Cryptocurrencies

The Emerging Economy of the Cryptocurrencies

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Cryptocurrencies are defining a new paradigm for the financial industry. Over the years, they have grown in popularity and are gaining increased integration into the fibres of e-commerce. The cottage industry that has built around cryptocurrencies owes its existence to a white paper published in 2008 by Satoshi Nakamoto, an intelligent but elusive entity that has since disappeared into oblivion.

The advent of cryptocurrencies ushered in the decentralization of money. Before now, only federal governments had the exclusive rights of minting cash. We trusted our governments with this responsibility and anyone caught carrying out this activity was dealt the full wrath of the law. Let’s see what our governments have done with this trust in recent times. I will explain it with a short story.

The Emerging Economy of the Cryptocurrencies

In 1944, more than seven hundred delegates from over forty countries congregated in Bretton Woods to decide on a new international monetary system. At the end of the conference, the US dollar emerged as an international reserve currency, which meant it was to become the benchmark for other currencies. But the US dollar itself would be backed by gold.

The latter part of the agreement was the most significant part of the agreement. That agreement became known as the Bretton Woods agreement. The product of the Bretton Woods agreement is two organizations that have played an immense role in international economics: the International Monetary Fund and the World Bank.

However, in 1971, U.S. president, Richard Nixon broke the agreement when he took the US off the gold standard. The implication of this was that the Federal Reserve could print as many dollar bills as it wanted without the discipline of gold. The consequence of this is that the US dollar has lost more than 95% of its value since 1971.

Without the discipline of gold, bills can be printed infinitely. If you have an idea of basic economics, you should know the consequence of this activity. it is something economists call inflation. To help you gain a better perspective, let’s consider the price of gold at the time the Bretton Woods agreement was adopted and what the price of gold is at the moment.

The Emerging Economy of the Cryptocurrencies
Cryptocurrencies

At the time, the Bretton Woods agreement came into effect, the value of the US dollar to gold was pegged at $35 an ounce. At the turn of the millennium, this relationship had deteriorated to the point that gold was changing for ten times the dollar value that had exchanged an ounce half a century before. The relationship of the US dollar to the gold has since gone past the one thousand dollar mark.

As fiat money continues to nosedive, cryptocurrencies are proving to be a viable alternative for storing value. While fiat money is inflationary in nature, cryptocurrencies are deflationary, which makes them a more appropriate store of value.

This fact is evident in the trajectory that has defined the growth of bitcoin since its inception. In just a decade, bitcoin has risen from a few cents for a single unit to about ten thousand dollars (at the moment). But it’s not just bitcoin. The poster child of second-generation cryptocurrencies, Ethereum, has also displayed a similar trajectory. But even more important is the fact that cryptocurrencies are gradually gaining acceptance into mainstream society. It won’t be long before they become an integral part of e-commerce.


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