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What Is Happening to Money?

Money — whether we earn it, spend it or save it, we hardly ever think about what it is and why it exists.

The post What Is Happening to Money? appeared first on Bitcoin Magazine.

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Money — the magical power it has over people is almost universal. But whether we earn it, spend it or save it, we hardly ever think about the following questions: What is money? Why does it exist? What will money look like in the future? And why should we think too much about it? Our money works. Day in, day out, we use it without much effort. So what’s the problem?

As August Friedrich von Hayek pointed out, we humans constantly use things we don’t know anything about. For example, you don’t need to know anything about internal combustion engines in order to drive a car.  It’s no different with money. We don’t have to think deeply about money in order to use it successfully. This very fact is what makes us such a successful species and indicates how well our market and knowledge society functions.

Given recent developments, more and more people have started pondering the state of today’s money. This is indicative of the fact that strange things are happening in the realm of money.

What the general public is being told right now is that money can be created ad infinitum. With the coronavirus popping the so-called “Everything Bubble,” central banks have been interfering heavily by providing vast amounts of money — in all the different flavors that money or money-like substitutes exist in today’s financial world. On top of that, governments have set up stimulus packages in the trillions of dollars, exceeding anything the world has ever seen by far. 

In the wake of the enormous money tsunami unleashed onto economies and societies, people have begun (rightfully) to start asking the question: What has become of money? Is money even worth anything any longer?

A Battle of Devaluation

Others, among them many bitcoiners, are asking the question: How has money gotten to this point? In order to answer this question one has to go back to 1971, when the dollar, as the last national currency, was cut off from gold. Perhaps surprisingly, government currencies did not crash to zero at that time; rather they moved to a system of free exchange rates. 

Whereas the yellow precious metal had previously served as an anchor of value and price, henceforth a battle of national currencies was unleashed. This battle turned out to be quite costly. The different exchange rates of individual currency pairs led to an increase in currency risks. The latter increased transaction costs for international trade, which continue to weigh heavily on global trade to this day, representing a globally inefficient barter system on a national currency level.

Merchants, companies and politicians reacted to this situation. Within the political sphere, the U.S. dollar developed into the global unit of account for oil and other commodities due to U.S. hegemony being the strongest economic power around the globe. To this day, the U.S. dollar continues to function as an international reserve currency. In this way, the greenback facilitates global trade, but due to its importance it also let the U.S. exploit what is called its “privilège exorbitant.” The sheer dominance of the dollar and the advantages for U.S. markets are impressive

Financialization of the World

The entrepreneurial response has been to financialize the world and create derivatives and more and more hedge funds. The former are financial products whose primary objective is the contractual hedging of risks over time and space. The latter, hedge funds, are entities that trade in these financial products in the form of actively managed investment funds. It is, therefore, hardly surprising today that hedging transactions to minimize exchange rate risks account for a considerable proportion of total financial transactions.

Government currencies beget ever greater financialization. It’s the entrepreneurs’ reaction to them. So the ever-increasing number of derivatives used today is ultimately a consequence of the costly effects of this diversity of national currencies. Anyone wishing to send money across national borders today pays hefty fees. The reason: the reality of different currency areas requires the involvement of banking and financial institutions. Countless banks, partner banks and financial service providers from different countries are involved and want their “fair” share. So, ultimately, our current international monetary order resembles a global barter trade based on numerous fiat monies. Legacy systems and regulatory requirements make their efficient and rapid transfer difficult.

The various fintech companies of today are therefore also actors in the entrepreneurial reaction to this state of affairs. The most popular and successful among them are those who want to remove artificial barriers in international payment transactions resulting from this global barter. Upstart companies such as TransferWise or Revolut are making possible those things that banks have barely managed to do. Sending and receiving national currencies is not only becoming faster but also cheaper.

Bitcoin: The Ultimate Reaction

The entrepreneurial reaction in the form of financializing the world has its drawbacks though. It might help investors, entrepreneurs and corporations to deal with the hassle of government currencies, but the system at large is being inflated and becomes ever more fragile. Ironically, this is also the reason why we see central banks floating the markets now. They are reacting toward something that has itself been a reaction to central bank national currencies in the first place. The problem is a closed loop that creates an ever greater problem.

In 2009, a new player entered the stage: bitcoin. In a sense, the crypto asset is the final reaction that aims to break this closed loop of national currencies and financialization. Born at the height of the financial crisis, Bitcoin represents the antithesis to the existing financial order. It is an attempt to wrest money as a force influencing the economy, politics and society from the hands of centrally planned God players. 

Money again should be scarce and decentralized in order to tame the endless appetite of politicians, functionaries and economic giants. In the eyes of its supporters, Bitcoin is a counter-reaction to the shameful misuse of fiat money. Whether fiat money is supported by the state and issued by private banks or even corporations, the problem remains the same: It remains in centralized hands and users cannot keep self-sovereign control of it. 

Digital payment solutions that promise to turn current money into “fiat money 2.0” are merely putting “lipstick on a pig,” according to the argument of Bitcoin aficionados. This would not solve the fundamental problem of monetary socialism that is ailing our current monetary system. Money is still tied to intermediaries and every payment made is recorded in a central database controlled by a third party. Transactions can be censored at any time.

A Real Alternative

For this reason, a distinction must be made between digital currencies and cryptocurrencies. The latter can be exclusively controlled by individuals using cryptographic methods. So-called cryptographic values can thus be held and used directly by their owners and without intermediaries, similar to bearer instruments or material objects. Instead of being managed by an intermediary, cryptographic values are based on a blockchain. This is a distributed database that nobody has sole control over. A blockchain is ultimately a computer protocol, based on programming code. From a technical point of view, this turns the crypto assets into pure information and mathematics.

Consequently, Bitcoin stands for an alternative way of thinking about financial systems. Today, our financial system is a conglomerate of abstract constructs such as contracts, promises and balance sheets. This bears witness to the fact that our economy has been becoming ever more abstract. Money is no exception. The great philosopher and sociologist Georg Simmel already noted this tendency toward ever greater abstraction in his work “The Philosophy of Money.” 

There exists a hierarchy of money in today’s financial system: money in the narrower sense, which is also known as base money; and money in a broader, more abstract sense in the form of bank deposits, shadow banking IOUs, credit cards or mobile payment options. This development toward more abstract forms of money is driven by the financialization of the past decades, which has led to a stronger fusion of the economic and financial worlds. 

This amalgamate requires a financial alchemy that is now based on three basic building blocks: institutions (technology), incentives and human participation. In the existing financial system, the human element predominates. Contracts and promises are framed by institutions, but they are executed and enforced by human hands. 

An uneducated observer might regard Bitcoin as only the latest iteration in this constant evolution toward more abstraction. And although bitcoin truly is an abstract form of money, it is not a mere extension of this hierarchy of money in a seemingly endless game of financialization. It is a new form of base money for a new form of network or institution powered by what is today generally called an open, neutral, borderless, censorship-resistant public blockchain.

As a new form of base money, bitcoin will see financialization occur and with it, ever greater abstraction happening on top of the bitcoin base money. Interestingly enough though, on its most fundamental layer, the Bitcoin protocol reduces the human element to an unprecedented extent and gives technology and incentives more weight.

Incentives to keep the human element in check and technology are becoming more important due to mathematics, cryptography and computer science. A financial alchemy as we know it today, but one based on Bitcoin, is likely to depend less on the human element and more on computers, formulas and code in order to control, execute and enforce it. It’s the hope of bitcoiners that this sort of financial alchemy will be better in an objective sense than what we have today. 

The Endgame Is Upon Us

So let’s come back to the question asked in the beginning. What has become of money? Quo vadis, financial system? It seems obvious that our current financial system can only go down this one path: Ever more money is needed to keep it alive. Helicopter money is imminent in the U.S., another chapter in the tragic but inevitable trajectory of money.

Further reading: Zero Interest, Limitless Repo And QE4: The Federal Reserve’s Market Operations Explained

The ultimate chapter will finally be the adoption of what is referred to today as “modern monetary theory” or MMT. This theory, which ironically is not “modern” at all, holds that the state does not need creditors because it can create funds in its own currency at will. As a monetary sovereign, the state is, therefore, not dependent on borrowing on the market in the form of government bonds. It would much rather create the money itself via the central bank incorporated into it. 

MMT has been growing in popularity, probably because more and more people seem to intuitively feel the inevitable endgame. Other reasons are also more pragmatic: MMT is a blank check for all kinds of political projects such as “jobs,” “education” or “climate protection.” Fewer and fewer people are able to resist financial resources for political “necessities” — after all, the ultimate aim is to enrich society.

Another argument at the heart of MMT is that of justice. Today, bankers and other financial actors seek to enrich themselves in the process of financing of the state, so the argument goes. A few people get richer and richer at the expense of the masses. The fact that MMT wants to end the whole financial circus around interest rates and government bonds by depriving commercial banks of the opportunity to create money is thus met with approval, especially from the political left. The entrepreneurial reaction of financialization will not be made possible anymore; the state will take over all on its own.

Debating whether MMT will be more just than today’s system really doesn’t make any sense, in the end. Once money has lost all its meaning, there’s no point in debating any justice because there won’t be any left. Money will truly be worthless; people will only use it under a state of coercion. 

In the wake of this coronavirus crisis, the great triumvirate of our day and age — governments, central banks and banks — has set out to achieve the following: “Fiat iustitia et pereat mundus” or “Let justice be done, though the world perish.” The problem, however, is that in fiat money, there is really no iustitia left. Without justice, there is only pereat mundus… 

So, as an antithesis to endless growth and the meaningless of money, Bitcoin stands firm: Its network is limited to 21 million bitcoin units only. There will never be more bitcoin. That is the message of it all, and in a world in which “relatively scarce” money in the form of state fiat currencies will soon only be suitable for lame jokes, such a message is more important than ever. 

So if Bitcoin didn’t exist, it would have to be invented: As a psychological elixir of life, so to speak, it will give comfort and confidence to many more people in the light of the crazy money interventions of our times. What would we do without Bitcoin?

This is an op ed contribution by Pascal Hügli. Views expressed are his own and do not necessarily reflect those of Bitcoin Magazine or BTC Inc.

The post What Is Happening to Money? appeared first on Bitcoin Magazine.

Source: https://bitcoinmagazine.com/articles/what-is-happening-to-money?utm_source=rss&utm_medium=rss&utm_campaign=what-is-happening-to-money

Blockchain

Bitcoin price hits $50K after bullish outlook from Citigroup and Goldman Sachs

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On March 1 cryptocurrency investors woke up to the sight of Bitcoin (BTC) rising from it weekend correction to $44,000 as the market found its bullish momentum and altcoins rebounded from their swing lows.

Data from Cointelegraph Markets and TradingView shows that the price of Bitcoin increased 16.6% from its low of $43,504 on Feb. 28 to the $50,000 level which bulls are attempting to flip back to support.

BTC/USDT 4-hour chart. Source: TradingView

Earlier in the day, MicroStrategy CEO Michael Saylor tweeted that the firm had purchased another $15 million worth of Bitcoin, bringing its total holdings to 90,859 BTC and further demonstrating that institutional demand for the top cryptocurrency continues to grow as firms buy each dip’

Analysis of key BTC price indicators also shows that bulls were eager to buy the $43,000 retest which occurred over the weekend.

Not every analyst is bullish

Bitcoin’s surge above $49,000 has some calling for new all-time highs in the near future, but according to veteran analyst Peter Brandt, nothing is certain when it comes to the cryptocurrency market.

Today Goldman Sachs announced that it would restart its crypto trading desk and Brandt was quick to tweet the following chart and point out that its launch didn’t work out so well for the cryptocurrency market in December 2017. 

BTC/USD 1-week chart. Source: Twitter

According to David Lifchitz, Chief Investment Officer of ExoAlpha, it’s still “too early to tell” if the pullback in Bitcoin is over but $44,500 appears to have provided strong support.

In terms of whether the top cryptocurrency could breakout to new highs in March, Lifchitz said he’s uncertain on exactly what might happen as March is historically a bearish trading month for BTC.

According to Lifchitz, tax season in the U.S. could put bearish pressures on the market as investors may need to “sell some of their holdings to pay for earlier realized capital gains.”

From a bullish perspective, the 20% correction during the second half of February may have signaled an “early start” to the usual March weakness, with the worst of the downturn already transpiring.

Lifchitz said:

“Despite the 20% pullback, we’re still in an upward sloping trend since the October $10K breakout. The big unknown is what the miners will do as they are net sellers. They are the real short-term risk.”

Analysis of Glassnode’s Net Unrealized Profit and Loss (NUPL) metric shows that while both 20% corrections experienced during this cycle have created the “signature sideways and choppy” price action typically seen during bull markets, buyers have been stepping in sooner than they had in previous bull cycles and fewer long-term holders are willing to sell their BTC. 

Bitcoin Entity-adjusted NUPL. Source: glassnode

Steadying yields help to stabilize traditional markets

The traditional financial markets also rallied on Monday as Treasury yields stabilized and optimism related to the COVID-19 vaccine rollout boosted investor sentiment about the future of the global economy.

The S&P 500, Dow and NASDAQ all closed the day in the black, finishing up 2.38%, 1.95% and 3.01% respectively. The strong performance from each index occurred as global central banks world continue to reaffirm commitments to accommodative policies that will support the global economic recovery.

Altcoins also recovered their recent losses as Bitcoin price broke out to $50,000.

Daily cryptocurrency market performance. Source: Coin360

Binance Coin (BNB) was the best performer in the top 10, increasing 21% to $248, while Ethereum (ETH) saw its price rise 9.46% to $1,525. PancakeSwap (CAKE) and Fantom (FTM) both rallied price 36% and currently trade for $12.30 and $0.558 respectively.

The overall cryptocurrency market cap now stands at $1.52 trillion and Bitcoin’s dominance rate is 61%.

Source: https://cointelegraph.com/news/bitcoin-price-hits-50k-after-bullish-outlook-from-citigroup-and-goldman-sachs

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Blockchain

Goldman Sachs Plans to Relaunch Its Cryptocurrency Trading Desk

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Reports on Reuters today revealed that American multinational investment bank, Goldman Sachs, will offer bitcoin futures and non-deliverable forwards on behalf of its clients starting next week.

According to sources familiar with the matter, the move is part of the bank’s effort to take advantage of the fast-growing crypto space, which is gradually becoming an investment of choice for institutional players. 

Notably, the bank is also considering developing a Bitcoin Exchange-Traded Fund (ETF) soon as part of its commitment to fully venture into the industry. 

Based on this regard, the unnamed source noted that Goldman Sachs had already “issued a request for information to explore digital asset custody.” 

Goldman’s First Shot At Crypto

In late 2017, Goldman Sachs became the first Wall Street biggest firm to ever consider offering crypto-related products, as the bank was planning to open a cryptocurrency desk.

At the time, the Wall Street financial institution was working on how to address security challenges associated with the business, as well as how it would custody the assets.

Plans were on the way for the launch slated for late 2018 when reports emerged in September that same year that the bank has chosen not to offer crypto-related investments. 

Sources said that the bank dropped its crypto plans due to the regulatory concerns associated with the industry, with regulators breathing down the neck of most projects. 

The issue of regulatory uncertainty has been the major stumbling block that hindered several institutional players from getting involved with cryptocurrencies. 

Interestingly, there have been clearer regulations in recent times luring institutional investors like Microstrategy and Tesla. 

The entrance of these large corporations has given other institutional investors the greenlight that crypto is safe compared to how it was viewed in 2018. 

Thus it could be the reason Goldman Sach is making plans to restart its cryptocurrency trading desk in earnest.

A Change Of Heart? 

However, Goldman Sachs’ second shot at launching a cryptocurrency trading desk comes less than a year after the bank told its clients during a conference call that bitcoin and cryptocurrencies are not an asset class.

Reports at the time suggested that part of the reason for the call was to discourage its customers from including bitcoin and cryptocurrencies in their portfolio.

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Source: https://cryptopotato.com/goldman-sachs-plans-to-relaunch-its-cryptocurrency-trading-desk/

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Bitcoin Still Has an Uncertain Future: Citibank Analysts

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In a 100-page deep-dive report dubbed “Bitcoin, at the Tipping Point,” Citibank’s global perspectives and solutions team noted that the cryptocurrency could potentially “become the currency of choice for international trade.”

The analysts acknowledged that the massive interest shown by several large institutional investors like Tesla, Microstrategy, and PayPal is one of the major propellants for the digital asset gaining mainstream adoption.

The team further noted that several other factors, including a wide range of digital payment options like stablecoins and Central Bank Digital Currency (CBDC), could also increase the chances of bitcoin adoption for cross-border settlements.

An Uncertain Future

The report also pointed out that a side-by-side comparison of the risks associated with bitcoin and the opportunities it presents makes it very easy to conclude that the digital asset is at a tipping point.

They wrote:

 “There are a host of risks and obstacles that stand in the way of Bitcoin progress… Weighing the potential hurdles against the opportunities leads to the conclusion that Bitcoin is at a tipping point… Bitcoin’s future is thus still uncertain, but developments in the near term are likely to prove decisive as the currency balances at the tipping point of mainstream acceptance or a speculative implosion.”

Bitcoin Going Mainstream Already 

The concluding part of the report quoted the famous philosopher, Schopenhauer, who said,

“All Truths pass through three stages, first it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.”

The team states that the positive change in stance on issues about bitcoin by several financial institutions very well prove these words of Schopenhauer, which he said more than 150 years before the bitcoin idea was born.

Several banks had actively shunned bitcoin in the past, arguing that it has no intrinsic value as it is allegedly backed by mere speculations from its proponents.

However, bitcoin’s immense growth has forced its former critics to re-evaluate their stance and join the bitcoin adoption trend. Some of the biggest banks in the world have started offering bitcoin services to their clients.

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Source: https://cryptopotato.com/bitcoin-still-has-an-uncertain-future-citibank-analysts/

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