Deflation Archives

What people need to understand as difference between Electronic Fiat and Cryptocurrency

Posted on May 1, 2017 | by [email protected]

With the advent of internet and electronic systems, payments and bank transfers for fiat currencies have gone completely digital. With cryptocurrencies like Bitcoin being advocated as simple, quick peer to peer transfer means, people have come to question how cryptocurrencies like Bitcoin and digital payments for fiat currencies are different. The difference lies in the issuance, means of validation, the speed of transfers and how the storage accounts are maintained. Let’s look into what exactly people need to understand as the differences between Electronic Fiat and cryptocurrencies:

Difference between fiat and cryptocurrency:

One major difference is the fact that cryptocurrency reserves are limited and their scarcity provides them with a deflationary outset. In cases like Bitcoin, the currency is set to produce only 21 million coins by 2040. Hence the programmed scarcity ensures that the currency’s journey is deflationary. In the case of fiat currencies, the purchasing power of the currency depends on how the country’s economy is doing. With traditional fiat reserves be it physical or digital, there is no way to tell how much money is circulating, Central Banks can print money on a whim without backing it up with stored Gold or standard reserves. Economists who are against this type of monetary practice believe that the world’s citizens are experiencing a silent robbery called inflation due to central planners unconditionally printing vast amounts of fiat reserves.

The digital payments system and push for a cashless society:

When it comes to physical currency, it becomes difficult to monitor the cash flow. The government has no way to know the amount of money in circulation. Hence there has been a constant push for cashless society amongst various countries of the world. Especially European countries have banned physical currency transfers over a thousand pounds. This has been taken as a step to proactively stop terrorism funding, to monitor the cash flow and be able to avoid transactions that might prove detrimental to the country. The electronic fiat currencies have come to existence from 1975 and now constitute 92% of world’s fiat reserves.

What advantages does Bitcoin provide:

Fiat electronic transactions where major banks or transfer companies act as a custodian or intermediary, there is a chance of censorship. A very good example is the recent Bitfinex’s lawsuit against Wells Fargo where the bank intervened in the business operations by halting the deposits. By placing the power in the hands of a central bank, we are also bidding good bye to financial freedom. Since Bitcoin transactions are decentralized, they don’t depend on any central authority making it a clear tool for financial independence.

Brazil in Deep Trouble: Bitcoin and Blockchain are what Brazil needs right now?

Posted on October 12, 2016 | by [email protected]

Recession stricken Brazil is the world’s seventh largest economy with a population of 207.8 million and GDP of US$1.775 trillion. Brazil’s worst recession in recent history continued as rising unemployment and deepening political turmoil dragged the economy into further decline. In the second quarter, Brazil’s economy contracted 3.8%, after shrinking 5.4% in the first three months of the year. It’s the longest recession since the 1930s for Brazil, Latin America’s largest economy.

The situation went from bad to worse as the President Dilma Rousseff was impeached owing to large scale corruption. While the proceedings in Brazil are currently bleak, let’s look into the possibility of Bitcoin adoption setting things right:

Bitcoin adoption currently:

The Bitcoin adoption in Brazil has been on the rise owing to the varying economic conditions. The recession cycle followed the pattern where Brazilian Real appreciated first and then went on to depreciate starting a probable hyperinflationary cycle. During the course of this pattern, there has been a significant uptick in the Bitcoin trading volume from Brazil. The dynamics of the economy and exports prompted people to look for alternatives, which turned out to be Bitcoin.

Brazil is the largest exporter of soft commodities in the world. During the deflationary part of the cycle, the Brazilian Real appreciated due to significant capital inflows. For major exporters, this was a setback as they wouldn’t be getting more local currency in exchange for their goods. Hence an alternative, they turned to receive payment in Bitcoin to be later converted into local currency when Real depreciated.

How Bitcoin can be a solution:

For an economy that is struggling, people’s faith in its currency fading, an alternative system has to be opted. Just like Government bonds where the Government backs fiat currencies, the central bank can alternatively back Bitcoin based assets. What makes this even more feasible is the transparency the underlying technology provides in such arrangements.

This decentralized system can be in place till the economy achieves stability. Later the asset holders can cash in for local currency. These assets unlike bonds can be transacted peer to peer without any processing fee.

How Blockchain adoption would be a relief:

The settlement time in Brazilian market is abnormally slow. The average settlement period for credit card transactions in Brazil is D + 28 which is very slow compared to western markets. Slow settlement times amount to loss of value of transactions due to holding up of the money. This would mean the loss of investment opportunities in time. A study by PWC revealed that Brazil has over 22 million [small and medium-sized enterprises] and micro-businesses. The mobile penetration is upwards of 132%, which has created a fertile ground for mobile payments.

Hence Blockchain based settlements which are quicker and more transparent are exactly what Brazil is looking for. Fortunately there has been significant development on this end with major banks and Mastercard trying to implement Blockchain based transactions in Brazil.

Can Bitcoin be the saviour during the next Global Financial Crisis?

Posted on October 3, 2016 | by [email protected]

The housing collapse in 2008, that shadowed the global financial markets, has had gripping repercussions on the global economy. With Greece, Venezuela and many other European countries still trapped in high recession, their economies are looking shaky and unstable. This is the consequence of the Great recession and countries are still feeling the ripples of it. As much as we don’t like it, another economic crisis is inevitable if the monetary policies aren’t very effective.

An economic crisis is a signal of how the existing monetary system has failed, which prompts for alternatives. Outside precious metals and the good old barter system, Bitcoin appears to be the best fit alternative to the existing system. Decentralized, border-less, peer-to-peer, and open-access digital currency surely seems to be a best fit in the face of calamity. Let’s look into how prepared Bitcoin is for the next Economic Crisis:

Sailing on both Tides:

An economic collapse can be of two types: Inflationary and Deflationary

Inflationary collapse or hyperinflation happens when an economy experiences very high and usually accelerating rates of inflation. This rapidly erodes the value of the local currency causing the population to minimize their holdings of local money. The population normally switches to holding relatively stable foreign currencies. Under such conditions, the general price level within an economy increases rapidly as the official currency quickly loses real value. The value of economic items remains relatively stable in terms of foreign currencies.

Deflationary collapse or Deflationary spiral happens when a period of decreasing prices leads to a situation whereby the economy collapses. Deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% (a negative inflation rate). Inflation reduces the real value of money over time; conversely, deflation increases the real value of money – the currency of a national or regional economy. This allows one to buy more goods and services than before with the same amount of money. Economists generally believe that deflation is a problem in a modern economy because it increases the real value of debt. This may aggravate recessions and eventually lead to a deflationary spiral.

How Bitcoin would fare under both circumstances:

Inflationary collapse:

In an inflationary collapse, people would be scrambling to buy bitcoin and other solid assets such as gold. This would be in an effort to preserve their savings from the debilitating effects of inflation. But for Bitcoin to be favored over other assets, the adoption level of Bitcoin should be very high. The digital currency should evolve to a stage where it can be used for all day to day transactions. This is prevalent in countries like Argentina, Venezuela and Greece. Users are actually looking at Bitcoin as an alternate to acquire foreign currencies and goods.

Deflationary collapse:

In this case, for Bitcoin to actually be preferred as an escape option, the currency should see mainstream adoption. The central banks and lenders should be able to accept Bitcoin in exchange for debt in fiat currencies. Unless the scenario is that positive, you’d see a massive selloff of bitcoin. This is because people would want to get as much USD as possible in order to pay debts.

In a financial crisis, there are limited tools available to sovereign entities to stem the crisis. Devaluation, bail-ins and capital controls are the go-to tools, Bitcoin counters them all. Bitcoin extends the basic properties of good money with extreme, no-cost portability, security and stealth. These properties are extremely valuable in cataclysmic financial collapse. However its utility majorly depends on adoption of the cryptocurrency before the impending crisis.