We are happy to announce our newest column: Banking on Bitcoin. The column will explore the potential of Bitcoin and other digital currencies from the perspective of an anonymous Wall Street insider. Bob Fogg is an anonymous finance insider and our newest contributor at Coinprices. He works at a large buy-side firm, which provides him with an intimate view of the industry.
Aside from the inherent difficulty of utilizing a priori projections discussed in Misunderstanding Mindsets, another prominent mental barrier when it comes to an American’s understanding of digital currencies is the challenge of viewing the world from the lens of another. The benefits of digital currencies in the first world are completely different than the benefits in developing nations.
I read two books recently that unknowingly highlight this point in very concise ways. In John Updike’s Brazil, the lives of Tristao and Isabel are touched by the dramatic inflation of the Brazilian cruzeiro from the 1960’s through the 1980’s, forcing them to tailor their life choices to their lack of financial options, “Their packet of cruzeiros was diminishing in value, and it seemed thriftiest to spend it rapidly.”
When Tristao came across a large gold nugget and got it appraised, the appraiser, “lisped a sum in hundreds of thousands of new cruzeiros. ‘What i[s] more… the value [of the gold] will go up… that of the cruzeiro fall[s].’”
The below excerpt from NPR succinctly explains the situation of the cruzeiro in Brazil:
Twenty years ago, Brazil's inflation rate hit 80 percent per month. At that rate, if eggs cost $1 one day, they'll cost $2 a month later. If it keeps up for a year, they'll cost $1,000.
In practice, this meant stores had to change their prices every day. The guy in the grocery store would walk the aisles putting new price stickers on the food. Shoppers would run ahead of him, so they could buy their food at the previous day’s price.
The problem went back to the 1950s, when the government printed money to build a new capital in Brasilia. By the 1980s, the inflation pattern was in place.
It went something like this:
The plans succeeded at only one thing: Convincing every Brazilian the government was helpless to control inflation.
Today, the cruzeiro is extinct, and before the extinction, the Brazilian government had to reinvent the currency three different times in a mere 60 years. The fact that the American Dollar has existed for over 200 years is not the norm, it is an anomaly. Inflation, market sentiment, war, or government intervention usually destroy a currency at an age much younger than 200. Ultimately, government-backed currencies are subject to the whims of individuals, and while human intervention brings about certain benefits, it can also have very negative ramifications.
Since Americans already have access to a developed financial services industry, the benefits of digital currency for an average person in the U.S. mostly equates to added freedom when it comes to their money. Benefits include reduced fees, complete control over funds, not having to type entire credit card numbers for online purchases, no worry of financial information being sold to third parties, to name a few. Digital currencies affect a U.S. citizen’s life in a transformative yet relatively marginal way.
In a first world sense, digital currencies are tailored for the internet age; the realization of a society that has already become integrated with the internet. The world of finance and banking are one of the remaining entities that have not reformed their infrastructure in order to take advantage of the added connectivity and transparency that the internet provides. It’s very easy from our privileged vantage point to get wrapped up in the above benefits, and to assume that digital currencies will affect the rest of the world just as they do in the U.S. and other developed nations. From a developing world sense, however, digital currencies offer so much more than “ease of use” factors.
While the above effects will eventually touch all parts of the world, less fortunate countries still need to catch up to developed world before they can begin to see these benefits. A large digital and economic infrastructure gap exists between the first and third worlds, and digital currencies will act on the third world gap in a more profound way than the first world gap. The two key ways that digital currencies will affect that developing world are taken for granted by the U.S. because of the stability of our society. Digital currencies allow members of the third world to access the global financial system with merely a cell phone; tapping a market that has been immensely underserved up until now.
The second way that digital currencies will majorly affect the developing world is by giving people freedom from poor monetary decisions made by their governments. For example, the Argentine peso has suffered from over 40% inflation and dramatic volatility in the last year. An Argentinian citizen has every reason to hold a digital currency, given the fact that the government has handled the Argentine peso so poorly. Digital currencies, such as bitcoin, remove human decision making from monetary policy. First world citizens do not feel these benefits, given their insulated stability, which causes a mental write-off without considering the third world possibilities.
The fact that far more people live in developing nations than developed nations, coupled with the fact that digital currencies can affect third world citizens with a positively greater magnitude than in developed nations, the potential for adoption is astronomical. In the U.S. right now, digital currencies are cool, but not life changing. In a country like Argentina, the option to own bitcoin can be the difference between a family maintaining their life savings, and losing everything to inflation or government seizure. The option to use digital currencies is a game changer in this sort of scenario, and those of us in the U.S are very far removed from from it. Access to a savings account and a higher level of security with that savings account allows a further level of efficiency in a global marketplace and individual benefits that far outweigh the current options available to members of developing nations.
In Galapagos by the immortal Kurt Vonnegut, who waxes philosophic from a million years in the future, he eloquently depicts the overwhelming power of human sentiment:
Mere opinions, in fact, were as likely to govern people's actions as hard evidence, and were subject to sudden reversals as hard evidence could never be. So the Galapagos Islands could be hell in one moment and heaven in the next, and Julius Caesar could be a statesman in one moment and a butcher in the next, and Ecuadorian paper money could be traded for food, shelter, and clothing in one moment and line the bottom of a birdcage in the next, and the universe could be created by God Almighty in one moment and by a big explosion in the next— and on and on.
Mexico and Chile and Brazil and Argentina were likewise bankrupt—and Indonesia and the Philippines and Pakistan and India and Thailand and Italy and Ireland and Belgium and Turkey. Whole nations were suddenly in the same situation as the San Mateo, unable to buy with their paper money and coins, or their written promises to pay later, even the barest essentials. Persons with anything life sustaining to sell, fellow citizens as well as foreigners, were refusing to exchange their goods for money. They were suddenly saying to people with nothing but paper representations of wealth, “Wake up, you idiots! Whatever made you think paper was so valuable?”
Brazil was written in 1994, while Galapagos was penned in 1985, each well before the blossoming of the internet and digital currencies, however each author understood and expounded upon how, despite their seeming stability, currencies are just as volatile as any other man-made construct. This is especially the case in the developing world, where regimes and governments come and go like seasons.
For the inhabitants of these nations, digital currencies offer an alternative outside of the immediate societal structure they live in. This alternative is not obvious from a first world perspective, and it takes conscious consideration in order for a person in a developed society to see these benefits that are so far outside of the realm of their awareness. Once the view from a third world perspective is realized, however, it highlights an enormous opportunity for digital currencies to transcend national and societal borders. There is a huge market inefficiency in the undeveloped world in the areas of banking and economics, and digital currencies have the potential to exploit this inefficiency for the better.
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