Here's why crypto should best fiat in the long run
There is a quiet battle brewing within the world's monetary systems. It is a battle between the central bank fiat paradigm and the new paradigm created by cryptocurrency. It began more than a decade ago with the introduction of Bitcoin. It has slowly festered over the years, and now it looks like it is ready to explode.
Who will win this battle? Ultimately, cryptocurrency should win. But it might not. The same problem that has allowed the fiat system to become entrenched also exists within the cryptocurrency world. The problem is ignorance. A study recently released by Genesis Mining says it all: the vast majority of American citizens have no idea how their monetary system works.
It is this ignorance that has led to a number of false narratives about the 1929 stock market crash, the decade of financial and economic malaise in the 1930s, and the most recent financial crisis that began with the collapse of the U.S. housing market in 2008. If not corrected, consumer ignorance could prevent cryptocurrency from reaching its full potential.
More about the study
At this point it would be appropriate to look a little bit closer at the Genesis Mining study. The study was intended to measure monetary system literacy among American consumers. It is a safe bet that its findings are not limited to Americans. Ignorance about monetary systems is pretty consistent worldwide.
The first statistic from the study shows that 29% of American consumers still believe the U.S. dollar is backed by gold. It isn't. In fact, it hasn't since the Nixon administration of the 1970s. Among those Americans who know gold no longer backs their currency, there are other strange ideas. Some 5% believe it is backed by bonds while another 4% think it is oil.
The truth is that the U.S. dollar is backed only by the good faith and credit of the U.S. government. Apparently, some 23% of the respondents knew that. Another 7% said nothing backed the U.S. dollar and, technically, they are correct. The full faith and credit of the U.S. government is essentially meaningless. There really is nothing backing the value of the dollar except government insistence that it is backed.
A cashless society
Genesis Mining went on to ask study participants a number of other questions covering everything from how bank deposits are protected to whether the government should completely eliminate the use of cash. You might be surprised to learn that 76% of the respondents thought completely eliminating cash in favor of a digital alternative is a bad idea.
It is interesting to note that study participants were not asked specifically about cryptocurrency as a fiat replacement. They were simply asked whether a digital monetary system should replace the current cash system. What people fail to realize is that the current fiat system relies more on digital assets than actual cash.
Most people do not realize that when the Federal Reserve infuses U.S. dollars into the banking system, they are not really sending hordes of minted coins and printed bills to local banks. Rather, they are crediting the ledgers of participating banks with digital money. The actual cash minted and printed by the U.S. government is only utilized to maintain a certain supply of cash in the system. It is only a fraction of the total amount of money the Fed has control over.
General questions about monetary systems
There is a lot more that could be said about the Genesis Mining survey in relation to consumer ignorance. But a better way to identify how ignorance could prevent cryptocurrency from becoming the monetary system it could be is through a series of questions and answers.
Cryptocurrency should best fiat in the long run. But in order for that to happen, consumers really need to understand some fundamental things:
Who actually owns money?
Most people do not realize that the bills and coins they carry in their pockets don't belong to them. They are owned by the national governments and central banks that control them. U.S. dollars are actually owned by the U.S. government and Federal Reserve. They are only loaned to citizens as a means of facilitating economic activity. The euro is owned by the European Union, the pound by the British government, and so forth.
Cryptocurrency is different. Anyone who acquires tokens by way of purchasing them, accepting them as payment for goods or services, or receiving them as a remittance becomes the owner of those coins. Ownership is determined by the digital wallet in which coins reside. Whoever possesses the wallet owns the coins.
Why does money have value?
In the world of fiat, money has value because the government says so. Fiat is no longer backed by any tangible asset in most developed nations. As previously mentioned, the U.S. dollar hasn't been backed by gold since the 1970s. A dollar bill only has value because the U.S. government considers it legal tender and backs it with its own faith and credit. It would have no value if the government decided to pull out of the system.
Cryptocurrency has value because those who own coins agree to that value as established by the laws of supply and demand. When Bitcoin was first released, it was arbitrarily assigned a value pegged to the U.S. dollar. Then, as more people started buying up the coins, the price increased. Modern price fluctuations are based almost exclusively on the supply and demand cycle with a little bit of help built into the code.
What gives Bitcoin its true value is agreement among coin holders. All of us who own Bitcoin agree to its value irrespective of anything government or central banks think about it. As such, neither government nor central banks have any control over Bitcoin's value.
How is money supply maintained?
Next up is the question of money supply. In a fiat system, the central bank controls the supply of money by either injecting new money or recalling existing money. When the government engages in quantitative easing, for example, it injects more money into the system in hopes of spurring more economic activity.
Money supply in the cryptocurrency realm depends on how code was written. Most cryptocurrencies, like Bitcoin, start with a predetermined number of coins. There are only 21 million bitcoins that can ever be mined. That's it. Other cryptocurrencies do not have a predetermined number of coins. However, the creation of new coins is written into the code. It is not arbitrary based on the decisions of central bank officers.
How are digital payments made?
If more people understood how digital payments were made, cryptocurrency might not be viewed with so much skepticism. Needless to say that world monetary systems are more digitized than most people know.
When you use a credit card to pay a bill with fiat, transaction information is sent to a payment processor. That payment processor initiates the call that transfers funds from the credit card company's bank to the recipient's bank. But that is not the end of it. The transaction must then go through another network that keeps track of bank payments. Running the payment through the secondary network is known as settlement.
Only when settlement is complete is the transaction officially finalized. It can be revoked at any point prior to the completion of settlement. But know this one important fact: actual cash is not changing hands. All of this is done with digital representations of cash. It is just numbers on a computerized ledger.
Cryptocurrency payments can be made in one of two ways. The first method is to use a payment processor similar to digital payments in fiat. The only difference here is that a second settlement network is not required. The payment processor can facilitate the payment directly and be done with it.
The second way is through direct transfer from wallet to wallet. You might purchase something with Bitcoin and push the payment directly from your wallet into the recipient's. This sort of transaction requires no intermediary. It is almost like handing cash to merchant.
Why is government resistant to cryptocurrency?
Finally, people really need to understand why government is so resistant to cryptocurrency. They are not resistant to digital currencies per se, just private cryptocurrencies they cannot control. Therein lies the issue. Governments rely on the current fiat system to control economics and distribute wealth. They are unfriendly to any cryptocurrency system that robs them of that control.
A privately established cryptocurrency is decentralized in every sense. It exists outside the purview of government and central banks, thus making it a monetary tool that cannot be manipulated or exploited for central bank purposes. Governments may be okay with stablecoins they create, but they will never be comfortable with a private cryptocurrency with decentralization at its core.
Hopefully you now understand a little bit more about the inner workings of fiat. If more people understood how fiat works, they might be willing to take a closer look at crypto. And if more people understood how cryptocurrency works, they would be less afraid of it. Cryptocurrency should best fiat in the long run. Whether or not it does hinges considerably on future levels of consumer ignorance.