Exchanging my cash for something of more value

Prior to reading about the term bitcoin or cryptocurrency, I seldom thought about the term fiat currency or fiat money.

Well, money to me, is just …. money. Pieces of paper with numbers on them, which I can use to purchase goods and services. Or these days, numbers on a screen. Perhaps it is also because up till now, in my life in peaceful Singapore, I have yet to witness a run on the banks here.

The term fiat derives from the Latin word fiat, meaning “let it be done” used in the sense of an order, decree or resolution. Investopedia defines fiat money as a government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it.

Investopedia highlighted that one danger of fiat money is that governments will print too much of it, resulting in hyperinflation.

Random thoughts on Cryptocurrency

I have been reading articles and watching documentaries on cryptocurrencies and the blockchain technology behind it. It is truly a ‘rabbit hole’. I am still a novice when it comes to cryptocurrency. However, it is worth understanding before investing.

I can understand the usefulness of bitcoins and other altcoins in revolutionising the financial system by creating a decentralised payment system among anonymous users (in lieu of having centralised third parties like financial intuitions or the government).

The loss of confidence in institutions (US Federal reserves, banks, etc), and the numerous rounds of quantitative easings, plus past examples of bank failures in Cyprus and Lebonon, devaluation of the Argentine Peso and similar situations in other countries like Mexico, and Uruguay…. all in a way contribute to the growing interest in cryptocurrency.

El Salvador becomes first country to adopt bitcoin as legal tender after passing law (read here)

Lebanese banks hold deposits hostage, face angry protestors (read here)

On one hand we have the block chain technology, with strong supporters from tech specialists, and on the other hand, its decentralised blockchain (aka ledger) allowed low cost financial transactions without the need for a third party intermediaries found strong supports among the libertarian, anti-establishment groups.

I see Dan, the old computer programmer from Pittsburgh who was the key figure in the documentary title “The Rise and Rise of Bitcoin” as part of the first group. His obsession is in the technology, and not the price of bitcoin itself.

I see Roger Keith Ver who is an early investor in bitcoin, bitcoin-related startups and an early promoter of bitcoin, aka the “Bitcoin Jesus”; and Charles Shrem IV, an American entrepreneur and bitcoin advocate, as part of the second group. The psychological and emotional drive behind Roger is probably best summed up in the later part of this video (fast forward to 47.18min), or just click the below video.

For me, I am not an expert in tech / cryptocurrency. I think for many people, their interest in cryptocurrencies stem from the basic human psychology affiliated with any other forms of speculation. The sudden surge in crypto prices led to FOMO (fear of missing out) and greed; basic human desires. Beyond this, there is this promise of the wide adoption of cryptocurrencies in the future.

In fact, I would like to believe in the libertarian notion though (eg. a decentralised payment system among anonymous users in lieu of centralised third parties like financial intuitions or the government).

My current doubts in bitcoins and many other altcoins, probably stem from the articles & videos pertaining to the manipulation of crypto prices via tether.

Why I SOLD All of My Bitcoins… IT’S OVER. (watch here)

The Bit Short: Inside Crypto’s Doomsday Machine (read here)

It is not so much about Elon Musk’s tweets, China’s crackdown on crypto mining and their ban of digital tokens in financial transactions, and the massive consumption of electricity from bitcoin mining, or even the argument that cryptocurrency is used for illicit activities eg, transactions of drugs, weapons, etc (eg. Silk Road website which was taken down in 2013)…

I believe that there are solutions to cut down on the massive consumption of electricity used for ‘mining’ bitcoins eventually.

How Ethereum plans to get around a major drag on crypto prices (read here)

A blockchain tweak could fix crypto’s colossal energy problem (read here)

There are also other criticisms about how cryptocurrencies seem to fall back into the flaws of fiat currencies eg. the rise of bitcoin end up enriching the very small number of early adopters or bitcoin whales.

And how prices of crypto can be inflated or manipulated by unregulated exchanges and other stable coins. Dejavu perhaps, like how the Fed is thought to be inflating or propping up the stock indexes, via qualitative easing.

The rise of “unbanked” exchanges like Binance, Bit-Z, HitBTC seems like a loophole. These exchanges don’t have direct access to the US financial system, and many of them are not registered in the US, and hence are beyond US regulatory scrutiny.

Binance is a Cayman Islands-domiciled cryptocurrency exchange. BitMEX is a cryptocurrency exchange and derivative trading platform. It is owned and operated by HDR Global Trading Limited, which is registered in the Seychelles. Bitfinex is a Hong Kong-based cryptocurrency exchange owned and operated by iFinex Inc., which is registered in the British Virgin Islands. Bitfinex customers’ money has been stolen or lost in several incidents, and they have been unable to secure normal banking relationships.

As with any subject there are the ‘for’ and ‘against’ camps. There are articles / videos debunking these doubts or findings. For instance, the overall amount / capitalisation of tether in circulation is only a small fraction of bitcoin’s overall amount / capitalisation to justify such manipulation or the jump in tether inflow did not correspond with bitcoin’s price rise (esp. through the long period of bitcoin price stagnation in 2018).

More findings may emerge, but in the meantime, the opaqueness of these exchanges, the leverage offered by many of these exchanges, and the large trading volume of tether (as compared other cryptocurrencies and fiat currencies) into bitcoin and many other altcoins, is something that could be a potent time bomb.

Actually I have been anticipating further and deeper falls in bitcoin or ether’s prices. Perhaps the inflow of funds or wider adoption of crypto by more and more institutions have helped to lessen the volatility. Still prices have dropped significantly.

Perhaps we are in the capitulation phase as mentioned by Cathie Woods. According to her, Bitcoin is on sale right now, reiterating her price target of $500,000 per BTC.

However, there are still many hodlers.

“We’re In A Capitulation Phase,” Says Ark Invest’s Cathie Wood; High Conviction In $500k Bitcoin Target (read here)

Investing is simply changing fiat currencies into something else

As we know, the fiat currencies we hold in our bank accounts depreciates over time due to inflation (around 2% to 3% yearly). In the broader scheme of things, the value of the fiat is determined by the government.

I find this dated video of a talk by Peter Thiel interesting. Yes perhaps he did predict cryptocurrency way back in 1999.

However, in the video (fast forward to 3.15 mins) or just click on the below video, he talked about other models whereby the financial instruments are very liquid. For example, in the US, it would be an Index on the S&P500, or other stock market index. This is in lieu of fiat currencies which have values backed by the government. The stock index would be backed by real properties, real companies… things that have real values. So instead, we can trade via slivers of this index, or even stocks of large multi-national companies (MNCs) like Microsoft, MacDonald, Intel… which becomes the de facto currency.

Just like people in Russia replacing their ruble for US dollar, there are people trading their dollars for equities.

So in the broader scheme of things, every time I ‘change’ my fiat currencies (SGD) to equities (REITs, stocks, etc) I am hoping that these real companies and properties perform better than my SGD over time, and hoping it is where the true value reside.

With regards to the Singapore dollar (SGD, from 1985 onwards, Singapore adopted a more market-oriented exchange regime, classified as a Monitoring Band, in which the Singapore dollar is allowed to float (within an undisclosed bandwidth of a central parity) but closely monitored by the Monetary Authority of Singapore (MAS) against a concealed basket of currencies of Singapore’s major trading partners and competitors.

Back to the idea of exchanging between fiat currencies and equities… To put it in another way, would I want my cash to be in USD back by a government who is in trillion dollars of debt or a well capitalised, strong moat company like Apple, Google or Microsoft, or a decentralised cryptocurrency like bitcoin or ethereum, over the long term?

Then again, we never know…

G7 nations reach historic deal to tax big multinationals (read here)

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