Blockchain Will Cause Rapid Devaluation of the U.S. Dollar
A little over two months ago, Comment Section posted an article entitled Blockchain Will Cause Higher interest Rates and a Better Third World. In the blog post, we describe how third world countries such as Venezuela, can switch to a blockchain-based cryptocurrency such as Bitcoin to produce financial stability within their nation. Venezuela, with an inflation rate of 720% for the year up through September, was and still is the poster child for government incompetence with regard to their domestic reserves. Also pointed out in the post, was how the Venezuelan citizens (like many other people in third world countries) can’t afford food or toiletry items necessary for everyday life. This brought us at Comment Section to the conclusion that there is no downside in the short-term for third world nations to have a monetary policy based off of cryptocurrencies.
Fast forward to today, the last day in November and the narrative of that story has progressed at a rapid pace. There are no governments that are dedicated to the use of bitcoin or another cryptocurrency yet, but usage not only in American markets but international has increased exponentially. In fact a lot of analysts such as David Faber at CNBC believe much of the boom in bitcoin is because of the populations of third world nations using the currency over their domestic one. This week he specifically stated Venezuela as a reason why bitcoin continues to go up by leaps and bounds.
Now, bitcoin has become so massively popular it has become impossible to ignore. It is common for landlords and real-estate firms to now accept bitcoin as a form of rent from their tenants (Google: landlords that accept bitcoin). But bitcoin is only the beginning. Other cryptocurrencies such as ethereum are making a splash. And there are private talks amongst coding communities in deep places on the web of a cryptocurrency being created that can operate and be transferred between multiple blockchains (whereas bitcoin and ethereum are stuck to one singular blockchain). If the talks of this cryptocurrency are true or such a thing is feasible, it may spell the fate of the U.S. Dollar.
I don’t mean to over dramatize the point; the U.S. has many ways of enforcing regulation and manipulating the market to slow down the eventual demise of the dollar. At some junction due to bitcoin or ethereum or some yet-invented blockchain cryptocurrency the dollar is going to be strongly devalued. It isn’t about which cryptocurrency (or combination of multiple cryptocurrencies) it will be, but the point is that now sitting money has another thing biting at it besides run of the mill inflation.
That enemy to the U.S. dollar is drastic devaluation at the hands of blockchain-based cryptocurrency. Surely, certain pundits will point to the fact that the U.S. dollar is backed by federal debt which makes it highly secure and not susceptible to the aberrations of blockchain and bitcoin. I’m going to use a Malcolm Gladwell term to argue the opposite case. That term is ‘tipping point’. Right now the U.S. Dollar is by far the standard of currency for the world. At any particular day across the world, more transactions are made with the U.S. Dollar (or securities based on the U.S. dollar) than any other currency in the world.
Now for a moment, think of the exponential growth bitcoin has had in the past years and how many transactions have been processed over its blockchain. Transactions, that would’ve been processed in U.S. Dollars had it not been for the cryptocurrency.
Today’s Wall Street Journal shows the nearly completely vertical rise of bitcoin relative to other bubbles in the past: (I apologize I couldn’t get a higher resolution image)The orange line going completely up represents bitcoin. The other blue lines represent the rise of various other bubbles such as the .com bubble. To detractors who say bitcoin is only a bubble- it may be, but blockchain is here to stay. And now that the metaphorical rabbit is out of the hat, cryptocurrencies are here to stay whether it be bitcoin or its successor that operates on numerous blockchains. Also, I think calling it a bubble is obviously ignoring the movement conveyed by the graph. We have had many bubbles in our nation’s history, but you can observe from the WSJ graph that this isn’t acting like one we’ve ever seen, it is an entirely different animal. What that means for the future of it, I don’t know.
And now that we have established the startling rate at which bitcoin has gone up, and what recent graphs (such as those seen in the Wall Street Journal have emphasized), is that less and less transactions are done in U.S. dollars and more are through cryptocurrencies such as bitcoin (or ethereum). This is where the ‘tipping point’ comes into play. There will be a point, sooner rather than later where there are more transactions done worldwide through cryptocurrencies then there are transactions through the U.S. dollar. One of the things that has made our currency so strong throughout the years is that it was the standard for international business regardless of what country you were in. If we are to believe that current market trends will continue, then it is safe to assume there will come a time where blockchain managed cryptocurrencies will outgun and overpopulate the vast amount of monetary transactions internationally as well as domestically. This will in effect cause a steep devaluation in the U.S. dollar that no matter how much the government tries to maintain- they simply won’t be able to. I wouldn’t be sitting on a pile of cash right now that wasn’t diversified amongst securities or commodities for that reason.