Crypto in the financial ecosystem

As we had described in a previous article, ,Cryptocurrencies can hold many different forms inside a trading portfolio. Now I wanted to describe in more detail how cryptocurrencies can work as financial tech disruptors focussing on more than just Bitcoin.

The current financial markets

Currently the world economy works on the following levels:

  • Lowest level: cash. These are coins and notes you can use to exchange for goods. These coins and notes have a guarantee of value which allows for you to easily exchange goods and services and your time, by which I mean your job.
    Cash can take on many forms, from shells to gold to paper. In its many forms it has taken on the role of method of exchange allowing you to easily exchange your time, or knowledge or anything you create for items or services that you in turn need at the time that you need it. Basically this was a disruptor for convenience.
  • Second level: electronic cash. This is your debit cards. Instead of walking around with notes or coins, you now walk around with a device that directly communicates with your “vault” where you have stored value. Through this communication device you can access your own funds easily. This has made life even easier as you can now walk around with all of your value and it won’t weigh you down at all.
    For this convenience however we have had to improve our security considerably as you wouldn’t want people to be able to access everything you own, simply by getting their hands on this communication device. We all see the communication device daily, but less know are all the background inventions which were required. Think of 3Ds, or 3 dimensions secure, which is why you need a pin code when you use your debit card or the lund algorithm which checks the validity of your card number.
  • Third level: credit. As your bank is holding your stored value and is willing and able to give you a loan it is a small step to allow you to overdraw which is the precursor to your credit card. Just like when the economic theory switched from supply side economics to demand side economics, this has switched thinking of many people from an incoming value mindset to an outgoing value mindset. What I mean is that people used to be able to spend only what they had first earned but now people can first spend and then earn as they can go into debt. On a larger scale, most countries have gone heavily into debt themselves and regardless of political views, governments mirror a large part of the population. Last year, global debt was 325% of global GDP.
  • Fourth level: derivatives and credit swaps. This is a level that most consumers don’t see, but last year it was about double the global debt or 6 times the global GDP. I won’t go into more detail on what this is in this article, but you can find that here: A good representation of the above to show you where all the value is actually stored you can go to here:

So looking at the different levels how would cryptocurrencies actually work in these markets?

Level 1. There have been some who have tried making a coin that can be used to pay with, but as an inherent digital product there have been many issues with using these coins and they are more collectibles than anything else. Especially with the current value of a bitcoin and the limited supply this becomes a difficult level to work at. Also, looking at global trends this is not a requirement anymore for a global market.

Level 2. Debit. This is really where Cryptocurrencies come into play. There are already wallets on your phone available which allows you to pay at specific terminals using your cryptocurrencies. Though the acceptance of this is not yet as widespread as would be required for a new payment product to come into use. We see that the global trend with products such as Apple pay, Android pay or the Alipay payment methods people are getting more used to using their phones to make payments anyway. A direct line to your own cryptocurrency wallet would not be farfetched anymore.
Even in cases where you are not using a cryptocurrency as a payment method, as described above, new payment methods have new requirements and we see many financial institutions step into the crypto world to make use of blockchain technology such as described here:

Level 3, Credit. Cryptocurrencies derive a lot of their value from the fact that you don’t need a third party anymore. You have a coin in your wallet and therefore it is yours to do with as you please. The downside of not having a third party is that there is no one to allow you to spend more than you have. This is one of the major obstacles for cryptocurrencies to become mainstream as a lot of the goods and services cost more now than what people can afford and therefore bringing the price down to a manageable level would severely hurt the economy. Look again at where the value is: and specifically at real estate. Very few people have enough cash to outright purchase their home. If people were not able to go into debt anymore either the house prices must collapse which would ruin people who own houses now just as happened in the 2008 crisis or more people need to start renting and a few individuals and companies would own all the land.

Level 4, derivatives and credit swaps. To all of us who travel frequently we have had to deal with the differences in currencies and have had to pay steep fees for banks and credit card companies to do these conversions for us. The global trend however is becoming increasingly global and we have already seen Europe introduce a single currency called the Euro. Cryptocurrencies allow you to travel and for a much lower rate exchange value between these currencies. The best known cryptocurrency operating in this space is Ripple. Running an international company or being a frequent traveler right now is a constant time intensive and very expensive undertaking of ensuring that you have the funds in local currency to pay your bills. Companies have treasury departments and full time staff who are required to save as much of all these extra costs possible. And even within the same currency. Exchanging money between my bank and your bank itself is time intensive and requires many parties. A solution for this using cryptocurrencies you can find here:
Though there might be more possible solutions, this one is already pretty far along and ready to go.

For derivatives we have already seen that crypto allows for these just as easily as gold and silver do. Look for exchanges allowing XBT swaps such as bitmex and you are able to take a piece of this pie, though be careful if you are going to use leverage.

In short; Cryptocurrencies are a new technology which is taking its place in the financial markets now. Don’t think of them as a currency but think of them more as a technology that can improve our current way of thinking about the economy and money specifically.

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