Why Cryptocurrency?
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It's not often that an investment class inspires the kind of cult-like passion that cryptocurrencies have. There are believers that are not interested in selling their bitcoin at any price. Why? What causes this kind of excitement? Let's look at the idea of cryptocurrency from the perspective of a citizen that is so very sick and tired of the fundamental lack of control in the storing and preservation of value.
Cryptocurrency = Freedom
Cryptocurrencies mean freedom. That's my bottom line. I don't need a bank to store value. I don't need a central bank or a government to manipulate the value of my wealth. Many people believe that inflation is a normal, naturally occurring phenomena. It isn't. It's not normal for your money to be worth less tomorrow than it is today. That only happens when more money is added to the system. If the supply of money stayed constant, a dollar today would have the same buying power as a dollar in 1970. We all know that isn't the case. The value of any commodity, money included, is based on supply and demand. If there's very little supply and high demand, the value is high. If there is lots and lots of supply, and very little demand, the value is very low. If (US Dollar and all other fiat currencies) the supply is high and the demand is high, a certain value is set. That value goes down as you increase the supply.
One way to see the value of money decreasing is to consider the price a cup of coffee. The coffee shop will charge exactly the right price or go out of business. If they charge too little, they can't pay for supplies or workers to pour the coffee. If they charge too much, thirsty cranky caffeine addicts will go to a different coffee shop. In order to charge more than your neighboring coffee shop, you have to provide a superior product or service. Sometimes that superior experience is convenience, sometimes it's reputation or ambiance. There is very little room for price increases because people have the same amount of money today as they did yesterday.
If the supply of money increases, some people will temporarily have more money. This is because the money is coming from the government borrowing/printing new money. Borrowing and printing are an injection of more money without adding sustainable value. Government programs aren't sustainable, when the borrowed money is spent, the jobs are gone. When that increase in the supply of money happens, the coffee shop can charge more for a cup of coffee because there's more money out there that can be used to buy cups of coffee.
Needless to say, if there is money being added to the system, people have more money, prices are higher, but personal wealth is not increasing. On the contrary, when Grandma put $63,000 into her bank account thirty years ago it was enough for her to buy a house. (My first house was purchased 29 years ago for $63,000) Now, that's about what she needs to buy a nice new car.
So the next time you hear "Government Stimulus Package", if you aren't literally receiving money, if you aren't one of the new temporary jobs that was created, then you are one of many people that are paying for that stimulus package by virtue of the fact that your spending power was just reduced.
tl;dr When money is added to the system, it's worth less.
The Federal Reserve is not your Friend
Photo by Alex Bierwagen on Unsplash
Financial responsibility to me means to spend what you have and not more. When a government does that, there is no need to raise additional money by increasing taxes or adding money to the system. Kings from prior centuries couldn't help themselves. They wanted to pay for a Navy to attack a neighboring country but couldn't raise taxes high enough. The solution? Shave some silver and gold off of every coin and create new coins from the shavings. Walla! New money. Higher prices, more stuff, less wealth.
What's the answer? Well, its willpower right? Just don't spend more than you make. When you represent the people in government, don't promise more than you can afford to provide.
We need constraints to force financial responsibility. We sort of had some constraints when we were on the gold standard. Each dollar had to be backed by a tiny bit of gold. That was too constraining. Now politicians are free to spend as much as they want without constraint. Fiat money is money constrained by nothing. Cryptocurrencies are constrained. The supply is carefully planned and managed by the system (except for maybe Ripple, which really isn't a true cryptocurrency). With a fixed/ managed supply of something, the value is determined by the demand. Ahhhhh! Can you hear the ability to relax from humans everywhere? You mean I'm not helpless? I don't have to hope that my government will make decisions that benefit me in order to store value and provide for my family today and in the future?
Absolutely!
There you have it. Crypto equals freedom because it has a systematically created constraint of supply. If a particular token provides a value to society, there will be more demand for it, and that demand will translate to more value because of the inability to increase the supply beyond the specifications of the system.
Next Step
If you believe that fiat currencies are a bad idea, one that puts the control of your wealth into the hands of a politician, then I would encourage you to continue to learn more about cryptocurrencies. If you would like to dip your toe in and own a cryptocurrency, this course will teach you what you need to comfortably do that.