Cryptocurrency — The Third Party in the Global Currency Wars

Brian Chu

Dear Reader,

The world has been at war for many years, but not with guns, tanks, or missiles.

The war I am talking about is covert. Taking a line from investor Peter Schiff, our wallets, bank accounts, and assets are being drafted into the economic battlefield.

Government and central bank officials openly admitted in 2015 that they are debasing their own currencies to be more competitive in the export markets.

Welcome to the ‘currency wars’.

In every war, there are casualties and hostages. The casualties in this war are our purchasing power, liberty, and hard-earned savings. The hostages are gold and silver.

Notice how you need more dollars, euros, yuan, yen, etc, than you did 10 years ago to buy the same thing? How about the increasing number of households that need two people working to make ends meet? Your purchasing power has suffered. You lose your liberty when biting your lip to avoid giving offence in a society where they dictate social norms. To offend is to lose your livelihood.

But, how are gold and silver held hostage?

A hostage has little freedom, and they are subject to the whims of their captors who control their destiny. Gold and silver once had the esteemed function of setting prices and ensuring an honest monetary system.

They need to be mined out of the ground. Their value is at least the machinery, labour, and fuel expended to extract the ore, plus the refining and fabrication costs for turning them into coins or bars. The scarcity of gold and silver preserves its purchasing power.

In the 20^th century, fiat currency usurped this role.

Fiat currency is taking something of lesser value and declaring it (the definition of fiat is ‘by decree’) to be valuable. You work for a government-backed sheet of plastic that they deem to be worth $50 (or whatever) in purchasing power. Its cost of production has no relevance to its declared worth.  

The fiat currency system keeps its legitimacy in the global economy through playing a numbers game to hide the real value of gold and silver. They prevent gold and silver from rising in price too quickly. People will not know that fiat currency is worthless if the price of gold and silver trade in a narrow range.

So, this system has taken gold and silver hostage. It has muffled their voices.

How?

Think of the US Commodities Exchange (COMEX), the London Bullion Market Association (LBMA), and the Shanghai Gold Exchange (SGE). The price of gold and silver are set by exchange-traded contracts and price fixes (banks agreeing on a single price during the day).

The physical market has little to do with the price of gold and silver. Jewellers, mines, and individuals buying from and selling to bullion stores do not matter much.

In fact, the volume of contracts traded on these exchanges far exceeds the volume of gold and silver mined annually. Central banks, financial institutions, and traders use contracts to get the prices they want and generate massive profits for themselves.

The way out of the central bank fiat system is in exposing the actual value of their currencies, which is zero.

Why do we need to expose the fiat system as being worthless?

The exchange-traded contract system gives power to the one with the most capital. They determine the price. Unlimited capital can be created. The creation of fiat is a fraudulent process designed to convert something of inferior value to one that is more valuable. They buy to cause prices to rise and sell to push it down. They keep their winnings and create more capital when they lose.

The fiat currency system remains relevant as long as people are convinced that resistance is futile. Those in control can set the prices of all alternatives.

This has changed in recent years. A new party has entered this currency war: cryptocurrencies.

Cryptos were born in 2008. The road to cryptos from being perceived to be a mini-disk (anyone still remember them?) to something like an iPod is nothing short of astounding.

Cryptos were obscure and slowly made its way into mainstream attention. Indeed, people heard of Bitcoin [BTC] here and there during 2010–13, but the first time bitcoin gained widespread attention was when it exceeded US$1,000 in December 2013. This did not last long though, as fraud, hacking, and the Mt Gox exchange collapsing overshadowed its ascent. The price of bitcoin tumbled 75% the following two years.

Financial commentators told people that bitcoin was a means for criminals and cartels to smuggle drugs and launder funds. Both the Mt Gox incident and these narratives cemented public opinion that cryptos would never gain a legitimate status as a means of exchange by the broader public. Case closed.

Or was it?

Look at how the price of cryptos has rallied in the last five years. Refer below:

The astounding returns of bitcoin (and other cryptos) seemed to contradict the notion that it was not gaining public interest. The chart for the price of cryptos shows massively increasing demand over the last five years. The parabolic rise in the price has spurred more people to buy, arising from FOMO (fear of missing out).

Bitcoin delivered more than 17,600% returns in this period while gold delivered just under 50%. Put another way, fiat currency lost 33.2% of its purchasing power (or relevance in the financial system) in gold terms, and 99.4% of its purchasing power in bitcoin terms.

So, cryptos have secured their place among the public as an investment that can both preserve and create significant wealth. They have also exposed fiat currency’s dwindling value.

Has the central bank fiat system found its kryptonite?

Quite possibly.

How may cryptos release the bondage on the price of gold and silver?

Tomorrow, I’ll talk about the friendly fire between gold and cryptos investors. The banter between faithfuls of both sides has turned nasty. Is there a common ground for both parties to agree on? Are cryptos in a bubble? And if so, will it burst?

All that, and more, tomorrow.

See you then!

Yours sincerely,

Brian Chu,
Editor, The Daily Reckoning Australia