Why crypto is the future of finance
Bitcoin was birthed in a post financial crisis era when skepticism and doubt were rampant. Our financial system had nearly collapsed and there was a public perception that the middle class had been left to foot the bill. The occupy wall street movement ultimately failed, but their slogan “We are the 99%" embodied the general public opinion of the time. However, aggressive monetary policy kept the economy humming along and with time the financial crisis was put into the rear-view mirror.
This policy has served some of America quite well. The trailing 10 years have seen the rise of technology and a resulting massive growth in the economy. Unfortunately, this new wealth creation has not been distributed very evenly.
One of the lead factors in growing wealth inequality is the post-crisis monetary policy. The price of stocks is driven upwards when when the federal reserve increases cash supply, and therefore the wealthier benefit disproportionately. This trend has since been exacerbated as the government provided trillions of dollars of “liquidity” during the COVID-19 crisis. According to Inequality.org “from March 18 to the end of 2020, global billionaire wealth increased by $3.9 trillion. By contrast, global workers’ combined earnings fell by $3.7 trillion, according to the International Labour Organization, as millions lost their jobs around the world.”
These monetary policies do more than just increase wealth inequality. They also drive down interest rates and therefore make passive investment opportunities more scarce. The downward trend in global interest rates began after the financial crisis and only seems to only be accelerating.
In many countries the interest rate is now negative — i.e. the balance in your savings account would actually decrease year over year. The recent pandemic has further pushed interest rates down and most in the developed world are near or below 0%.
A lot of America feels disenfranchised by the state of our system and in turn they are fighting back or looking for alternatives. This is likely to be more than just a fad as the two pronged effect of inequality and low growth is a powerful motivator for disruption. When viewed through this lens we can see a deeper context for the “GameStap saga” and the recent rise of cryptocurrency.
More on the Gamestop Saga
Looking beyond the memes we can see that the Gamestop saga is a symbolic act of defiance from the disenfranchised. The WallStreetBets (WSB) community started out as a brazen troop of risk takers who didn’t care if they lost it all. Users would gloat about losses while treating the entire financial system like a video game.
This gamification of investing is actually not so irrational. WSB was a grassroots community trying to play the same game that the hedge funds were playing. They reveled in victory and shared in defeat when a community-wide trade took hold. Sometimes ideas would permeate the community too. For ex., disdain for COVID-19 monetary policy was made clear through a plurality of posts accusing the FED of printing money in April/May 2020.
As the WSB user base grew, so too did their combined power. And to everyone’s surprise WSB ignited a small short squeeze in Gamestop. This was only possible because the short interest on Gamestop stood at over 100%. Blood was in the water and everyone knew some hedge funds were on the losing end of the trade — this enticed more individuals to pile in.
The price of Gamestop was sent shockingly high. It was the highlight of an entire news cycle and it pervaded most millennials minds. At one point during the frenzy the buying of Gamestop was halted on many brokerages — a move which helped reinforce the narrative that the financial system was stacked against the everyday man.
The saga continues, though most hedge funds have long since closed out their short positions at a loss. Today the WSB community boasts 10.6M “degenerates”.
What does crypto have to do with Gamestop?
There is one unifying thread between these two stories. Both the WallStreetBets and cryptocurrency are grass roots movements that look to disrupt the current status quo of finance. What is interesting is that there is a deeper connection between crypto and the Gamestop saga. The connection has to do with free trade, let’s explore it in detail.
Imagine that there was a system for producing stock-backed cryptocurrencies. I.e. imagine that there exists a provider who sells cryptocurrency tokens backed 1-to-1 with stocks they hold in reserve. These tokens would be traded over the blockchain, thereby allowing unparalleled transparency into trading volume, short interest, and ownership distributions. Moreover, trading of the tokens could happen 24/7 globally without any access barrier.
It’s clear that such a construction would be more efficient and transparent than the current stock market. No one would be able to “turn off” trading. These are very appealing properties for those who feel burned by the Gamestop saga.
Moreover, these tokens are readily composable, i.e. a token’s owner could easily use that token for a variety of applications, such as collateral for a loan. These hypothetical tokens are something that current technology already allows for — it’s just a matter of convincing regulators that it should be allowed and then building it. Mirrior.finance has already built a slightly less efficient derivative variant this system that skirts regulatory burdens.
What else can crypto do?
So, we’ve seen that implementing stocks on the blockchain would solve a novel problem, but what else can crypto do for us today? Well, for starters, the obvious first point is that crypto gives us a universal standard with which we can price anything. Bitcoin does this without associating the standard to a sovereign and therefore it helps to bring the world together. However, it is hard to recreate the financial system with Bitcoin alone, because a lot of finance is contingent on contractual obligations. Enter Ethereum. With Ethereum users are able to create smart contracts on the blockchain that mimic contractual obligations.
A new financial system called Decentralized Finance (DeFi) is being built on the Ethereum network. DeFi allows for trading, lending, and borrowing without financial intermediaries like brokerages, exchanges, or banks. DeFi is a growing system and has large positive interest rates. This means that individuals in countries with negative interest rates are highly incentivized to convert their holdings into crypto and to start earning interest with DeFi.
Where does all this leave us?
The positive properties of universal pricing, unrestricted free trade, and positive interest rates make a strong case for using cryptocurrency. That being said, it’s not likely that the technology alone is providing the incentive for change. Blockchain technology is still nascent, the amount of utility is limited, and the network is struggling to run at scale.
Still, people will seek out alternatives to the current financial system. The level of inequality in the system and the poor growth prospects incentivize migration. Moreover, with time the amount of technology on the blockchain will only grow and improve. It is the confluence of disruptive technology with today’s circumstances that make crypto the future of finance.
We are looking forward to the day that global exchange is carried out over DeFi with 24/7 unrestricted access. We see this as the basis for a more transparent, more efficient, and more equitable financial system.
If you enjoyed this article please clap (up to 50 times) or follow me. I will be writing more articles on DeFi and cryptocurrency in the time to come, thanks!
We are working on building a regulated custodial solution that automates interest earning through DeFi, please visit ChainVault if this interests you.
