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What Is Happening to Money?

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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

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Is Babel, China-based crypto-lending giant, in deep trouble?

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China-based Babel Finance has been a prominent crypto-lending company for a while now. However, it has been in troubled waters recently. The trouble, in fact, came in full force after the Black Thursday crash in March.

Tether trouble

According to an investigative report by Colin Wu, Babel Finance was badly affected by the crypto-market crash that took place on 12 March. In fact, the company allegedly lost almost all its funds and customers due to an acute shortfall.

Days before the crash, the crypto-lending company had claimed to have $380 million in outstanding loans, as of February, according to reports. The Co-founder of the company, Felix Yang, had then noted the growing demand in the market for crypto-lending businesses, with outstanding loans growing from USDT worth $52 million in Q1 2019 to $289 million by end of December 2019.

However, as per Wu, Babel had advertised a $300 million loan out of which $20 million was a borrowed sum. Wu explained the business fundamentals of Babel by stating,

“The core of Babel’s business is to absorb funds at a low cost, including the users’ collateral to borrow in series, to obtain more BTC and then to bet on rising BTC prices to obtain profits.”

At the time of the crash, the active trading of Bitcoin had led to huge liquidations on the platform. There was evidence of customers liquidating their positions, equaling over 3000 to 4000 Bitcoins, although there was speculation that the company was trying to protect customers from liquidations. Wu added that “Babel defaulted on the funder and suffered pressure from the funder.”

BlockFi, Genesis, Gemini, Coinbase-backed Babel

Prominent names in the crypto-business – BlockFi, Coinbase, Gemini, and Genesis have been among those that have reportedly backed the Babel Finance Group. However, after the crash on 12 March, its overseas funding was put to the sword as BlockFi and OSL interrupted their cooperation, along with Tether.

The report added,

“Recently, it has resumed. The partner that continues to support Babel is Genesis. Previously, BlockFi gave a pledge ratio of 1:1.”

In fact, Twitter user @btcking555 highlighted this baffling incident as a “scam,” suggesting that BlockFi had “cancelled partnership.” However, BlockFi has not confirmed this, as of yet.

At the time, Tether had extended its replenishment period from 48 hours to 1 month to help Babel, Wu claimed, with the latter owing Tether 5000 BTC at the time, despite having only 200 BTC.

“Babel has blocked its fate on Tether. It believed that Tether will give it time, and Tether can print money indefinitely. Tether did not respond to Wu’s consultation, suspected to be worried about its behavior will bring legal risks and other borrowers will also request extension”

About Babel investors

Crunchbase data suggests that there are three major investors in the company – Dragonfly Capital Partners, Parallel Ventures, and Next Generation Capital. However, its core customers and partners included f2pool, NGC, KuCoin, BigOne, and others.

Apart from a partnership with F2Pool, Poolin was another mining pool that had partnered with the company during its inception. However, according to Wu, that partnership was suspended in time too.

Source: https://eng.ambcrypto.com/is-babel-china-based-crypto-lending-giant-in-deep-trouble

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Cardano, Waves, Enjin Price Analysis: 26 September

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Cardano registered a bearish pattern on the charts, one that validated the previous pattern to some extent, before the markets shifted dramatically to spur ADA upwards. Waves was in the oversold territory and might be forced to drop further in the coming hours. Enjin, however, appeared directionless in the market as buyers and sellers each negated the other’s effect on price movement.

Cardano [ADA]

Cardano, Waves, Enjin Price Analysis: 26 September

Source: ADA/USD on TradingView

ADA broke out to the downside of a bearish flag pattern, one that projected ADA would drop to $0.073. However, ADA had support around the $0.077 region and also displayed a bullish divergence, highlighted in pink.

The RSI went into the oversold region as ADA reached a resistance level around the $0.1 zone. If the RSI stays above 50 in ADA’s coming pullback, and the support at $0.91 holds, it would be quite bullish for the crypto-asset.

Waves [WAVES]

Cardano, Waves, Enjin Price Analysis: 26 September

Source: WAVES/USDT on TradingView

WAVES dipped beneath its support level at $2.31 and looked to be headed lower, but went into the oversold territory on the Stochastic RSI. WAVES mounted a weak fightback to rise above the $2.31 level twice, and at the time of writing, was trading at $2.50.

However, the Stochastic RSI showed consistently overbought conditions. If this plays out as expected, the latest hike in WAVES’ price will be just a bounce on a wider downtrend, which can be expected to resume in the next few trading sessions.

After $2.3, the next level of support for the crypto-asset lay at $2.

Enjin [ENJ]

Cardano, Waves, Enjin Price Analysis: 26 September

Source: ENJ/USDT on TradingView

Enjin showed a lack of direction in the market. The Aroon indicator showed that neither an uptrend nor a downtrend was dominant, with one replacing the other every few days. At the time of writing, it was trading just above a level of support, and ENJ held a value of $0.156.

The trend appeared to be bullish as the Aroon Up (orange) crossed above the Aroon Down (blue). However, it remains to be seen if this would continue or if the price would be forced back down once more.

The Chaikin Money Flow also backed this conclusion as it was within the discretionary 0.05-neutral zone, indicating that buying and selling pressure were in balance.

Source: https://eng.ambcrypto.com/cardano-waves-enjin-price-analysis-26-september

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NYC Auction House Features Bitcoin-Themed Art Containing Original Code

Christie’s New York auction house is featuring a piece of bitcoin-themed artwork that represents a portion of the protocol’s original launch code.

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A massive piece of artwork containing a portion of bitcoin’s code is being auctioned at Christie’s New York. 

According to the official website, Christie’s auction house in New York is hosting a massive piece of bitcoin-themed artwork. The project, dubbed “Block 21,” is one of forty pieces of art in a series depicting the entire 12.3 million digits of bitcoin’s original code. 

Block 21 contains 322,048 digits of hexadecimal code, some inscribed in gold. The art collection, which currently spans the globe, is more than 50 meters long in total, with the entirety of bitcoin’s historic v0.1.0 code hand-inscribed on its surface. 

Ben Gentilli, the artist behind the project, calls the collective series “Portraits of a Mind.” He described each piece as a digital fingerprint carved out of paint and attributed the artwork as a portrait of bitcoin’s anonymous founder Satoshi Nakamoto. 

Gentilli told Decrypt, 

Bitcoin’s original codebase is like a historical document, and I wanted to celebrate it and preserve it in the same way as a document like the Magna Carta. But I also wanted to try and answer the question of how one might make a portrait of Satoshi Nakamoto, when there is no image of him.

He continued, calling Portraits of a Mind a decentralized piece of art reflecting the underlying nature of bitcoin. 

Featured Image Credit: Photo via Pixabay.com

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