James Martin – why cryptocurrency will change the world
James Martin – dentist, investor and crypto enthusiast – explains what cryptocurrency is and why it will change the world soon.
To understand this cryptocurrency, one must understand the simple fact that money we have in our bank account is baseless.
This means its value is not underpinned by anything. The only reason paper money has value is because there is consensus and agreement amongst society that it does.
Once upon a time in a simpler world, all money was backed by gold. The alchemists in the audience will know only too well that gold is not something that we can arbitrarily create. This meant that cash the banks gave you could be exchanged for a quantity of gold. Therefore meaning it had an intrinsic value.
During World War One the British government unpegged the value of the British Pound from gold. They did this to help generate funds for the war effort.
The German government did it at roughly the same time. Richard Nixon did the same across the pond for the States in 1971.
These measures were taken in all these instances to help relieve economic strife by creating more money to pump into economies.
A brief background
This means that currency-issuing banks (central banks) can print as much money as they like.
Doing this to a degree is necessary for a healthy economy. Money is lost every year through people hoarding it in savings and the environment. The problem arises when too much money is created.
The central banks do this to provide governments with income through the bond market. Governments use it as an easy way to generate funds.
Often the system is abused and too much money is created and used to pay government debts. The finance related jargon/euphemism used for this process is known as quantitative easing (QE).
This isn’t so much of an issue except for the fact that when governments increase money supply it means your cash is worthless.
We’ll use some round numbers to illustrate this. Let’s say the total money supply of a country is £1,000 (low I know but round numbers – remember). Suddenly this increases to £2,000. If the amount of available goods and materials (ie ‘stuff’) the population can buy stays the same then what each pound can buy is halved.
Think of the amount of ‘stuff’ available to buy as a metaphor for all the world’s resources. As the world population swells more and more, there is therefore more demand driving up price and increasing the effect. The squeeze continues at the other end as the amount of world resources grows ever thinner.
The term for decrease in value of money over time is of course inflation. You will likely be familiar with the word used in this sense already.
Central banks recklessly print money to bail out governments who accrue too much debt all the time. The news purports inflation to be around 2%, this figure is however heavily massaged. Actual inflation varies around 7-8% and can reach as high as the 10% mark.
This would mean that if you keep all your money in cash, you will lose 10% of its value every year – crazy!
We can look to countries like Zimbabwe and Venezuela as examples of runaway inflation.
The vast government debt of many western countries mean they are effectively bankrupt. They owe more money than they will likely be able to repay.
The impact of COVID-19 on the world has not yet been accounted for in this chart. It is likely making government debt much worse.
We’ve seen Trump proclaim on the news the American government’s $2 trillion dollar coronavirus relief package.
Looking at the above chart I find it hard to believe the American government has that cash lying around.
Remember the only two ways a government can generate funds is through debt monetisation (resulting mainly from quantitive easing or printing money) or taxation.
I don’t recall Trump hiking taxes around that time. I hope you catch my drift when I say that.
We are sitting on a debt timebomb that is likely to explode at some point. When it does it is our personal savings that pay for the government’s egregious mismanagement of the situation via inflation leaching them away.
What makes Bitcoin (and some other cryptocurrencies) unique is that no one can change how much Bitcoin there is. In fact, the supply decreases as time goes on. Therefore less and less is created each year.
As this happens it will tend to increase in value due to the laws of supply and demand.
Lots of cryptocurrencies also stick to these principles. But every single one is slightly different, so please do your research.
This serves as the basis for most people’s logic for investing in Bitcoin/cryptocurrencies. The word deflationary is used to describe this property of Bitcoin.
Bitcoin was designed intentionally by its enigmatic creator Satoshi Nakamoto to do this. He/they (no one knows if it was more than one person or not) did so as a reaction to money printing of world governments. Indeed, in Venezuela people frequently use Bitcoin as a means of exchange given the inflation rate of their local currency.
But what exactly is ‘bitcoin/cryptocurrency’?
You may wonder this or have never sufficiently had the question answered for you.
Bitcoin is simply one example of a cryptocurrency. The term cryptocurrency is flawed. It implies that we can use it as currency (a practical means of exchange), which isn’t necessarily always the case. Therefore, I prefer the term crypto. This is the term we will use henceforth.
What is a ‘crypto’?
I realise at this point I still haven’t given you a good answer! Please allow me to go into more detail.
Crypto is simply a collective name for Bitcoin and all other associated tokens/coins (Ethereum, XRP, etc). It means that they cannot be created/backed by a central authority once they are up and running.
Contrast this to how a bank creates/backs currency continuously out of thin air eg GBP, USD or YEN.
Cryptos are instead backed by science and mathematical principles that we cannot break/change. They cannot be created arbitrarily as often happens when one centralised body (a bank) is in charge of our money.
To avoid abuse of power, they are distributed across many locations at once via computer networks.
In a nutshell, this means that there are millions of computers across the world confirming who owns what and every transaction between individuals. These networks are infallible and can run completely independently from input. They are unable to be hacked as doing so would mean you need to hack millions of computers all over the world at once.
The trust of the system cannot be abused (as banks do regularly) as no one person is in charge.
I appreciate this may sound strange and it does require a degree of mental acrobatics to understand initially. However, when we learn how everyday currency is created, its strangeness is somewhat mitigated!
The banks basically act as third party to any transaction and unfortunately abuse their power.
The collective power of this may not be immediately obvious but is in fact immense. They can independently verify any agreement between any two individuals without consulting a third party. This means that the necessity for any third party in any transaction is eliminated.
This may not sound like much, but we all use third parties pretty much every day. Booked a taxi with Uber? Uber is the third party and takes a cut. Rented/bought/sold a house? The estate agents and lawyers likely took a handsome portion. Placed a trade on a stock/commodity/future? The broker will have their piece. The list goes on.
Each one of these third parties takes away some time, money and efficiency from each one of these interactions. Who’s ever had a lawyer take their sweet time over the process of buying a house while charging a princely sum? Who’s ever tried to transfer money internationally using the archaic SWIFT system? Their international money sending/remittance services will make you wait weeks whilst insisting you pay through the nose.
The merchants and shop owners among you will no doubt be aware of Visa’s merchant charges. Crypto has the potential to make all these free/negligible in cost.
These are some egregious yet everyday occurrences that we somehow normalise in our society. These are some pertinent examples of the money and time that we can save through the immense and endless possibilities of crypto!
Trying to squeeze how much crypto can change the world into this short article is very difficult. There are a hundred more things I would love to say.
Hopefully I have conveyed to you concisely why I and many others have such whole-hearted faith in them and believe they have a massive future.
The World Economic Forum themselves speculate that by 2025 that the entire market for crypto will be worth 7-8 trillion dollars.
This is currently valued at 350 billion and would represent a 20 times growth in market share.
Truly a compelling thought.
Find out more about James Martin and his group Dentists Who Invest by visiting www.facebook.com/groups/dentistswhoinvest.