Cryptocurrency is Forex
Medium of exchange and low liquidity risk - on why I don’t understand people’s confusion of cryptocurrency
For the currencies that have institutional backing or single IPO launches you would absolutely be correct in calling them probable scams or pump and dumps. However, Bitcoin and other decentralized currencies with those improving the code having a minority influence on what changes can be made are as stable as pure cash. Cash, after all is a medium of exchange. Even at banks, where most of your cash is insured by FDIC. The FDIC states that “FDIC insurance is backed by the full faith and credit of the United States government.”. The USA even has a credit rating attached to them by Moody. Bitcoin in particular revolutionized the way we think about trustless based transactions.
The way I like to think about cryptocurrency is to think about it as a forex (or foreign exchange)
A country is a collection of people
The country declares a currency
People within the country get rewarded with currency by doing work (physical)
The internet is a collection of people
The internet declares a currency
People within the internet ger rewarded with currency by doing work (digital proof-of-work)
The two way you are able to acquire cryptocurrency?
- Contribute computational power and get rewarded in the cryptocurrency
- Exchange it and buy it with your own currency
The two ways to acquire foreign currency?
- Do work in the country and get paid in their local currency
- Exchange it and buy it with your own currency
A Forex Transaction Example
USD > USD/BTC > BTC > BTC/USD > USD
USD > USD/JPY > JPY > JPY/USD > YSD
By all accounts there is nothing technically different between the Japanese Yen and Bitcoin. The only difference is your perception of the country behind it and the ‘credit worthiness’ of the entities that creates money.
What I’m trying to get at with this short article is that what is used as a medium of exchange does not matter. Anything can technically be used for it. The reason the USD has more perceived stability than BTC is the cultural and societal expectation behind it. The price of BTC fluctuates way more than that of USD because unlike the US dollar there is no entity to control the price of BTC. Only that of market sentiment. That is why I try to think about it as a forex. You are exchanging “country money” for “internet money”. This is solidified by the fact that some websites do not (such as people living in areas of censorship or suppression) or cannot (such as dark markets) accept traditional forms of payment like ACH, Debit, or Credit Cards.
My favorite article about the theory of: Satoshi Nakamoto