Is Cryptocurrency the Solution to the Current Economic Crisis?
Stocks, gold, real estate and ETFs — everyone’s talking about that! But what about the forgotten child: cryptocurrency?
One of the biggest things that this 2020 economic crash has taught us is the importance of having a savings cushion. It has became painfully apparent that most people in most of the countries in the world do not even have $1,000 saved up to protect them from an emergency like what we’re seeing right now. And this savings crisis is pushing the governments of many nations to give people money to eat, but there’s a cost to printing extra money to keep economies afloat.
The fact is our paper dollars are not backed by gold or silver or anything tangible, whether we come from the developed or the developing world. Dollars have value because the government says they have value and people have faith in the dollar. For instance, it costs 12 cents to print a $100 bill in the US. But basic economics will tell you that if you pump up the supply of something, like if you print trillions and trillions of dollars, the value of that thing will come down. That’s what inflation is. As the value of each dollar comes down, the price of everything around you goes up. That’s why savers actually end up as losers and your paycheck loses buying power.
That’s also a big reason why the rich continue to get richer and the poor will continue to get poorer, because the rich understand this and they grow their money with or faster than inflation, while the poor don’t have the financial education they need, and so they continue to get screwed over by the system. Traditionally, investors would protect their cash against this type of inflation by turning their cash into gold, but now there’s a new digital gold on the block — cryptocurrency!
The original goal of cryptocurrency was to create a decentralized worldwide digital currency. Now I know that’s a mouthful, but let’s break it down.
‘Decentralized’ means it’s not controlled or run by any individual government. It’s supposed to be run, managed and controlled by people — by the owners and users of the cryptocurrency. It’s supposed to be used and accessible anywhere over the world. It is digital, which means you don’t have to carry around huge chunks of gold. You could just carry around your phone, because you can access your cryptocurrency online. And it’s a currency, which means it’s supposed to be used to buy goods and services.
Now in theory and by definition, it sounds like cryptocurrency is the solution to everything, including the global economic crisis we’re facing these days. But in reality, there are pretty big roadblocks ahead before crypto becomes a commonly used currency.
For one, if people started to widely use cryptocurrency, that would mean that governments would lose their power, and governments don’t want that! Remember cryptocurrency is meant to be decentralized, meaning not controlled by governments? Moreover, people aren’t widely accepting cryptocurrency as a means of exchange yet. If any government lost control over their monetary system, that would mean they would lose their power and influence over the world. And of course no government would want that.
So while the concept of cryptocurrency makes sense intuitively, it’s not there yet, practically speaking. However, that doesn’t mean that cryptocurrency won’t be used in the future.
Cryptocurrency has really evolved a lot and its concept has changed in people’s minds. Just over the last few years, cryptocurrency was almost taboo. Even Jamie Dimon, CEO of JPMorgan Chase, came out and said that cryptocurrency doesn’t make any sense, and that everybody who owns Bitcoin is stupid. Then a couple years later, that same person secretly changed his mind on cryptocurrency and spent tons and tons of money creating his own cryptocurrency. Plus Facebook is creating their own cryptocurrency, Libra. And Amazon is in talks of creating their own cryptocurrency. Pretty much every banker and politician takes cryptocurrency and bitcoin a lot more seriously now.
This drastic shift in thinking makes cryptocurrency investors really excited because this opens up the possibility to using cryptocurrency as a real currency in the future. Plus unlike our paper dollars which can just be printed at the click of a button, many cryptocurrencies like bitcoin can’t. There’s a limit to how much bitcoin can be created or mined. And right now that limit is 21 million bitcoins! So after 21 million bitcoins are mined, there is no more bitcoin that can be created.
Now that means there’s a limited supply of bitcoin and certain cryptocurrencies out there. So if the demand for cryptocurrency and bitcoin goes up, there’s a limited supply of bitcoin out there, and that would make the value of each bitcoin go up.
By the way if you were wondering, you don’t have to own a whole coin to own a bitcoin. You can own just a small fraction of one coin now. Remember that cryptocurrency like bitcoin is supposed to be a currency — something that you use to buy goods and services with. But many people treat it like a get-rich-quick scheme too! So make sure you’re aware of what you’re trying to do.
Can you make a lot of money with crypto? Sure, I mean lots of people have made a lot of money with crypto and people have made a lot of money trading currencies. But like any other investment, it comes with risk and you can lose money too.
Cryptocurrency is still a very new concept, which is one of the reasons why it’s so volatile. That’s why you can see crypto currencies like bitcoin skyrocket and then come down just as fast.
So let’s talk about how cryptocurrency matters in today’s economy. Countries all over the world are printing tons and tons of cash to keep their businesses and people afloat right now. But like I said, this printing of cash has consequences. Many countries are racking up trillions and trillions of dollars worth of debt that they’ll probably never pay off. People are getting increasingly worried about the devaluation of their currency.
Remember that our paper dollars aren’t backed by gold or silver. They’re just backed by a promise and faith behind the US dollar. Right now there is a ton of faith on a US dollar, which is great news for people who have the US dollar. But there’s no guarantee that this faith will always be there.
In the future, especially if the United States government and the Fed keep printing an unlimited amount of cash, the last thing you want to happen is you spend your whole life working for dollars, saving dollars and investing in dollars, thinking that’s the right thing to do, and then you find out that dollars have become worthless! I know that’s an extreme example, but we need to be prepared for the worst.
As much as people ask for the United States to go back to the gold standard, it will never happen, because if that really happened, the Fed would lose their power to print an unlimited amount of currency, and it would be nearly impossible to get the government to agree to that. So that’s where cryptocurrency comes in.
Cryptocurrency can fill that void if it ever got to the point where people just got so fed up with the system that they started to use cryptocurrency amongst themselves as a means of exchange. Remember the point of cryptocurrency was to create a decentralized currency that can’t be printed with the click of a button? That’s what makes cryptocurrency more like gold than paper dollars. And environments where the Fed is printing trillions and trillions of dollars make cryptocurrency more attractive to the general public. When the government prints huge sums of cash, that makes people really worried about the value of their savings, because they don’t want to see their savings lose value due to huge inflation. And that makes cryptocurrency more attractive!
But even if cryptocurrency becomes more attractive, you still have to deal with the roadblocks that I mentioned earlier. And you also have to go through the learning curve, just like how people were very skeptical and hesitant to buy things and spend money on the internet back when the internet was becoming popular. People still don’t trust the internet as a place to store their money.
So even though there’s a lot of potential upside with cryptocurrency, especially if it becomes widely used and the demand for cryptocurrency goes up, but like with any other investment, it comes with its fair share of risk. That means don’t get emotionally attached to it. Do your research and make informed financial decisions.
Originally published at https://opinined.com on May 31, 2020.
