I am sure that almost everybody has heard about cryptocurrencies. Some might even be investing in them. But few understand what are they really for and, most importantly, how should they be valued? As of Dec 15, one Bitcoin had a market price of US$48,144 (slightly over 1.6 million baht per coin).
Three years ago, the same coin was priced at 1 coin per $3,300. The price of Bitcoin peaked at almost $68,000 per coin last month before taking a nose dive to the current level. Do crazy price movements give an indication that these virtual currencies are nothing but gambling chips?
Cryptocurrency is an imaginary or virtual currency invented by Satoshi Nakamoto (probably not even a real name) in 2008. The currency (Bitcoin) is meant to be a medium for international payments free from government intervention and financial institutional control.
The technology which allows for the creation of the cryptocurrency is blockchain technology. Bitcoin first circulated in 2009 with an initial valuation of 0.00 per coin. The coin started to be traded actively after 2017 with a market price of about $1,000.
From one single cryptocurrency in 2008, by 2021, there are over 6,000 cryptocurrencies in the market with a combined value of $1.49 billion. It is estimated that the crypto-market expands at an average of 12.8% per year. In my view, the crypto-market is nothing but a gambling den because there is no intrinsic value to a cryptocurrency. It can be priced as much as anything one fancies.
Unlike cryptocurrency, fiat money, such as the baht, yen, dollar, and euro, has intrinsic value. These real currencies are backed by the values of their respective economies. For instance, the total Thai money supply of 23.7 trillion baht is backed by the Thai economy with a GDP value of 15.7 trillion baht in 2020.
With the intrinsic value principle, economists can always tell the direction of real currencies. As of October 2021, Thai money supply had grown by 5.3%, while the Thai economy is likely to grow less than 2% this year. Therefore, it is not surprising to see the baht depreciate against other currencies because its intrinsic value is falling.
When Mr Nakamoto created Bitcoin in 2008, he was right to give it an initial value of 0.00 as the coin had zero intrinsic value.
Apart from being like gambling chips, are cryptocurrencies able to take on the role of a medium of exchange like Mr Nakamoto intended? The answer is a clear Yes and it is happening right now. Cryptocurrencies have taken on the role of fiat money in many countries. One example is Venezuela.
With an annual inflation rate of 1,200%, it would be unwise to hold Venezuelan bolivares (the local currency) as they lose their value quickly. Many Venezuelans hold crypto-coins instead and convert these coins into bolivares when they need to make cash payments.
But Venezuela is not the world number one user of cryptos for payments; it ranks number 7. According to the Global Crypto Adoption Index 2021, the world number 1 crypto user is Vietnam.
I guess that it is because Vietnam's economy is growing faster than its financial market can support, particularly for international transactions. Businesses have to find a more efficient means for transactions. Using crypto provides the perfect answer. By the way, there could be another explanation: tax management. Trading with crypto can avoid reporting income and profits.
At this point, we should distinguish between "digital currency" and "cryptocurrency". Digital currency is nothing more than a digital version of printed money. Digital money provides no extra economic benefit other than the convenience of not having to carry paper money.
But cryptocurrency is an entirely different story. It could change the path of the world economy.
However, government-sponsored cryptocurrency is meaningless because one cannot distinguish fiat money from government cryptocurrency. The Venezuelan government issued a cryptocurrency called "petro" and it failed miserably.
To illustrate the true power of cryptocurrency. I will give a fictional example. Actual names are altered, of course.
BaBa is China's largest e-commerce platform with 1.18 billion customers (912 million in China and 265 million overseas). What if BaBa wants to create its own Ba-coin to be used for payments alongside the Chinese yuan on its platform? Shoppers can borrow Ba-coin from AND -- a BaBa fintech subsidiary which is the creator of the popular international e-payment system, Ba-pay -- to help stimulate sales.
Not only can shoppers use the Ba-coin for payments, but sellers are encouraged to use Ba-coin to buy materials from upstream suppliers. Soon, Ba-coin will be widely used in China and around the world.
The bankrupt Evergreat real estate company could be rescued by BaBa if someone offered to buy its prime assets. The catch is the payment will be made in Ba-coin issued by AND. Then individual units of these assets will be posted for sale on the BaBa website which is accessible worldwide.
Certainly, interested buyers can apply for Ba-coin loans to buy those assets at favourable conditions like zero down payments, no interest charges, and super long-term mortgages. Why not? Ba-coin has no cost to BaBa. Remember, cryptocurrency is an imaginary money.
In a short period of time, BaBa will control the Chinese economy because it controls the supply of Ba-coin. No doubt, the Bank of China and Chinese government will not be pleased. Readers can guess the end of this story.
Smart readers will notice that, in this fictional story, Ba-coin gradually develops an intrinsic value. The value is the profit of the BaBa platform and prime assets of former Evergreat group. The virtual currency is now on a par with fiat money.
The potential of cryptocurrency is indeed as great as the creator intended. I am sure it will reach that goal, particularly when the whole world is over-indebted, causing the financial sector to be on the verge of collapse. When central banks are busy printing fiat money to support their economies, don't you want to find alternative, trustworthy currencies?
Take the case of Thailand. Government debt is over 60% of GDP and rising, while household debt is at 90% of GDP. There is no way that our financial sector can function properly. Cryptocurrencies can provide alternative liquidity for the economy.
Go back and read my fictional story on BaBa rescuing Evergreat. Cryptocurrencies might be able to do the same for the ailing Thai real estate sector and help prolong the life of the travel industry.
Who needs commercial banks? I am ready and willing to be a part of this currency revolution. If any organisation is interested in putting the ideas in this article to work, I am all ears.