If you listen to the financial news, then it doesn’t paint a pretty picture of the state of the global economy. Trade wars, ballooning government debt, overvalued markets, and record-low bond yields all add up to an economy that’s teetering on the brink of disaster.
Many obscure economists think that we could be approaching the end of the financial system as we know it. These analysts cite that if there were another liquidity or credit crisis like back in 2008, the global economy would not be able to sustain the hit.
As a result, the entire global financial system would collapse, leaving your bank account worthless as currencies evaporate their buying power. Sure, this is a worst-case scenario, but it’s a possibility. If something like this situation were to transpire, then what would we use as money?
Some analysts believe that the advent of cryptocurrency signals an end to the fiat system.
They expect crypto to be the new reserve currency to replace the dollar in times of a currency crisis and collapse.
Let’s examine the case for cryptocurrency as the future of money.
A Brief History of Money
- 1 A Brief History of Money
- 2 The End of the Gold Standard
- 3 The Establishment of World Reserve Currencies
- 4 Global Debt and Credit Markets
- 5 The End of Dollar Hegemony
- 6 Is Crypto the Next Reserve Currency?
- 7 Governments and Cryptocurrency
- 8 Threats, Roadblocks, and Bottlenecks
- 9 Wrapping Up – Embrace the Future Today
To predict the future, we need to look at the past. The first recorded money system began in ancient China some 2,500+ years ago. The Chinese stopped using tools for trading and adopted the world’s first coins, known as “cash,” which is where we get the term today.
King Croesus of Lydia was the first government authority to mint gold coins in 561 B.C., ushering in a new way to pay for goods and services instead of bartering. Gold coins were the preferred choice for money around the world, right up until the 1930s, when President Theodore Roosevelt decided to withdraw gold coins from circulation at the start of the Second World War.
The End of the Gold Standard
Throughout history, countries and governments relied on gold as the preferred medium of exchange. However, history has plenty of examples of governments that debase their currency, leading to the collapse of society.
The world traded using gold coins until the early thirties. Then-president FDR announced that the public turn in all its gold holdings to the federal government in support of American war efforts. The Federal Reserve later issued the first notes or paper dollars, which we use today.
However, back during the first confiscation off gold by FDR, gold still had some relationship to paper money. Each banknote represented a physical quantity of gold, which was supposedly redeemable. However, after FDR suspended gold exchange rights in the broader economy, people moved away from coins and into paper money.
On August 15th, 1971, President Richard Nixon put an end to the gold standard, ushering a new “fiat” money standard that no longer had any ties to gold. Fiat money describes a currency system with no collateral backing the assets.
Unlike the era of the gold standard, where every note was a check deposit for physical gold, the new fiat dollars issued by the Federal Reserve had nothing backing them.
As a result of being the world’s superpower and the leading reserve currency, America’s economy grew leaps and bounds over the next four decades. The fiat money system allowed for the expansion of global credit without the need for collateral to back the world’s monetary reserves.
Today, dollars are eligible for the payment of public and private debts, and settlement of taxes. It’s the taxes part of this equation that gives the dollar its credibility in the eyes of consumers. As long as the American public only accepts dollars for payment of taxes, the dollar will have a use as legal tender.
The Establishment of World Reserve Currencies
Since the 1300s, the world traded on a system of reserve currencies. Typically, the leading reserve currency was from the nation that was the world’s superpower at the time. Reserve currencies started with the Portuguese and cycled through the Spanish, Dutch, French, and English until America became the dominant superpower of our time at the end of the First World War.
Since this period, America and the dollar remain the world’s leading reserve currency. The IMF controls the Special Drawing Right, or ADR, which is a basket of currencies it uses to manage the global debt crisis as a lender of last resort.
This basket of currencies includes the Dollar, Euro, Yen, Pound Sterling, and the most recent addition, the Chinese Yuan. All of these currencies play a role in regulating the world’s financial markets, but it’s the dollar that reigns supreme. Some analysts suggest that China will eventually take the role of the leading reserve currency from the dollar.
However, if we look at the current weighting of the SDR, China accounts for less than 10-percent of the basket. Therefore, while China’s economy continues to grow, we don’t see it placing much threat on dollar hegemony in the coming decades.
Global Debt and Credit Markets
The fiat dollar system led to the development of international credit markets and the establishment of the Eurodollar system. As a result, the world experienced rapid transformation. Companies grew wealthy, establishing a new globalized and interlinked economy.
With all the world’s central banks collaborating in the reserve currency system, managed by the IMF, it was easy for the U.S. government to take over the world’s financial system. By issuing bonds in USD, America financed its wars, while the rest of the world felt the effects on imported inflation through currency devaluation.
It wasn’t until the 1997 failure of Long Term Capital Management that the world started to feel the adverse effects of a financial system bloated with debt. This crisis ended up nearly sinking the global financial system. A few years later, the dotcom bust of 1999 would also send the global economy into a tailspin that resulted in disaster.
However, with the advent of the subprime mortgage crises in 2007, followed by the Great Financial Crisis of 2008, the world’s central banks started to wake up to the consequences of unlimited credit.
You would think that governments would learn from their mistakes. However, they did the opposite, and the response to the credit crisis was to print more money and swell central bank balance sheets across America and the developed world.
As a result, the American economy experienced the longest bull-run in history over the last 11-years. The S&P500 now holds above the 3,000-point level, which is a fantastic recovery from the post-crisis level of 666-points. With the Dow Jones approaching the 30,000-mark, economists are starting to get edgy in their seats, as the talk of a pending recession starts to permeate the air.
The End of Dollar Hegemony
As we mentioned earlier, history paints an impressive picture of what’s to come in the future of money. Historically, ever fiat money system ever launched by society ends up failing. Whether it was the Portuguese or the British, eventually, power transfers to the next regime to take global economic control.
The American fiat dollar system is currently the most successful of the more than 2,200 fiat currencies used throughout the history of the civilized world. However, while the Federal Reserve desperately tries to maintain dollar hegemony, inevitably, this system will eventually expire as well.
So, what’s coming after the dollar dies?
Is Crypto the Next Reserve Currency?
What’s interesting about all the past reserve currency systems is the transition period. Each system experienced a period where the new reserve currency emerged into dominance. For most countries, this build-up period lased between 20 to 40-years.
Considering that leading economists are saying it could be the end of the financial system, what currency would replace the dollar if every currency becomes worthless in the next crisis? The only economic system that would survive, such as an event, is cryptocurrency.
It’s also interesting to note that crypto has only been around for little more than a decade. It’s also the only asset class that’s emerged to challenge the current financial system. Therefore, if we go on history, we could say that crypto is ideally positioned to become the world’s next reserve currency.
Governments and Cryptocurrency
The only snag with crypto becoming the next reserve currency is its decentralized nature. Banks and governments can’t control Bitcoin, as the Blockchain is a self-evolving entity controlled by the end-user.
Therefore, there is no way governments can manipulate the currency or use it to create credit. It’s for this reason that many governments around the world refuse to recognize Bitcoin and crypto as a legitimate currency.
Instead, these governments post Bitcoin and crypto as the money of choice for criminals and drug dealers. However, the reality is that the preferred currency of choice for drug dealers, money launderers, and criminals is the U.S. dollar.
We think that it’s unlikely that governments and central banks will allocate Bitcoin or any crypto they can’t control, as a reserve currency in the future. Without reserve status, crypto will never achieve mass adoption in the industry and the broader economy.
However, that does not mean that crypto is out of the picture entirely. The Venezuelan government recently launched “the Petro,” a cryptocurrency tied to the nation’s oil reserves. However, this experiment is proving to be as much of a disaster as the Bolivar, the nation’s currency.
Nothing is stopping the USA, U.K., or another reserve currency nation from issuing crypto as its new currency system. Back in the nineties, The Economist magazine released the elite’s plans to implement a new, one-world currency called “The Phoenix.” Analysts argue that this could be the cryptocurrency of a new financial system.
Threats, Roadblocks, and Bottlenecks
Apart from the danger of big government stepping into squash crypto or warp it to their means, there are also other roadblocks and bottlenecks. These threats might stop the introduction of cryptocurrency as the future of money, and in some cases, might jeopardize the entire crypto ecosystem.
The first threat against crypto comes in the form of quantum computing. Cryptocurrencies typically operate on military-grade encryption for the networks that control the various blockchains. Google recently released the first-ever quantum computer, and they state that four to five evolutions of the processor could lead to breaking 256-bit encryption.
If this technology reaches the hands of hackers, and it inevitably will, then the security of the Blockchain is under severe threat. There would be noting stopping hackers from breaking into the Blockchain and destroying it.
The next threat comes in the form of bitcoin mining. At the moment, there are millions of people mining Bitcoin. However, there is a finite amount of the cryptocurrency, limited to 21-million coins. What happens after miner’s finish mining the Blockchain? If they all turn off their machines at the same time, who will be responsible for maintaining and verifying all of the transactions on the network?
Another issue with crypto as the future of money comes in the form of a whale. At the moment, research shows that 20-percent of all BTC wallets hold over 80-percent of BTC. Therefore, there are players out there that can swing the markets by selling their portfolios.
Our final concern for the future of cryptocurrency as money comes in the form of global utility. The most advanced cryptocurrency, Bitcoin, can still not process transactions as fast as the VISA network. According to research, Bitcoin can only process seven transactions per second, whereas Visa does hundreds of thousands of transactions.
Therefore, if we were to move global trade to a blockchain, it would slow things down tremendously. Imagine waiting weeks for your credit card transactions to go through.
Wrapping Up – Embrace the Future Today
One thing is sure; the U.S. dollar system cannot last forever. While its mere speculation to guess at what’s coming next to replace the dollar, the only contender so far is crypto. We don’t think that it will be Bitcoin that emerges as the next global reserve currency.
However, we do believe that governments will eventually transfer into this monetary system when the current financial system fails. Do everything you can now to familiarize yourself with the technology or get left behind in the next evolution of money.