Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche


Is Cryptocurrency Really Money?

Facebook’s Project Libra raises the interesting and divisive question: “is cryptocurrency really money?” Moreover, Project Libra leads to the disruptive question should we allow corporations to issue money?

Predictably, some prominent politicians; including U.S. President Donald J. Trump (R-New York) and U.S. Senators, are on the warpath against Libra. For example on 9 July 2019 Trump Tweeted, “Facebook Libra’s ‘virtual currency’ will have little standing or dependability.”

What Value will Libra Have?

 What happens if Mr. Market values Libra like Facebook stock? Under those circumstances, Libra could have an instant Market Capitalization of $528.858 billion, or more, when it appears.

Plus, Libra could have an instant Coin Price of $182.44 or higher. To explain, that was Facebook’s stock price was on the morning of 15 July 2019.

Consequently, Libra could immediately become the most valuable cryptocurrency. Moreover, Libra’s value could over twice that of the next most valuable altcoin. To explain, CoinMarket Cap estimated, the most valuable cryptocurrency; Bitcoin (BTC), had a Market Capitalization of $179.373 billion, and a Coin Price of $10,003.17 on 15 August 2019.

Will Libra be as Valuable as Facebook stock?

I think speculators could base Libra’s value on Facebook’s financial numbers because will be the only data they have on Libra. Plus, some people could confuse Libra with Facebook stock.

Hence, they could pay the same price for Libra Token and Facebook stock. Moreover, exchanges and exchanges will be happy to promote this belief, so they can make more money by selling or betting against Libra Tokens.

Yes, this behavior is irrational but investors, speculators, and markets are irrational. As a result, Facebook could own the cryptocurrency market until other companies enter it. Remember, Mr. Market is insane particularly with new instruments like cryptocurrencies.

The Real Danger from Project Libra

Trump is right and wrong about Project Libra. I think the President is correct to view Libra as dangerous. However, the President does not see the true danger from Libra.

The danger is Libra could quickly become more valuable and more widely accepted than many national currencies. Such a valuation is likely because Facebook is a very profitable and successful company. For example, Macrotrends estimates Facebook had a $13.579 billion gross profit for the quarter ending on 30 June 2019, a 23.25% increase over the previous year.

Moreover, Mark Zuckerberg operates the world’s greatest media empire with 6.225 billion users worldwide. In detail, Statista estimates he Facebook Empire comprised 2.325 billion Facebook users, 2.325 billion WhatsApp users, 1.3 billion Facebook Messenger users, and one billion Instagram users in July 2019.

How Libra Could Destroy National Currencies

Thus, Libra could have a cryptocurrency with a $182.44 Coin Price it could instantly make available to 6.225 billion people.

What happens to lesser national currencies such as the Polish Zloty, the Argentine Peso, and the Egyptian Pound when every citizen can instantly access a better currency through her phone? The Egyptian Pound had an exchange rate of 6₵ ($0.06) to the US Dollar on 13 August 2019 for instance.

The US Dollar and the Euro are probably safe from Libra but what about the Chinese Yuan and the British Pound Sterling? Notably, the People’s Bank of China (PBOC) is devaluing the Yuan to Yuan to counter President Trump’s latest round of tariffs, CNBC reports.

Could Project Libra Profit from Hyperinflation?

Meanwhile, many people think the Pound Sterling could collapse because of Brexit, The Guardians Nesrine Malik speculates. What happens if tens of millions of frightened British and Chinese convert all their cash to Libra to protect their money from government stupidity?

Notably, hyperinflation in Venezuela is fueling a surge in Bitcoin use in that country, Investopedia reports. In addition, over 2,200 Venezuelan merchants accepted the DASH (DASH) cryptocurrency in November 2018, Inverse claims.

Interestingly, DASH launched DASH Text a short messaging service (SMS) peer-to-peer (P2P) payment solution similar to Libra’s proposed Calibra Wallet in November 2019, Market Mad House reports. Theoretically, DASH Text could allow you to “text” DASH from Miami to Caracas via Telegram or WhatsApp.

A Scary Cryptocurrency Scenario

Thus, Americans could theoretically send millions, or tens of millions of dollars in DASH to people in Venezuela instantly.

The potential havoc cryptocurrency P2P transfers could wreak is vast. For example, how is Nicholas Maduro supposed to stay in power if every soldier in his army gets this text: “the moment Maduro goes, we will send every Venezuelan soldier $1,000. If Maduro stays, you get no money.”

Such a text could prompt broke Venezuelan soldiers with families to feed to stay in their barracks during a coup. Or worse shoot any officer who orders them to defend the president.

The last coup against Maduro collapsed because the army refused to go along, CNN claims. Cryptocurrency money transfers with a P2P app could quickly the change the army’s loyalty during the next coup. Libra could make cryptocurrency coups inevitable by putting the tools to bribe anybody anywhere into everybody’s hands.

A Libra Stablecoin could Make Things Worse  

Greater disruptions could occur, if Libra offers a stablecoin. To explain, a stablecoin is a cryptocurrency that contains a smart contract or digital robot.

They program a stablecoin’s smart contract to release $1 or €1 from a trust account when you spend the stablecoin. Thus, a stablecoin is theoretically worth $1 or €1.

How can lesser currencies like Mexican Peso survive when the average citizen can quickly access dollars or Euros through her phone? If Facebook offers an easy to use point-of-sale (POS) solution for Libra, merchants in some countries could stop accepting the national currency. Remember, DASH is proving that such a solution can work and find a market.

Frighteningly, Stablecoins already exist and are becoming widely available. For instance, CoinMarket Cap estimated the most popular stablecoin Tether (USDT) had a $4.039 billion Market Capitalization on 15 July 2019.

Should We Allow Corporations and Banks to Issue Money?

Corporate cyprotcurrencies like Libra could lead to total privatization of the economy by privatizing money.

Private money could be a nightmare because its issuers could deliberately restrict its use to certain segments of the population. For example, only allowing the rich; or people with “good credit ratings,” to use the Corporate Coin.

Commendably, Zuckerberg wants to make Libra available to everybody but other corporate altcoins may not be as democratic. For instance, the cryptocurrencies, Big Banks like Goldman Sachs (NYSE: GS) and JPMorgan Chase (NYSE: JPM) are supposedly working on.

 A supposed Walmart (NYSE: WMT) cryptocurrency could be more problematic. Walmart, could make change only in Walmart Coin that recipients could only spend at Walmart, for instance. Remember, Walmart is a retailer that could make more money by limiting customers’ ability to shop elsewhere.

Coin Telegraph claims Walmart is exploring the possibility of issuing its own stablecoin. In addition, Walmart Coin could work like a rechargeable gift card, that could give Walmart an unfair edge over other retailers by allowing it to extend large amounts of credit to shoppers. Notably, Walmart has applied for a “digital currency” patent, Coin Telegraph claims.

 Should we be Afraid of Private Money?

Privately-issued currencies are not a new concept but they represent a paradigm shift in finance.

To clarify what people like President Trump think of as “money;” bank notes issued by a Treasury or government-owned central bank, has only existed for around 150 years. In fact, the Bank of England; the United Kingdom’s central bank, was a private institution until 1946.

Thus, the money they paid His Majesty’s soldiers, airmen, and sailors with in World War I and World War II was issued by a private institution. Incredibly, the British monarch’s picture did not appear on British banknotes until 1970.

Additionally, private banks issued most of the money in the United States; paper banknotes, before the Civil War. The US Treasury only began issuing paper dollars, or greenbacks, in 1863 to pay the Union Army.

The success of the Pound Sterling, the currency of the British Empire, proves private currencies can be safe and successful. However, history demonstrates private currencies can be dangerous in other circumstances.

How safe is Private Money?

For example, one of America’s worst financial crises, the Panic of 1837 began when banks stopped accepting private paper money. This led to deflation, in which money became so expensive – most people could not afford it.

Historians estimate the panic led to unemployment as high as 25% and a collapse in wages. Thus, the Panic of 1837 rivals the misery caused by the Great Depression of the 1930s.

I imagine it is this kind of economic chaos Trump fears when he discusses cryptocurrencies. So yes, President Trump has a good point, private currencies are dangerous.

Private Currencies are Dangerous

However, Trump’s claim that “Bitcoin and other cryptocurrencies, which are not money, and whose value is highly volatile and based on thin air,” is wrong. Cryptocurrencies are money which is what makes them so potentially dangerous.

Unfortunately, one of the most dangerous aspects of private currencies is politicians monkeying around with them. For example, U.S. President Andrew Jackson (D-Tennessee) helped create the Panic of 1837 by ordering the US government to stop accepting paper money in payment for federal land purchases.

Disturbingly, Trump’s Tweets about cryptocurrency are reminiscent of Jackson’s attacks on paper money. Interestingly, Jackson hated paper money and wanted to destroy it, Real Clear Markets notes. I think Trump’s Tweets show the president holds a dangerous, unrealistic and simplistic economy philosophy with no grounding in reality.

We could be entering a brave new world where private currencies replace government or central bank issued money. Only time will tell how safe and effective those private currencies are.

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