Crypto: Asset or Currency?


#1

How do we value currency? How do we know a single dollar bill is really worth that? The answer is quite simple, because the government says so. One dollar is worth one dollar only as long as the government is willing, and able to defend its value, but before it gets to the point when the government needs to step in to defend its currency, people expect the government will defend their currency no matter what, so a minimum value of one dollar is formed for a single dollar bill!

Now, let’s think about the opposite situation. What happens if people regard a one dollar bill to be of more value than just a buck? The answer is still the same, it is only worth one dollar. Why? Again the same answer - because the government says so. However, there is a slight difference - the government is able to back up its claim simply by printing more currency. If demand for currency rises, what the government (or the central bank to be exact) needs to do is supply more currency. That is why in a growing economy there will always be some moderate inflation.

The value of a currency is decided by the size of the economy (apart from the US dollar which functions as a base currency for other currencies) and the amount in circulation is controlled by the central bank in order to ensure stable growth. If too much currency is supplied, a more than desired inflation rate may hurt the economy, and if currency is not supplied enough, sluggish growth will hurt sentiment.
Basically, currency value fluctuates relative to the size of the economy, and the supply and demand of currency is dependent on which direction the economy is taking. A clear example of this is the foreign exchange market. Exchange rates fluctuate every second because market participants expect a different value for currency A relative to another currency B.
For example, the GDP of South Korea for the year 2016 is equivalent to 1.411 trillion USD, and if the South Korean economy is expected to grow relative to the US economy, KRW will appreciate relative to USD, given the supply of KRW stays the same.

Then how do cryptocurrencies fit in to all this? Cryptocurrencies are universal, borderless, not controlled by a certain entity and acceptable anywhere. This means cryptocurrencies are not tied to a local economy and thus, it is only plausible to think of cryptocurrencies on a global scale. The issuance schedule for cryptocurrencies and its hard cap allow its circulation and total supply limited to a certain number. Combining such factors of having a limited number of currencies in supply in relation to a single global economy means there simply aren’t enough cryptocurrencies to “cover and match” the global economy. There is no central bank to supply more crypto. Since the supply of cryptocurrencies is limited, the only logical progression is for the value of cryptocurrencies to go up. Some might think the rise in the number of ICOs may provide increased supply. This is only true to a limited extent as a lot of cryptocurrencies launched have a domain specific use rather than a general use, and which is also why cryptocurrencies such as Bitcoin and Ethereum, considered as base currencies in crypto world have a higher market cap.

Since the value will rise and people expect it to continue rising, people will be inclined to keep rather than spend. Although originally designed as a currency, this aspect highlights the asset side of crypto and will continue to be considered as an asset until people are convinced that the value of crypto will not rise significantly more than the global inflation rate. So, until the market cap of cryptocurrencies reach a certain percentage of the global GDP, it is quite likely that cryptocurrencies will continue to rise in value and thus considered more like an asset. The Chicago Mercantile Exchange planning to launch Bitcoin futures, and the Accounting Standards Board of Japan to guide cryptocurrencies to be recorded in the asset side of the balance sheet is reflecting such trend. (Currency, or cash, is also booked in the asset side, and currencies also have futures for trading but this is because they are an asset!)
Mind you, the total market cap of cryptocurrencies is only approximately 350 billion USD as of recent, and this figure is just a fraction of the global GDP and not even comparable to the total global wealth. Bitcoin’s market cap is only a fraction of that of gold, so you could say crypto is still a relatively small market despite the hype and frenzy (https://www.fool.com/investing/2017/08/17/how-does-bitcoins-market-cap-stack-up-next-to-gold.aspx). To me, it seems it is just the beginning.

Then by how much and to be more specific, which out of the 2,000+ cryptocurrencies will rise? Who knows. Unfortunately there is no clear cut answer to how much of the global economy will be ready for cryptocurrencies. There will be parts of the world where using fiat is preferred to using crypto, or the usage of crypto is banned altogether. It is quite unlikely that crypto will replace fiat and efforts to provide a reasonable projection based on past data is useless at this point as there just isn’t enough of any.
As already mentioned, it is just the beginning and so it’s hard to tell which project will prevail. Some compare the rise of blockchain to the rise of internet in the 1990s. People claim that like Yahoo or Lycos, most projects will be wiped out after the first burst of the bubble. However, giants such as Google or Facebook emerged after the burst. Many crypto projects have raised enough money for them to last several years. We’d have to wait and see how this goes.

Nonetheless, there are a few factors that are necessary for a cryptocurrency to be successful - low latency, universality, enhanced privacy, and a decentralized governance system. I would dwell into all of the such qualities in more detail but that’s an extensive topic of its own.
Bitcoin, though being the first blockchain and thus best known, has limited functionality - all you can do is remittance. It is also slow and does not have a governance system hence the endless split in the chain, first Bitcoin Cash, then Gold, then Diamond, then who knows what. This may be a threat to the potential value of Bitcoin as a single chain.
Ethereum strives to offer more functionality, but it is still slow and does not offer safety for their smart contracts. The dependency for the charismatic founder, Vitalik Buterin, is a bit too great as we have witnessed with the split of Ethereum Classic. There is still lots of room for improvement for Ethereum, but also lots of complexities that need to be addressed.

BOScoin aims to achieve all four by creating a platform based on a consensus algorithm called mFBA, Trust Contracts which are easy and approachable even if you don’t know how to code as well as being decidable, and a governance feature called the Congress Network. Compared to other consensus algorithms, mFBA provides a fast and stable network with little downside. It aims to provide a transaction speed of 1,000x per second and more nodes will provide more stability to the network. Despite being possibly the fastest consensus algorithm there is, depending on the number of nodes, DPOS offers a structure where economic incentives and thus political influence will be concentrated only to the few. This goes against the principle of blockchain, and it is the belief of the BOScoin team that despite its merits for low latency, DPOS does not offer a truly decentralized and democratic governance system.

There will be dips in the markets to adjust the rate of growth and skeptics who dismiss it as a bubble, even compare it to tulip mania. Some call it the “cryptocurrency craze” as Bitcoin has gone beyond $10,000. My opinion is, it hasn’t even started.

What do you think? Write a comment below and tell us what you think about crypto.


BOS Newsletter 04.12.2017
#2

Explanation of DPoS (Delegated Proof of Stake):

http://cryptorials.io/glossary/delegated-proof-of-stake/
http://docs.bitshares.org/bitshares/dpos.html


#3

This is just the beginning, more and more people begin to realize that this is not a game and it is reality. I agree that many projects will explode, but Now is the opportunity for boscoin to arrive high and have a name before all similar projects arise. the race started


#4

Great article. Really enjoyed reading.

Transparency is sorely missed and blockchain tech can bring this to many areas beyond currency or assets. Social media, insurance, education, legal services, data storage, virtual reality, currency are only the beginning of applications for blockchain. We are in for a wild ride!


#5

Good point!
The article only talked about purely from an economical perspective and didn’t even touch on the pros that blockchain can bring from a social perspective. Some people still need to realize what blockchain is all about and that it can hugely improve social utility. Thanks for your opinion.


#6

This is one approach to the question: Asset or Currency?

But for me the question is missing a 3rd catagory and purpose of crypto: Raw Material btw. Commodity
E.g. BTC and Dash mainly aim to be a currency and BTC becomming an asset.
But ETH is mainly a raw material, a fuel for a new economy and industry and only 2nd and 3rd place a currency and asset. Its value lies much more in the many ways it can be used, like iron, copper or oil, rather than BTC = just “gold”.

Let me say it in another way to make it clear. ETH and similiar platforms (BOScoin) are getting more and more indispensable as a fuel, as a raw material, while I predict that people will have a rude awakening from their dreams to see gold = high value in some cryptic numbers of BTC hashcode.

I think for BOScoin holders its very important to understand this, because BOS aims to be a platform for economy, for economic, industrial, fintech, social etc. purposes and services.

The bigger this crypto industry gets, the more it will change reality, especially nationalized currency and fintech reality.

And I fear this will not be a peaceful transition because the less people trust their governments action to keep stability (of prices and economic value) the more they will join global = decentralized crypto and even more undermine local FIAT currencies, which again boosts crypto economy.


#7

Interesting view. I suppose that’s the reason why they call it ‘gas’ in Ethereum.


#8

At a time when trust in government is at an all-time low it is no wonder that nobody trusts the currency or the bonds that it issues, we already know that the gold market, well at least the Comex which fixes the price of gold by shorting the market with paper contracts. When the Federal reserve was created in 1913 the First World War was for the very next year and in the time since then 97% of the American dollars value has disappeared thanks to ‘inflation’, when the next bank crash happens our currencies will go into hyperinflation like currencies such as Venezuelan and a lot of South American countries are going through at the moment.
Bolivia is now creating its first national digital currency that will represent the country’s gold, oil and diamonds, these are exciting times we are living in…… 2018 will be a great year for BOScoin!


#9

@Chef_Bedo we need to distinguish between digital currency and decentralized blockchain.
Thats absolutely not the same.

What does decentralized blockchain mean? It means there is ideally no central control, no government, no single instance able to control or force its will or decisions on it. The blockchain is driven by miners from many countries or speaking for BOScoin by node owners from all over the world. If Australia prohibits blockchain or node running, mining etc. it won`t stop the blockchain as there are other countries allowing it.

Blockchain was one of the answers to the ugly Lehmann disaster: To take money control out of the hands of banks and governments and put it back into peoples globally. Blockchain is anarchistic in a positive way.
It may force the whole FIAT pyramids of governments and banks to collapse or at least change.

Now, a digital currency is just a governmental currency as any else, its just digital FIAT, nothing special about it. It has nothing to do with blockchain. And do you think Bolivia can keep its promise to back up this currency with physical value? I dont. They dont keep their promises now, why they should with that digital money?


#10

Well it won’t be decentralised that’s sure but I was just sharing something that is going on around the world because fiat money has been and will be a depreciating asset, I wish Bolivia all the best with the digital currency as they are desperate to do anything to get around the sanctions that America imposes on them for daring to stand with the people against the Empire


#11

A bit of sci-fi mode I know

I try my best to wrestle my mind into a classification…here’s where I go :slight_smile:

  1. Block chain cannot exist without power (I think)

  2. Blockchain cannot exist without computing power (I think)

  3. Blockchain cannot exist without humans ie code makers

  4. Blockchain once created can continue provided the majority of users agree on what the blockchain is. As soon as the probability of agreement shifts then a new chain becomes the most valid chain ie mutation

  5. This is very similar to evolution. The highest probability mutation is mostly adopted but still other mutations exist in various states.

  6. The most interesting thing is that we the human race are the environmental factors not the environment that created us. Currently without us block chain does not exist…Is this the beginning of another layer of reality?.. :slight_smile:

Blockchain is not currency, not an asset, not a raw material its electronic trust/cooperation/colobration because once on the blockchain you are no longer you you are a number bound by what the majority of numbers think you are…Ok now my head hurts :slight_smile:


#12

Nice piece! Easy readable, that’s a good thing.
The answer to your question is: both! Crypto money is as well an asset as a currency. This is an easy statement, since the invention of blockchain solved the Byzantine Generals Problem / Two Generals Problem. To read Satoshi Nakamoto’s paper today, is still very inspiring.

To put it the other way around; currency is nothing more then a representation of trust. That is why we have currencies, because we trust in its aspects to represent assets. This is solid moral base, institutionalized in the application of Primary Banks. Primary Banks have the ability to create currency, representing assets ( a house, or a car, etc.)
The immoral part of currencies is in the need for a central authority. This is immoral because it can not be fulfilled without a never ending line of authorities (in fact; the Byzantine Generals Problem). The central authority is never authorized to handle. They can do whatever they want. This can be seen in the fact that Central Banks can create currency, without representing any asset at all. How much more immoral can it be!?


#13