The Rise of Cryptocurrencies
Written by guest-author Peter Miller.
This essay describes the possible evolution of Bitcoin and other cryptocurrencies, from the present time until the 2030s. Popular software never exists in a vacuum, but rather continuously adapts to its market environment. In the case of cryptocurrencies this environment consists not only of consumers, but also of competitor currencies, financial regulations, the methods used to enforce these regulations, and catastrophic world events. Therefore in this essay, I intertwine the world events which I predict will occur over the next few decades with the developments in cryptocurrencies over the same period. While many of these predictions may sound far-fetched, none of them are unprecedented in human financial history.
2008 – 2018
Not long into Janet Yellen’s first term as chairwoman of the Federal Reserve of the United States it became apparent that quantitative easing was to be a permanent fixture of the new economy. The three attempts to wean financial markets off the stimulus under Ben Bernanke and the two attempts under Janet Yellen had each time resulted in plunging stock prices which threatened to drive the world economy back into recession. And having no other tools to counter the stagnating GDP figures in the USA, the Fed ramped up its asset purchases at first from $30 billion a month to $75 billion a month, then from $85 billion to $100 billion to $200 billion.
Among the general Western populations this was an era of mildly dejected economic sentiment, but not of outright despondency. Many anticipated increasing commodity prices due to inflation in the near future and cautiously moved some of their wealth into gold, Bitcoin and other stores of value. As a result, Bitcoin rose steadily from $1500 to $31,000 by the end of Yellen’s first term.
Each new rise in Bitcoin‘s price attracted short-term speculators out to make a quick buck, and long-term savers who expected the upward trend to continue. As the market cap grew, the wild price swings flattened out somewhat. Fiat currencies and credit cards were still widely prevalent in this era, and the cryptocurrency technologies of the day largely revolved around currency exchanges, merchant services, remittance services and services for maintaining price stability.
Cryptocurrencies had always had their devoted fans, but as the big online retailers adopted Bitcoin (Amazon, Ebay, Wal-Mart, etc) the sentiment among the world’s population changed from skepticism to optimism. The big brands lent their credibility and prestige to Bitcoin, and in return, Bitcoin saved them millions of dollars in transaction fees. Shops all around the world including supermarkets, cafes, restaurants, grocery stores, pubs, butchers and bakeries followed suit until one could conduct business in Bitcoin just about everywhere. The majority of merchants accepted Bitcoin as well as credit cards, however a growing number of small business owners found that they could completely avoid the high costs of credit card chargeback risk by only accepting Bitcoin and cash.
Many valuable core cryptocurrency developments emerged during this time, including altcoins, hardware wallets, and anonymisation services. Noteworthy altcoins included PGPcoin, Fawkescoin and Trucoin, each of which used a different public key algorithm to Bitcoin’s ECDSA. These altcoins were used by those wishing to hedge their risks against a breach in ECDSA. After a successful proving period the cryptographic algorithms from these altcoins were incorporated back into the Bitcoin protocol and Bitcoin became more secure than ever before.
Open source hardware wallets also grew into a multi-million dollar industry during this time. Whistleblower Edward Snowden had revealed that most computer chips contained backdoors enabling spy agencies such as the NSA and GCHQ to capture or distort user’s private keys, so the market naturally shifted towards secure alternatives. Hardware wallets were designed to interface with computers and mobile phones via USB or bluetooth and keep Bitcoin private keys separate from the compromised network client hardware.
Many forms of anonymisation services also developed during this era, but Zerocoin was the most popular due to its decentralised and trustless nature. Zerocoin began as an altcoin and was eventually merged back into the Bitcoin protocol. At this point, tracking of user’s movements via their transactions in the blockchain became completely impossible.
Towards the end of Janet Yellen’s first term the US dollar teetered on the brink of collapse. Russia, China, India, Brasil, Australia, Europe and Africa had gradually been setting up swap lines between themselves to enable trade while bypassing the dollar, and as the world became less dependent on the dollar as a reserve currency, demand for US treasuries began to fall. The lower demand for treasuries resulted in higher yield rates, and without the ability to fund repayments with further debt the Fed faced only two options – monetize or default.
Almost no thought was given to defaulting on the debt, a common train of thought at the time was, “We’ll just inflate some of our debt away – it will be relatively painless and we’ll come out in better shape for it.” And so the Fed began to print money to pay its bond holders. The first items to suffer price-inflation were fuel, food and imported goods. By the end of Yellen’s first term inflation in the USA hit 25%.
2018 – 2030s
The high interest rates in the USA, which also quickly spread around the world, were great for Bitcoin. People threw caution to the wind and flocked to the online exchanges, transferring as much of their wealth into the finite asset as they could. The spike in demand quickly pushed Bitcoin up to $50,000 then $100,000. Fearful that their fiat currencies would become completely obsolete, governments around the world seized online cryptocurrency exchange bank accounts, effectively freezing the value of Bitcoin. Executive orders were issued to seize all gold and silver, and anybody with more than 10 bitcoins was required to send the excess to specified government Bitcoin addresses. Gold and silver were easily confiscated from bank vaults and personal safes, but it proved impossible to confiscate people’s bitcoins. Even traveling internationally with Bitcoin posed no risk of seizure – people simply memorized a brainwallet passphrase and the authorities had no way of knowing how much money (if any) they were carrying.
With online Bitcoin exchanges closed, Bitcoin markets continued to operate face-to-face, albeit with reduced liquidity. Laws were rapidly drafted and passed forbidding employers from paying wages in Bitcoin. However this did not stop employees from converting their wages into Bitcoin at the first chance they got.
Aggravated by the oppressive financial regulations, large crowds took to the streets in protest. They gathered outside the banks who had imposed capital controls on their personal accounts, and outside government buildings and politicians’ houses. The protests were initially angry but non-violent, however demands from riot police and the military for the protesters to “turn around and go home” incited the crowds to violent confrontation. The police and military did not hesitate to use lethal force and the crowds quickly dispersed, making their way through the cities, looting and destroying shop fronts and warehouses. Martial law was quickly imposed all around the Western world and a subdued form of order was restored.
The already high and ever rising interest rates put incredible strain on the insolvent Western banking sectors and central banks. With nobody willing to lend to them, and with money printing now causing worldwide inflation of about 50% the decision was made to abandon fiat currencies entirely and adopt Bitcoin as the reserve currency. The government issued Bitcoin addresses to each registered business for the purposes of taxation, which was set at a flat rate of 30% for simplicity. With martial law still in effect, the military was assigned the task of enforcing tax compliance. The collected taxes were allocated primarily to the military, politicians and banks and whatever remained was used to fund the now overcrowded hospitals. Those on welfare were given food and clothing directly, which the military confiscated from supermarkets and warehouses and dumped in poor neighborhoods.
All debts previously denominated in fiat currencies were transferred to Bitcoin at a nominated exchange rate, except for government debts, which were wiped clean “for purposes of national security”. From this point on, the vast majority of fractional reserve banking ceased. Governments tried issuing bonds to raise revenue; however, having recently reneged on their debts to their stakeholders, demand was non-existent. Furthermore, savers no longer needed to buy government bonds to hedge against inflation, since by this stage Bitcoin’s absolute inflation rate was running below 10% and was flat relative to economic growth. With taxes as the only source of revenue, the costs of funding martial law began to be infeasible. To attempt to increase government revenues, taxes were initially raised from 30% to 50%, but this had the opposite effect, triggering a spike in corporate bankruptcies and therefore a drop in funds. So taxes were again lowered to 35% and gradually martial law was scaled back.
With the US dollar no longer world reserve currency, the prosperity of the more productive manufacturing economies of the world began to rise. China raced ahead and by the mid 2030s its standards of living were overtaking the West. But most surprising of all was that the economic output of Africa and South America began to climb just as rapidly. Beginning in the 2020s, the Western world entered a deep depression as entire industries, built on misallocated funds during the past forty years of central banking, found that customer demand was virtually non-existent. Governments’ inability to raise sufficient revenues for bailouts through debt and taxation meant that employment quickly shifted away from these non-productive sectors and was allocated to efficient areas of the economy.
During the 2020s Bitcoin was instrumental to the successful growth of Africa, India and South America, while simultaneously alleviating some of the hardship of the depression in the West. Finally able to save their wealth, and able to easily raise capital funds by denominating shares in satoshis on the blockchain, the third world began producing anything it could export cheaply in exchange for Bitcoin. At first, exports consisted of food and basic consumer goods, however as time went by and capital and Bitcoin accumulated in the third world, the factories grew more and more complex until technical items such as computers, commercial airliners and even fusion reactors were being produced and shipped to the rest of the world.
From the 2030s onwards, the world enjoyed steady growth thanks to the financial discipline imposed by Bitcoin. People’s natural inclination to save and retain control of their money was met for the first time in history, and as a result, the previous centralised banking and financial sectors became virtually unnecessary. Prices dropped as people stopped fueling asset bubbles with cheap debt and instead started saving to buy their houses and cars. And since fractional reserve banking was no longer possible, the economic booms and busts which had caused wide scale unemployment in the past flattened out almost completely.
The transition from fiat currencies to Bitcoin was indeed painful, but the world economies emerged stronger than ever before. Bitcoin absolutely revolutionised finance for centuries to come and in far more ways than there is room to describe in this essay. If there is one thing that we can be sure of, it is that when people are given complete control of their own financial destiny, prosperity abounds.