The Somali case. Today there are three Somalias and all are growing at a fast pace and enjoying good economic health thanks to Chinese and Arab investments. From 1991 to 2012, however, much of the area covered today by the three Somalias was ravaged by civil war and radical Islamism. State structures collapsed and the central bank was bombed and ceased to function. For more than two decades, the old Somali shillings, issued by a bank that no longer existed and guaranteed by a state that no longer existed, continued to be used for commercial transactions.
The banknotes, increasingly worn out, were in finite quantities and since the war economy was flourishing in its own way, the phantom shilling continued to appreciate against the dollar. Given the strong demand for money, some counterfeiters thought of issuing more shillings, perfectly recognizable as counterfeits. These fake shillings were accepted by the public and exchanged at par with the real ones. Then, in waves, more fakes arrived. These too were accepted, but at a discount.
Moral. A good currency does not necessarily have to be issued by a state (history is full of coins minted by private individuals) but to be accepted it must be around in such quantities as not to create too much inflation, on the one hand, and not to choke growth , exchanges and debtors on the other.
Cobalt blue. Kobalt is German for goblin. In the imperial gold mines, when the miners of the Middle Ages found base cobalt instead of the coveted gold, it was said that it was the bad goblins who had substituted one for the other. However, a few centuries pass and it happens that gold is relegated to a comfortable but modest niche, while cobalt, widely used together with lithium and manganese in batteries, appears to be the metal of the future but also of the present, given that its price from beginning of 2017 has already doubled).
Moral. Nothing is forever. Many things that appear intrinsically valuable are actually historically and culturally determined. As a consolation for gold enthusiasts, it can be said that cobalt coins would be equally beautiful and luminous, but would also be radioactive, carcinogenic and toxic.
Past and future. Making a skeptical and disgusted face just hearing about bitcoin gives us a strong aura of seriousness, maturity and severity. It's gravitas. On the other hand, assuming an excited and fascinated expression gives us an aura of modernity and makes us appear to be in step with the changing times at a speed that we still struggle to understand, but at least there are those who try.
Moral. Bitcoin came to earth to divide fathers from sons, the serious from the brilliant, the cynics from the fearful. It is here to confuse men and to generate strong passions in them. That's why the CME and CBOE will launch futures and options starting Sunday evening at 17 p.m. Chicago time. They need longs and shorts, futurists and traditionalists, visionaries and skeptics, and they will find them in abundance, both of them. And this is why the most objective, clear and concise analysis of the merits and limits of cryptocurrencies that we have ever read so far is published on the Cme Group website in two episodes. They have to appeal to both supporters and detractors, and they do well with both. Let the games begin.
Inflationary or deflationary. The global money supply is about seventy trillion dollars. Gold adds two more. Cryptocurrencies, all of the thousand that circulate, are close to half a trillion. The amount is still small, but that half trillion, out of the blue, might appear inflationary. But be careful, bitcoins are not given away and dropped from the helicopter, but bought and sold. The effect is therefore the same as a rise in the stock market and with the global stock exchanges having gone from 34 trillion in 2008 to more than 80 today, the set of cryptocurrencies is equivalent to a share rise (which no one would particularly complain about) of 0.4 per hundred.
However, if bitcoins extend their area of acceptance and become hypothetically the most widely used currency, their effect would be powerfully deflationary. By construction, bitcoins tend to be finite in number. In other words, they will be 21 million in 2140. If the quantity of a currency is fixed, the growth of the GDP must be accompanied by a drop in prices. Such a fierce monetary condition did not even exist in the golden days. In fact, the mines extracted between one and two per cent of the quantity already in circulation every year and this was generally enough to accommodate the growth of the GDP without causing prices to rise or fall.
Due to this characteristic, bitcoin will never be used to contract debts. In return, it will continue to be loved by those who want a store of value not subject to the whim of a sovereign money maker. Today's fiat money, with its slow depreciation of one to two per cent a year, is loved by debtors without burdening creditors in a confiscatory way. The positive social function of bitcoin (and gold) is in any case to offer an alternative to the currency of states, moderating their desire to abuse seigniorage by printing too much money to buy consensus. A private alternative to the state monopoly on money is a form of biodiversity that may be interesting to preserve.
Criminal currency. What did the mafias use before cryptocurrencies? The 500 euro banknotes and, before that, the 500 and 1000 marks, more common in Kosovo than in Germany. Everyone knew it and the Bundesbank was the first to always strenuously oppose the adoption of smaller denominations. And what are central banks studying today to abolish cash on the day when, in the next recession, they will try to apply negative rates of 4-5 percent on deposits? They study the blockchain.
Environmental impact. It's true, the bitcoin transaction validation process is the safest that exists, but it consumes an enormous amount of energy, equal to that consumed by the whole of Denmark, and heats up the planet. The way the bitcoin mechanism is designed, however, the energy required will not increase beyond current levels in the event of an increase in transactions and will gradually decrease. Be careful not to be a one-way environmentalist. Cobalt for the electric cars that warm our hearts so much will require the opening of many new mines in the heart of the Congo rainforest and will further destabilize a country which, precisely because of its wealth, has been plagued by civil conflicts of all kinds for decades which have caused millions of victims and refugees and much more significant environmental damage than that caused by bitcoin.
The risks. The biggest threat to cryptocurrencies comes from within. The first problem is governance. We are already seeing how the elegant simplicity of bitcoin begins to be messed with the issuance of parallel special series that fragment and confuse the market and make it easier for intermediaries to abuse. Then there is the indiscriminate proliferation of new currencies. Of course, natural selection will allow only a fraction to survive, but many investors will fall victim to improvised or fraudulent initiatives. Sooner or later, on the other hand, someone will think of further engineering cryptocurrencies by creating volatility derivatives, leveraged ETFs of volatility derivatives and other nice instruments with a high risk of implosion or explosion. Incidents may involve clearing houses and therefore, potentially, anyone dealing in derivatives of any kind.
Regulators, who are currently observing events with a scientist's attitude (the same spirit with which they observed the proliferation of new financial technologies in 2007), could at a certain point react and insert sticks of all kinds into the machinery. The taxman, still slumbering and technologically in trouble at this stage, could wake up and demand its share. Theoretically, cryptocurrencies could simply be driven underground. Of course, the longer you wait to regulate them, the more embarrassing, difficult and risky it becomes to intervene on an ever-widening market. But let's not forget that Roosevelt, in 1934, did not hesitate to outlaw anything less than gold (which in those days was far more important than cryptocurrencies are today) because he competed with his devalued dollars.
Cryptocurrencies (and above all the blockchain as a mechanism for validating contracts of any kind) have such technological potential to ensure their survival and development in the coming decades. However, this does not exclude (and indeed makes it more probable) almost fatal accidents followed by rebirths and new accidents. Of the technology companies of the XNUMXs, very few are still around.
The rest. The markets are in place. In a few days, we'll know whether the new US corporate tax rate will go into effect in 2018 or 2019. In the grand scheme of things, nothing changes, but for the first quarter of next year, it makes the difference between a markedly lower start and a moderately up.
