Cryptocurrency and the Blockchain Economy
Category: Column By : Rainer Michael Preis Read : 245 Date : Wednesday, August 02, 2017 - 10:20:22

Cryptocurrencies and blockchain assets are the newest, and potentially most promising, asset class. Investment returns in cryptocurrencies have outperformed—by far—traditional assets. The Lawnmower Blockchain Index is up 374% versus world primary equity indices 16% and 4% for bonds (using the Bloomberg Barclays global aggregate total return index).

However, public opinion and investors’ minds on cryptocurrencies are divided, and incite philosophical, or even emotional, debate. The cryptocurrency-based blockchain economy is an asset-based economy, while the fractional reserve banking system based on fiat currency is a debt-based system. High volatility and unexplained falls, risks of hacking attacks are among the reasons why many still shy away from cryptocurrencies and think of it as “magical Internet money.” In a free, decentralized global market where volatility is not suppressed by trillions of central bank-created QE, the market becomes more volatile as it becomes more efficient, acting faster to information changes.

 

Some say they like blockchain but they do not like cryptocurrencies such as Bitcoin, Ether and Litecoin. This argument is like those in 1994 arguing a privately controlled Intranet is better than a decentralized Internet. A private blockchain without a trustless and distributed consensus-based cryptocurrency is nothing more than a shared Intranet. Cryptocurrency proponents feel that blockchain, or distributed ledger technology, could soon give rise to a new Internet era even more disruptive than the current one.

Blockchain’s ability to generate unprecedented opportunities to create and trade value via cryptocurrencies will lead to a generational shift in the Internet’s evolution, from an Internet of information to a new Internet of value. Governments that embrace cryptocurrencies can reap enormous benefit by using the money native to the Internet. If a country cracks down on Bitcoin and cryptocurrencies, it would be like saying no more TCP/IP and innovation.

Countries that do adopt the Internet of value are going to be much better off. The Internet has allowed massive disruption: Netflix now threatens Hollywood, Spotify dominates the music business, Google and Facebook dominate advertising and media businesses.

Cryptocurrencies have the potential to do that to the finance industry. The new finance industry will settle on where the innovation will be for smart contracts and cryptocurrencies. It is Silicon Valley’s replacement for the old finance infrastructure. Traditional bankers in suits were the miners of the old generation, getting paid in the currency of the central bank run by un-elected officials. The new Federal Reserve is the cryptographers.

The new owners of the financial infrastructure are the holders of cryptocurrency, which is, or could be, anybody. Many today would like to have invested $100,000 into Facebook in 2004 if given the chance. The existence of cryptocurrencies today is a second chance. For the first time, open-minded early adopters can make a Silicon Valley venture capital style bet on the future of money and finance. The future is generally an uncertain place. Like any other investments, cryptocurrencies carry risks. However, the risk of not owning the native money of the Internet is even riskier. 



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