Events that will shape the next decades of our future are happening now.
Before we get into the details, I’d like to explain my background briefly. I’m a Ukrainian immigrant who moved to the U.S. at a young age. My interest in financial markets started in college. Shortly after my graduation, I began my professional career at one of the biggest Wall Street currency brokerages. The company provided access to the most liquid market, called Forex. It was part of my job to understand capital flow, liquidity, and execution. I’ve provided solutions for traders, hedge funds, and institutions.
My interest in crypto started when bitcoin was below $100. At the time, I was more fascinated by the technology and its potential rather than the rapid price rise. It took me a couple of years to learn and understand the functionality and purpose of this new market. There are many explanations and theories; however, I will describe the one that resonates with me the most.
I’ve carefully watched cryptocurrencies disrupt capital restrictions.
Throughout my career, I was able to see how countries manipulate values of their fiat currency through interest rates to stay competitive in global trade.
We’ve seen Central Banks across the world actively decrease interest rates to devalue their currency. For example, let’s take two countries like China and the U.S. China has been dominating the manufacturing business for decades using the value of their currency relative to others. Their trade restrictions translate into them capitalizing on the cost importers will have to pay for goods. If a product is priced at 1,000 Yuan and the value of Yuan per USD rises, this means that U.S. importers will spend more dollars to buy the same product.
This is a common strategy used worldwide to stay competitive. You may ask, how do interest rates affect the value of currencies? If a central bank sets lower interest rates, it promotes cheap credit which, in return, increases the money supply. On the other hand, it steers investors away from holding a country’s currency because of the lower paying interest.
Coming from a basic concept of supply and demand, we know that more supply and less demand brings the prices lower. Currency devaluation is also known as inflation. The loss of currency value does not benefit ordinary people that try to save money. Besides the fact that your savings bank account is yielding lower interest, your money is losing value due to inflation. Keep in mind that I’m talking about the actual inflation that includes food and energy. Some investors try to move their capital elsewhere to chase a high return on their money and offset inflation. However, capital restrictions have made this option difficult.
If a country is suffering from geopolitical issues and tariffs, they can merely use bitcoin as a means of exchange for goods and services.
That sounds great, but there is undoubtedly a dark side to this.
An excellent example of that would be Russia. The Russian ruble has lost more than 65% of its value against the dollar since 2014. This means that an ordinary Russian citizen that wants to visit the U.S. for vacation will have to pay more for the trip and may not be able to afford this luxury anymore.
If you’re going to transfer USD from a Russian bank to the U.S., you will come across limitations and hefty fees. For example, if you want to move $100,000 from a Russian bank to the U.S., you will need to split the transfer into $10,000 increments that carry a 3.3% wiring fee. Meaning your full wire transfer will take multiple weeks to transfer, and will cost $3,300. This is a form of capital control that limits the options for people to move money and holds them hostage to the inflation that the country has.
Now that we understand basic capital flow and how countries use different strategies to restrict the movement of your money, let’s discuss how cryptocurrencies are disrupting that area.
Today, we can convert that same $100,000 from Russia into bitcoin and send it anywhere for a negligible fee. This way, people can move capital freely and take advantage of investments outside of their country to battle inflation or other economic issues. Since it’s decentralized, this type of platform gives an opportunity to nations battling restrictions in the global trade arena. If a country is suffering from geopolitical issues and tariffs, they can merely use bitcoin as a means of exchange for goods and services.
That sounds great, but there is undoubtedly a dark side to this. A country with a high concentration of corruption and terrorism that is isolated from global trade with sanctions and tariffs can now participate in exchanging goods without restrictions. Nevertheless, giving people more control over their capital movement is overall a good thing. Countries like Greece suffer from economic issues that result in austerity measures like taking money directly from people’s savings account.
Before we discuss my opinion about crypto, let’s briefly cover what money is. According to IMF, it’s anything serving as a store of value. Which means people can save it and use it later — smoothing their purchases over time; Unit of account. That is, providing a standard base for prices; or medium of exchange, something that people can use to buy and sell from one another. In short, money is a current medium of exchange for goods and services. Central Banks, like the Federal Reserve, control the value and transactions kept in centralized banking ledgers.
Even though each bank is considered an independent institution that can hold and protect your money, previous events show otherwise. As we saw in 2008, too-big-to-fail institutions posed a risk to the collapse of our current monetary system we call money. Nobody believed that a single failing bank could put the entire financial system in jeopardy. In short, once the Lehman Brothers went bankrupt, other major banks were on a path to fail as well.
The platform that is relying on a single institution to protect the integrity of your money and value is not as safe and efficient as we thought. Bitcoin created a two-part solution for this:
- First, there is a network of decentralized computers that keep track of transactions and value each currency owner has.
- Second, there is a limited supply of bitcoin which means that more can’t be created to devalue holdings or create inflation. This also creates a scarcity effect, which is valued based on supply and demand structure.
Since millions of computers keep track of integrity of transactions and value, no single place would be vulnerable to risks that the financial crisis presented.
My overall outlook for crypto markets is positive.
Since this is a new market, we will continue to see volatility and more regulations.
This is a natural progression for any new disruptive market. As this market matures and volatility slows down, we will see more use of this technology across the world.
In my next article, I will focus on topics related to the financial market adoption of cryptocurrencies and blockchain technology.