Why I fell in love with Crypto? and why you should too? -Part 1
By: Danielle Shaul
Tags: Cryptocurrency, Economics, Crypto, Money

Photo by Icons8 team on Unsplash

This year has been a rollercoaster for everybody with this minor pandemic that you might have heard about, called Covid 19. For me personally, this year was not just a rollercoaster, but a very accelerated one.

At the end of the last year, my life took a turn to the realm of the unknown. I left everything that was certain behind. I left a 6 years relationship and a serious management career in the tech industry back home and bought a one-way ticket to Thailand.

When the pandemic had started making waves in Thailand at the beginning of March, I found myself on a tropical Island, which could sound like the perfect place to spend a lockdown in. Actually, it was. But my mind was worried about other things.

Living on an island, most of the food supply and other goods are coming from the mainland. This kept this island of Koh Phangan relatively simple and kept me far from the capitalist life that I was pursuing not that long ago. This fact made me worry about what would happen if the pandemic would seriously hit Thailand. How will food arrive on the island then? What would happen with the few ATMs that are on the island? Living in a country where you are not even a citizen puts you always secondary in the priorities at times of crisis, and this definitely was one. I didn’t have a Thai bank account nor a convenient way to get my money out in Thailand when needed.

I was talking about that to one of my friends on the Island, a crypto enthusiastic, and he had a clear solution for me. I was introduced to the crypto industry a bit before 2017. I was very fascinated by this technology but rather reluctant about the whole industry. I mainly heard about scams and ICOs that were a fraud. I heard about people FOMOing in right before the price dropped which caused them to lose their savings. So I made a conscious decision to stay away from the hype so far.

I was telling him all of that, but he was one of those fundamentalists. He then told me that crypto is not just the solution to my problem, but the solution to the economical crisis that is upon us. How we need a paradigm shift and that our money is getting stolen by our governments and banks every day. He was very determined to convince me otherwise, I am very grateful for that.

This was the beginning of my love story

Cryptocurrency is at the intersection of economics, computer science, politics, and math. As a software engineer, my knowledge about math and computers and all that nerdy stuff were enough for me to understand the technical parts, but I didn’t have the full picture yet. Like every love, you start with the superficial love, exploring the surface, but if you see some sparks, this is where you really want to go deeper.

The thing that lights up my spark was an article I found online claiming we know the price of everything, but we know the value of nothing. And the thing we overvalue the most is the value of money. I found it very arrogant but also quite intriguing. To explain this, I will take you with me on a journey through the history of money. I promise that by the end of this article, you will fall in love too.

Before money was created, the way to exchange value was by using commodities. If you had a sheep farm but you wanted to cook a seafood dish for dinner, you had to go to the fisherman and get 3 fish, a bag of calamari, and some oysters. You had to bring some sheep with you and pay the price for your yummy seafood with one or two sheep. There were a few problems with this barter method:

The sheep didn’t really fit in your wallet so you have to carry around a bunch of sheep everywhere you go. You had to hope that the fisherman needs your sheep, but what if the fisherman was actually vegan? The worth of the seafood you like to get should be at least 1 sheep because you can’t pay with half or a quarter of a sheep. It is sad to say, but someday the sheep will die, and you will lose your purchasing power. Younger sheep are more valuable than older ones, and fat sheep are better than the skinny ones. Taking all those characteristics into account would make the stripe\square\paypal world of today much more complicated.

Photo by Dibya Jyoti Ghosh on Unsplash

So we had to find a different sort of payment. This new payment medium had to be:

A Medium of exchange Portable Durable Divisible — I can pay with half a sheep or a quarter of a sheep Unit of account Fungible — a unit is the same as the next unit (my sheep has the same value is the same as the neighbor’s sheep) Store of value — The sheep I have will be of the same value in a few years.

There were different mediums of exchange along the history trying to meet these requirements like salt (this is where the word salary comes from) and seashells but they were missing one thing- they were not a store of value. To enter this category, the item acquired should, over time, either be worth the same or more. This usually applies to items that are relatively rare, and what is rarer than a matter that is produced by supernova nucleosynthesis, and from the collision of neutron stars?

Then at some point in history, we start using gold coins. It was within the world’s first democracy in Athens, that gold started to gain its popularity. Precious metals are still the perfect store of value, and in the last 5000 years, only gold and silver maintained their purchasing power.

But when there is an asset that is so stable and valuable, greed happens.

Athens got into a war with Sparta. The Athenian soldiers that were fighting the war out of the city, were paid with gold coins. There were fewer gold coins in the city of Athens because most of the gold was used to pay the soldiers. This means that the citizens had less purchasing power, so the prices had to go down. But what was more painful for the Athenians was the fact that they didn’t have enough money to keep the war going on.

So they came out with a “brilliant” idea. Why have the coins made solely from gold when they can dilute them? So they started a process called currency debasement. Taking the money they were getting from taxes and adding the same amount in copper. The result was double the amount of currency that they had before. Taking 1000 gold coins and mixing them with 1000 copper coins creates 2000 mixed coins that are now worth less — this is called deficit spending.

When a currency is debased, and therefore loses its value, sooner or later the citizenry catches on and begins demanding higher prices for the goods they sell or more wages for their work. This results in prices eventually rising because there is the same amount of goods and services but more money in circulation. The Athenians mixed their coins with copper until it was just copper which resulted in the world's first hyperinflation.

History definitely repeats itself. Most of the currencies in the world were once backed by gold. In the past, the bill you had in your pocket, was just a receipt representing the gold you had in the bank. On the US 20$ bill, for example, was written “20 dollars in gold coins payable to the bearer on demand”. So you could go to your bank, give them the receipt for your money and you would get gold- your real money.

The 1st scam

During the World War, to subsidize the war, countries in Europe started printing more receipts for gold than there was really gold. Then those currencies were no longer redeemable in gold. In Germany in 1923, there was hyperinflation causing a loaf of bread, which cost 250 marks in January to the price of 200,000 million marks in November. By autumn 1923 it cost more to print a note than the note was worth.

Then in between the wars, they went on something called the gold standard exchange where currencies were backed partially by gold with a 40% reserve ratio. In the US it meant that a 50$ bill was suddenly backed by only 20$ worth of gold. And again, there were more dollar bills in circulation than their real value which was gold.

When more money is being printed, this can have a negative effect on its value since there is a larger supply of it

Photo by Omid Armin on Unsplash

The 2nd scam

After the great depression in the US of 1929, large quantities of gold had started flowing out of the vaults of the Federal Reserve Bank. It occurred because, in a financial crisis, most people, companies, and governments prefer physical assets over bank deposits or paper money, which can suddenly lose their value. The government, that didn’t want the dollar to lose its value, had to call in the gold held by private hands and prohibited the Treasury from redeeming dollars for gold.

The order required all persons, businesses, and banks to deliver their gold and gold certificates to the Federal Reserve in exchange for $20.67. This led to a rise in prices of gold to nearly $35. Imagine now you own a property, now the government demands your property for a specific price and benefits from the rise in its price, allowing you to buy it back at a higher price. By doing this, the Treasury saw the value of their gold holdings increase by $2.81 billion. It was less than 100 years ago. How is that for a “free” market?

The 3rd scam

After the Second World War, everything changed. In both wars, the US was not participating until a very late stage. While all other countries turned their economy into a war based one, their goods had to be imported from the US. The European countries paid the US with their gold. At the end of the war, 2/3 of the world’s gold was in the hand of the US.

The world monetary system was about to collapse. To save the situation, in 1944 a new monetary system called Bretton and Woods was announced, in which every currency would be pegged to the US dollar and the US dollar would be backed by gold for 35$ per ounce. This was a promise for a stable economy because the exchange rate was fixed. There was only one problem, the reserve ratio was not fixed.

At the end of the ’60s, the US was in a very challenging economic and political position. Their economy was weak, the bill for the Vietnam war was mounting, and the annual spending burden had risen significantly because of the new entitlement program, so they again started printing money that was not backed by gold.

Charles De Goal, the president of France realized that the US doesn’t have the gold to back up all the dollars that were floating around. Then all other countries started asking for their gold in return for the US dollars they had, but again there were more receipts for gold, than gold itself. The ratio was about 12 times more dollars than gold in existence!

Photo by Aneta Pawlik on Unsplash

The 4th scam

Once again we had to go off the current monetary system to avoid a major crisis. Nixon’s decision in 1973, known as the “Nixon Shock,” was all but dissolved the Bretton Woods agreement and allowed the U.S. to print its own fiat money at will — a government-issued currency that is not backed by a physical commodity, such as gold. Then the magic happened, in 1973 all currencies became fiat currencies. This was a crucial moment in history because ever since governments have been able to create as much money as they need. We went from having an asset with real value as our currency to just notes and later on numbers and accounts.

Currency has to be backed by something. It used to be gold. Now, currencies are backed by the faith of the people. Faith is what gives a currency its value. We believe that the bills that we have today in our pockets can buy us the same things tomorrow.

Photo by Jp Valery on Unsplash

The 5th scam

When you deposit your money in the bank you don’t actually deposit it into an account to be safely held for you. You are basically loaning the bank your money. Banks are required to keep on hand a certain amount of the cash that depositors give them. If you deposit $100 into your account, the bank can’t lend out the entire amount. Nor is the bank required to keep the entire amount on hand. Most of the banks are required to keep 10% of the deposit. This is called fractional reserve lending.

Let’s look at the following example

When you deposit your 100$ in the bank, the bank will keep 10$ in your account and will loan 90$.

Now I go to your bank and I borrow those 90$. Your bank will have on its balance sheet 190$ in assets because you still own you 100$ and I lent 90$ from your bank

Then I deposit those 90$ in my bank account. My bank will keep 9$ but will be able to lend 81$. So now my bank has 171$ on its balance sheet.

This process keeps repeating creating money out of thin air all along the way. Money is redeposited and relent, creates banking credit all along the way. An initial deposit of 100$ will eventually create 1000$ in existence. This has 3 major conclusions:

The money we think we have in the bank is not really there Money is created out of the blue by the banks If more than 10% of the bank customers withdraw their funds simultaneously, the bank will not have enough money to pay them.

The 6th Scam

The US government generates a budget deficit whenever it spends more money than it brings in through income-generating activities. Then it creates treasury products to finance the deficit by borrowing from investors which it will pay in the future with interest. The sum of all the budget deficit is the worth of the national debt.

Borrowing money that our children will have to pay back in the future is not necessarily a bad thing. Think of it like a company that is borrowing money in order to build a better business that will pay this debt in the future, when it will be wealthy and successful enough.

Since we are pushing the debt to the next generation, each generation has to be larger and wealthier to pay off the debt plus interest rates from its previous generation. This was the case so far. However, the aging of the baby-boom generation (those born in the post-World War II), as well as increases in life expectancy, drive the increase in the number of elders worldwide. So what would happen when the millennials have to pay off a debt of a generation that is actually larger than them?

This wouldn’t be a problem if the government was dealing with the national debt problem. Since creating debt creates more currency (we learned it at the 5th scam), Stop creating debt will stop creating currency. Less currency in circulation can lead to severe deflation. U.S. presidents are limited to serving two elected four-year terms. This makes it rather easy to push the debt problem to the next president to deal with, after all, no one wants to handle a financial crisis under his watch.

The 7th scam

The covid-19 pandemic will hopefully end soon, but we will feel its effects long after it’s gone. The central banks are printing money to create stimulus packages. But money does not grow on trees so where does it come from?

Photo by Micheile Henderson on Unsplash

This money comes from our future. From our pension, our wealth, from the next generation’s wealth, and so on.

The U.S government routinely spends more than it collects, adding billions — even a trillion — to the national debt each year. The U.S. has retained its position of being the world’s largest economy, which makes its national debt to be a global economic problem.

The pandemic has given rise to a massively inflationary monetary policy and aggressive expansion of money supply while prices in certain key areas, such as food staples keep increasing due to supply shocks caused by lockdowns.

However, a financial crisis does not happen only as a result of money printing. Since currencies are not backed up by anything, they get their value from our belief that tomorrow they will be worth the same. When people stop believing in a currency, which happens when the political situation is not stable (i.e citizens are not sure about their government's ability to take care of them), This is when things really get messy.

I honestly believe that if you care about your future you need to educate yourself about the financial situation. Financial institutions and governments make it hard to understand all those fancy policies, for a reason. Due to the complexity of the monetary system, we take it for granted, allowing those financial institutions to commit fraud under our noses.

The financial mud we are in drives inequalities and chaos in society. The mud is so deep that we need a fundamental change and a paradigm shift. For me, realizing all of this was shocking and terrifying and I hope this article triggered your curiosity too.

So why do I think that crypto is the answer? follow my next article in the series to really fall in love.