Lyn Alden December 2022 Newsletter: The World’s Money Problem - Summary
In this piece, Lyn provides us with a global view on how the majority of humans in the world experience money and liquidity. While we in the developed world have the priviledge of using stable currencies within stable economies, most of the human population in this world doesn’t have this privilege. Simple actions like liquidating a house and keeping the value in a currency comes with a lot of negative consequences in the developing world.
Let’s dive into the summary:
The World’s Savings Problem
Many people in developing countries do not have access to foreign bank accounts or do not have easy access to foreign currencies at fair exchange rates. Many people are forced to hold physical cash or or assets like Gold or Silver. These types of assets come with their own inefficiencies, risks, and downsides.
The challenges faced by people in developing countries highlight the problems with the global financial system, which often favors those in the top jurisdictions and is based on fiat currencies that can be printed or diluted.
In countries like Nigeria and Egypt, the value of the local currency has significantly declined relative to the US dollar, making it difficult for people to preserve their savings.
Interest rates in these countries are often below the prevailing inflation rate, meaning that even when people hold their savings in bank accounts or government bonds, they are still losing purchasing power over time. That has been true in the US, Europe, and many other developed countries.
The problem is on another dimension when we look at countries like Nigeria or Egypt.
The World’s payment problem
The vast majority of currencies are not widely accepted outside of their local jurisdictions. There are 180 different currencies, each with their local monopolies, and only a few of them, such as the US dollar and Euro, are widely accepted globally.
It can be difficult to exchange or use currencies that are not widely accepted outside their home jurisdiction, and small banks may not accept them at all. In addition, even if the exchange is possible, it comes with additional costs for those seeking to
Many developing countries enforce financial censorship, with bank accounts subject to arbitrary freezes and access to physical cash often restricted. Many people, including refugees, face challenges in bringing their wealth with them when they move to another country
There is a lot of potential to enhance the world’s relationship with money. Transferring liquidity can be very easy. Banks have been in existence since the early 1900s, yet smartphone usage exceeded the percentage of people with a bank account and continues to rise faster.
The velocity of money vs Velocity of commerce
For thousands of years, the velocity of commerce and money was limited by the speed of physical travel. The invention of the telegraph and telephone increased the speed of commerce and transactions to nearly the speed of light.
The increase in the speed of commerce and transactions led to the increasing abstraction of gold and silver as bearer assets, as they could not keep up with the speed of telecommunications-based payments. Abstraction means that gold and silver bearer assets were replaced with paper certificates that represent the underlying value. That has been the source of other problems in the past.
The mismatch in velocity between transactions and bearer asset money gave governments and banks an opportunity for custodial arbitrage, leading to the creation of 180 different fiat currencies.
The increasing financialization of the world over the past century and a half can be partly attributed to the mismatch in velocity between transactions and bearer asset money. Governments and banks sit at the interface between transactions and bearer asset money and control the flow.
Nakamoto’s Proposal
In 2008 and 2009, Satoshi Nakamoto introduced the Bitcoin network as a solution to the mismatch in velocity between transactions and bearer asset money. The Bitcoin network is a globally distributed public ledger that is backed up by energy from millions of machines around the world, and has a finite supply of units that are controlled by users through private keys.
The network allows for permissionless, global payments that can be sent quickly and at scale, and does not require a bank or central bank to facilitate transactions. The intrinsic value of the Bitcoin network lies in its ability to enable permissionless, global payments and self-custodial funds that can be accessed regardless of location or government restrictions.
The use of cryptocurrency can bypass government and central bank restrictions on financial transactions, and has the potential to disrupt traditional financial systems.
The current market capitalization is currently below the on-chain cost basis, which has historically been described as Bitcoin being dead, which ironically led to good long-term buying opportunity. While not being a recommendation to buy, it’s worthwhile learning about a technology that allows liquidity to be transferred across economical boundaries.
A Period of Exploration - Stablecoins
The invention of the Bitcoin network led to a period of exploration in which people asked questions about how to scale the technology and use it for things other than money
One solution that emerged from this period was stablecoins, which are digital tokens that represent a claim on a specific asset, such as a dollar. Stablecoins have been useful for people in developing countries with severe currency devaluation issues, as they can hold their value in a stablecoin rather than their local currency and avoid the risk of confiscation.
Stablecoins have found significant utility in multiple countries suffering from ongoing currency problems, along with Bitcoin.
A decade of Affinity Scams and Grift
Over the past decade, there have been negative elements in the cryptocurrency industry, including pump-and-dump schemes, hype cycles, altcoin casinos, and leverage. Satoshi, the creator of Bitcoin, was focused on solving problems such as currency dilution and transaction censorship, and wrote in a plain-spoken and academic style.
Satoshi never gave himself coins as a reward for his invention and mined in the first two years to keep the network functioning, then tapered off as more miners joined.
Many industry participants that followed Satoshi have been more focused on creating new coins, hyping them up, and dumping them on retail investors, rather than building sustainable projects. Retail investors are often left holding the bag when these projects do not go anywhere and the founders and early investors become rich.
Short Description of The Problem of Arbitrary Seigniorage
In the traditional tech startup industry, founders and early investors tie their fortunes to the success or failure of their idea, and must spend years building a business that is attractive enough to be acquired or go public.
In the cryptocurrency industry, founders and early investors can create a project, sell the coins to accredited investors or overseas, hype it up, and then dump the coins on the retail public without being tied to the success of the project's fundamentals. This practice, called "arbitrary seigniorage," involves creating a crypto asset for little cost and profiting from it through hype and speculation, rather than creating value.
The cryptocurrency industry may face further regulatory clampdown or a shift towards more decentralized, open-source projects that do not rely on arbitrary seigniorage for profitability.
Some projects in the cryptocurrency industry, such as Bitcoin, have been created and distributed in a decentralized way without relying on arbitrary seigniorage.
However, the broader cryptocurrency industry has also been used for scams, frauds, and penny stock-style pump-and-dump schemes, leading to a negative perception of the industry as a whole.
Does it need a token?
Ethical problems in the cryptocurrency industry arise when founders and early investors try to make millions of dollars from their work prior to the fundamental success of that work.
When evaluating a cryptocurrency or adjacent project, it is important to ask if it really needs its own coin or token, as many projects include them simply to benefit the founders and early investors with fast exit liquidity. Most projects don’t need their token before proving that their idea is worthwhile pursuing.
The use of tokens can add unnecessary friction to a project and may not be necessary for its success. The Web3 industry marketing term refers to a subset of cryptocurrencies that aim to offer a more decentralized internet experience, but many of these projects are not truly decentralized and will likely fail, with the founders still profiting through fast exit liquidity.
Swan.com identified only 3 out of 20,000+ crypto assets were able to reach a higher-high in bitcoin-denominated terms in their second growth cycle. After their initial hype cycle.
Back to Basics - Conclusion
It is important to focus on the utility of cryptocurrency technology, such as storing and transmitting value globally, rather than speculation and leverage.
Lyn has invested in private ventures to scale and improve the Bitcoin ecosystem with a long-term growth timeframe, and is also interested in technologies that make dollars or gold more digitally accessible globally.
Many people around the world have problems with storing and transmitting value, and this should be the focus of the cryptocurrency industry rather than offshore leveraged crypto casinos.