Creative destruction of the currency

Creative destruction of the currency

Cryptocurrencies are back in the news. But in a different way. And this time, the consequences for you could be severe.

I no longer believe you can ignore cryptocurrencies, even if you wanted to.

Let me explain why. And no, this isn’t going to be all about cryptos themselves. It’s going to be about the consequences of cryptos. The fallout in all financial markets. For you and your money, whether you invest in them or not.

But why am I warning you now?

Facebook is preparing its Libra cryptocurrency. Japan’s version of Whatsapp has approval to create its own. And there are countless more in the works.

What distinguishes the new crop of cryptos is they are more useful. More convenient, safe, cheap, stable and fast. Than what? Than the likes of bitcoin for starters. But here’s the key:

What if cryptocurrencies become better than our Aussie dollars?

Or should I be asking when it’ll happen?

You can no longer ignore the cryptocurrency threat

My desk-mate here in London, Boaz Shoshan, put it like this: “The pound will go the way of the post office. They’re all over the place, but nobody really uses them anymore.”

Imagine if you owned shares in the post office. They would’ve performed rather badly over the last few decades.

Well, you hold Aussie dollars, right? And probably Aussie dollar denominated investments like bonds.

If cryptocurrencies begin to feature in everyday use, what will they do to the value of our normal money? What will they do to the demand for government bonds, which are denominated in fiat currencies like dollars?

If people use dollars less and less, increasingly switching to cryptos, the value of your investments and money could crash.

This isn’t some abstract idea. It’s what happens, historically speaking.

Economists call it “creative destruction”. When a new and improved technology comes along, it doesn’t just create a new industry. It also destroys an old one.

When it comes to cryptocurrencies, the banking system, the value of money and the value of bonds are on the list of things set for destruction.

Then there’s Gresham’s Law. The idea that people will hold on to cryptocurrencies and spend/dump their Aussie dollars and investments. Which will destroy the value of our currency and investments.

But could cryptos really feature in day to day spending? Are they a viable alternative to money?

They certainly aren’t yet. But think about how long it took the printing press, steam engine and internet to have an impact. Decades. And cryptos are on the move, fast.

The Aussie dollar is doomed

For some reason, it’s the price of the big cryptocurrencies that get all the media attention. But perhaps it’s their viability and usability that you should be watching.

At some point, cryptocurrencies will begin to compete with dollars. I think that’s what’s changing in the latest round of cryptocurrency innovation. Companies that allow you to actually easily use the crypto they issue are popping up.

Like I said, this is what happens, historically speaking. Both recently, with cryptocurrencies being used in places like Venezuela and China. And going back centuries, where people would switch to foreign currencies or precious metals if their government undermined the financial system with QE.

Still not convinced? Here it is, front page news at Bloomberg on Tuesday:

A cryptocurrency to rival the US dollar? Is it possible? The politicians are taking it seriously enough to panic about it. The same Bloomberg article mentions several responses, including this one:

French Finance Minister Bruno Le Maire said Libra shouldn’t be seen as a replacement for traditional currencies and called on the Group of Seven central bank governors to prepare a report on the project for their July meeting.

“It is out of question’’ that Libra “become a sovereign currency,’’ Le Maire said in an interview on Europe 1 radio. “It can’t and it must not happen.”

Competing currencies mean evolution and extinction  

Only weeks ago, the same French Finance Minister announced he’d plough 4.5 billion euros of government money into cryptos and related research. "We are pioneers" he told an audience. Now he’s trying to stop innovation… because he realised what it means for the euro and the financial system.

The trouble is, cryptocurrencies are hard for the government to control. That’s why they boomed in places like China and Venezuela in the first place.

In coming years, you’re going to face a rather interesting choice. You’ll have to pick a side. Who do you trust more with your money? Cryptocurrencies, or governments and their banking systems?

If you think that’s an easy choice, you’re simply wrong. Cryptocurrencies are yet to change the game. And governments will respond with crackdowns. Hopefully the finance and banking industry will respond with some improvements too.

We’re seeing the beginning of a conflict between governments and technology. The prize is the financial system itself. And you could be the collateral damage.

Until next time,

Nick Hubble Signature

Nick Hubble,
For The Daily Reckoning Australia