A war on asset devaluation: BTC will witness the occurrence of financialization

Author: PASCAL HÜGLI

Translation: Ziming

Editor's note: The original title was "What happened to the money in our hands? 》

Money has magical power for almost everyone. However, whether we make money, spend money or save money, we almost never consider the following questions: what is money? Why does it exist? What will the money look like in the future? Why should we consider these issues? In fact, our money system works well, and we use it effortlessly every day. So what's wrong now?

As August Friedrich von Hayek points out, we humans constantly use what we know nothing about. For example, you don't need to know anything about internal combustion engines to drive a car. Actually the same is true for money. In order to use money successfully, we don't need to think carefully. This is what makes us such a successful species and shows how well our markets and the knowledge society operate.

In light of recent developments, more and more people are thinking about the state of money in their hands today. This shows that something strange is happening in the currency field.

Now ordinary people are often told that money can be created infinitely. As the outbreak of the coronavirus burst the so-called "bubble," the central bank has been intervening intensively by providing large amounts of money (money or other alternatives to financial markets). Most importantly, the government has established a multi-trillion-dollar stimulus plan that has surpassed any package the world has seen so far.

A war about asset depreciation

Others (including many BTC practitioners) are asking a question: why is our money so far? To answer this, one must go back to 1971, when the dollar was decoupled from gold. But perhaps even more surprising is that the value of the government currency did not fall to zero at that time. Instead, the dollar turned to a free exchange rate system.

Gold used to be the anchor of value and price, but since then there has been a currency war between nations. This battle is costly. Differences in exchange rates between countries lead to increased currency risk, which increases the transaction costs of international trade, and also places a heavy burden on global trade, indicating that the current national currency system is very inefficient.

Businessmen, companies and politicians expressed different views on the situation. In the political arena, because the United States is the world's most powerful economic force, the dollar has become the global accounting unit for oil and other commodities. To this day, the US dollar continues to serve as an international reserve currency. In this way, the dollar promotes global trade. The US dollar is so important to the world that it has allowed the United States to take advantage of so-called "excessive privileges." The absolute advantages of the US dollar and its benefits to the US market are really impressive.

Global financialization

Entrepreneurs' perception is to financialize the world and create derivatives and an increasing number of hedge funds. The former is a financial product whose main goal is to hedge contract risk over time and space. The latter are hedge funds, entities that trade these financial products in the form of actively managed investment funds. So it is not surprising today that hedging transactions that minimize transaction risk account for a significant proportion of the entire financial transaction.

Government currencies have become increasingly financialized. This is the view of entrepreneurs. As a result, the number of derivatives in use today is increasing, and ultimately it is the result of high transactions caused by the existence of many national currencies in the world. Today, anyone who wants to send money across borders will pay huge fees. Because these businesses require the involvement of banks and financial institutions. Countless banks, partner banks, and financial service providers from different countries are participating, and they hope they can get a “fair” share. So in the end, our current international monetary order is like a global exchange of goods based on many fiat currencies. Traditional system and regulatory requirements make it difficult to move efficiently and quickly.

Therefore, various fintech companies today have expressed the same view. Among the most popular and successful are those companies that want to eliminate such artificial barriers to international payment transactions caused by global "barter-for-material" transactions. Emerging companies like TransferWise or Revolut are making things that banks can hardly do. Sending and receiving national currencies is not only getting faster and faster, but also getting cheaper.

BTC: the entity that ultimately achieves this

But financializing the world has its drawbacks. It may help investors, entrepreneurs, and companies cope with government currency troubles, but the entire financial system is expanding and becoming increasingly vulnerable. Ironically, this is why we are seeing central banks making markets more foamy. They are making follow-up actions on the adverse effects of their actions. This is a closed loop that will only make the problem worse.

In 2009, a new market player entered the arena: BTC. In a sense, digital assets are the ultimate response designed to break the closed cycle of domestic currency and financialization. BTC, born in the worst period of the financial crisis, represents the opposite of the existing financial order. This is an asset tool that attempts to take money from those so-called "privileged players" and become a force that affects the economy, politics and society.

To control the endless greed of politicians, civil servants, and those economic giants, money should be scarce and scattered. In the eyes of supporters, BTC is a counterattack against fiat currency abuse. Whether fiat money is supported by the state, issued by private banks or even companies, the inherent problems caused by currency still exist, and the existence of such problems is still in the hands of the central government, and users cannot have subjective and active control over the entire situation .

According to BTC practitioners, digital payment solutions that are expected to convert the current currency into "fiat currency 2.0" are simply "applying lipstick on the pig's mouth". This does not solve the fundamental problems that plague our current monetary system. Money is still linked to intermediaries and every payment is recorded in a central database controlled by a third party. Transactions can be reviewed at any time.

A really effective alternative

We must distinguish between digital and cryptocurrencies. The latter can be specifically controlled by individuals using cryptographic methods. The so-called password value can be directly held and used by its owner without an intermediary, similar to a carrying tool or physical object. Unlike intermediary management, the value that cryptography brings to cryptocurrencies is based on the blockchain. This is a distributed database without anyone's sole control. Fundamentally, blockchain is based on computer protocols of programming code. From a technical perspective, it turns crypto assets into pure information and mathematics.

Therefore, BTC represents another way of thinking about the financial system. Today, our financial system is a combination of abstract structures such as contracts, commitments, and balance sheets. This proves that our economy has become more and more abstract. Money is no exception. The great philosopher and sociologist Georg Simmel has pointed out in his book "The Philosophy of Money" this tendency to become increasingly abstract.

In today's financial system, there is a hierarchical system of money: money in the narrow sense is also called base money; and more abstract money in the broadest sense includes bank deposits, shadow bank IOUs, credit cards or mobile payment methods. The financialization of the past few decades has promoted the development of a more abstract form of currency, which has led to a global economic and financial integration.

This big fusion requires a financial alchemy, which is now based on three basic building blocks: institutions (technology), incentives, and human participation. In the existing financial system, human factors dominate. Although contracts and commitments are made by institutions, they are made and executed by people.

One who has nothing to do with this field might think that BTC is just the final iteration of this evolving evolution towards a more abstract economy. Although BTC is indeed an abstract form of currency, it is not just an extension of this currency system in seemingly endless financial games. It is a new form of base currency under a new form of network or institution. This new form of network or institution is powered by today's open, neutral, borderless, censorship-resistant public blockchain.

As a new form of base currency, BTC will also witness the occurrence of financialization, and with it, there will be a greater abstraction over the BTC base currency. What is interesting, however, is that at its most basic level, the BTC agreement reduces human factors to unprecedented levels and gives technology and incentives a greater weight.

With the development of mathematics, cryptography, and computer science, incentives to control human factors have become increasingly important. A type of BTC-based alchemy as we know it today may rely less on human factors and more on computers, formulas, and code to control, formulate, and execute it. Those BTC companies hope that from an objective perspective, this financial alchemy will be better than what we have today.

Will the end come?

So let's go back to the question we asked at the beginning. What has money become? Where is the financial system headed? Obviously, our current financial system can only go this way: keep printing more money. In the United States, a new round of QE is imminent, which has also opened a new chapter in the trajectory of currency development that is tragic but cannot escape.

The final chapter will certainly be related to the "modern currency theory (MMT)" we are now talking about. This less "modern" theory states that the country will no longer have creditors because the country can create new currencies at will. Therefore, as a currency sovereign state, the state does not rely on government bonds to borrow from the market. It would rather create money through its central bank.

MMT is gaining popularity, probably because more and more people seem to feel this inevitable situation intuitively. Other reasons are also more pragmatic: MMT is a blank check for various political projects (such as "job", "education" or "climate protection"). Fewer and fewer people can resist the financial resources brought about by these political necessities, after all, their ultimate task is to make this society richer.

Another argument at the core of MMT is "fairness." Today, bankers and other financial actors are making themselves rich as the state seeks financing, and a few are getting richer at the expense of the general public. MMT hopes to end the entire financial circle's tricks around interest rates and government bonds by depriving commercial banks of the opportunity to create money (especially on the left side of politics). The perception that entrepreneurs are financializing their economies will no longer be possible. The state will take over everything.

Finally, it doesn't make much sense to argue whether MMT will lead to a fairer system than it does now. Because once money loses its full value, nothing can be talked about, and people can only continue to use it in a forced state.

After this coronavirus crisis, the Central Bank and other banks have begun to achieve the following goal: "Despite the world's demise, justice must be achieved." The problem is that there is no justice in fiat money. Without justice, the only thing left for us is the destruction of the world …

As a result, BTC stands firm on the opposite side of endless growth and meaningless money: its network is limited to 21 million BTC units and there will never be more BTC. And those national fiat currencies that can be created indefinitely will also become "lame" jokes.

Therefore, even if BTC does not exist now, then we must invent it: It can be said that given the crazy monetary intervention of our time, it will provide comfort and confidence to more people as a panacea in life. Imagine what would we do without BTC?