfer and more.
Vertex.Market is a product of Vertex Capital (vertex-capital.io), a cryptocurrency asset management company with a focus on Middle Eastern clients, including Saudi Arabia, United Arab Emirates, Bahrain, and Kuwait.
