Throughout history, the perceived value of financial sovereignty has reigned supreme. Rulers and government leaders understand that to control currency is to control the people and is an essential tool for protecting the wellbeing of constituents. Power to control the levers that influence monetary value is necessary for counteracting external influences that can create economic instabilities such as inflation or recession.
The problem with financial sovereignty is that it can complicate cross-boundary commerce, trading, and economic integration. Below, Dan Calugar, a successful investor and tech enthusiast, will share an overview of the reasons currencies evolve, how they meet political and economic needs, the invention of cryptocurrency, and how Bitcoin gained market share.
Modern technology has created previously unimaginable opportunities for global economic integration. Through resale and distribution giants such as Amazon and Alibaba, a small merchant in the microstate of Liechtenstein can sell their goods to buyers worldwide as the world becomes more economically integrated, market pressures for financial integration increase as well. There are significant disadvantages to both the buyer and seller when they use a currency different from one another. It is difficult for a buyer in New York City to estimate the relative value of an item sold by our Liechtenstein merchant if the Manhattanite uses U.S. Dollars and the Liechtensteiner uses the Swiss Franc. Still, there are competing political pressures to retain financial sovereignty.
More currencies and countries exist today than ever before. It is the existence of these two competing desires – financial sovereignty versus integrated global commerce – that has given rise to the popularity of cryptocurrency. The promise of cryptocurrency is that no one can manipulate the levers that control its value, so it rises above political financial sovereignty. It is also ideal for global commerce because it simplifies and balances the complexities and costs of cross-currency commerce.
The technology that makes cryptocurrency possible is blockchain. A blockchain is a collection of blocks. In each block is a collection of transactions. Because the nearly 50,000 computers running the blockchain have the same list of blocks and transactions and can transparently see these new blocks being filled with new Bitcoin transactions, no one can cheat the system.
While there are about 7000 cryptocurrencies today, Bitcoin has dominated the market since 2009 when the first bitcoins were mined. Bitcoin accounts for 57% of the cryptocurrency market. Being the biggest name in crypto affords it a worldwide acceptance that smaller cryptos don’t have. Many investors argue that Bitcoin is the best cryptocurrency to buy.
Cryptocurrency, including Bitcoin, is not strictly legal tender but is treated as property for tax purposes. It is legal to use in the U.S., Japan, the U.K., and most other developed countries. Advocates for the use of Bitcoin generally resist attempts to regulate its use and product, believing that it is the lack of governmental control that drives universal acceptance of cryptocurrency.
Like other currencies, Bitcoin is not without the risk of scams. Many of the “old school” scams have their digital currency equivalents. A call from someone claiming to be an IRS agent demanding a back tax payment, pump-and-dump schemes to inflate value artificially, and counterfeits all have their Bitcoin version. There are also hackers using malware looking for ways into an unsuspecting victim’s Bitcoin wallet.
Until a new technology comes along to knock Bitcoin off its perch at the top of the cryptocurrency hierarchy, investors have confidence that it will continue to grow in popularity and acceptance. If cryptocurrencies will overcome the political pressure to support financial sovereignty, it is still a long shot.
About Daniel Calugar
Daniel Calugar is an experienced investor with a background in business, law, and computer science. As a tech enthusiast, he became interested in computer science and pursued it before obtaining business and law degrees. Dan developed a passion for finance while working as a pension lawyer. He leveraged his technical skills to build computer programs that would analyze vast amounts of data and explore trading strategies to identify more worthwhile investments.