The CEO of JP Morgan, Jamie Dimon, has recently publicly bashed Bitcoin, the most popular and valuable cryptocurrency in the world. Stating that Bitcoin is a “fraud” and that it will likely be “shut down”, Dimon attacked the cryptocurrency, ironically mere hours before JP Morgan was observed by market analysts making several large Bitcoin purchases.
While there are many articles online discussing the particulars of exactly why Dimon’s cavalier statements are poorly informed, the issue does provide a good example of a large section of public sentiment toward cryptocurrency in general.
The main reason many embedded financial industry analysts and armchair investors possess a negative perception of cryptocurrency is largely due to a lack of understanding, and the confusion surrounding exchange hacks, ICOs, and the strength of blockchain technology.
In order to gain a fresh perspective on cryptocurrency, in this article we’ll be assessing the US dollar as though it were a new cryptocurrency, using the same critical analysis tools used by crypto opponents to assess the stability and viability of new digital currencies.
The US Dollar is without a doubt the most widely accepted currency in the world. Functioning as a reserve currency for many different central banks around the world, the USD is the undisputed number one currency, and has been since the end of the second world war. It’s possible to use USD in virtually any country globally and exchange it into local currency, making it an extremely usable medium of exchange.
Store Of Value
The United States abandoned the gold standard in 1971. This action has caused the US dollar to lose more than 80% of its value in the intervening years, as measured by the loss of purchasing power caused by inflation. Over the short term, the US dollar is relatively stable, with just a two to three percent inflation rate. In the long term, however, the USD is guaranteed to lose most of it’s purchasing power.
Cryptocurrencies are limited by an algorithm that determines the pace at which new tokens are created, and sets a limit to the total number of tokens that will ever exist. US dollars, however, are created out of thin air either electronically or via the printing of new currency.
The creation of new USD tokens is managed solely by the Board of Directors of the United States Federal Reserve. This centralized control can have a profound negative impact on the economy- in 2008, the Federal Reserve created $4,500 bln for the sole purpose of buying US government debt and a range of other mortgage-backed securities. Since then, the total M2 money supply of USD, which is composed of both cash and deposits, has increased a total of 92% from $7,500 bln to $13,500 bln.
The US dollar has no intrinsic value whatsoever. Like any fiat currency, the US dollar is not linked to or convertible to any fixed amount of gold, such as the gold standard used to provide. The US dollar is instead backed by the “faith and credit of the US government”, which has no meaning in financial terms.
All this statement means is that the US government will provide the bearer of currency with one dollar should they wish to exchange one dollar. US dollars essentially function as an “I owe you” issued by the Federal Reserve that does not provide any interest, never matures, and is susceptible to a constant dilution of value by the creation of more USD.
Ease Of Ownership And Transfer
Not everybody in the world has the opportunity to access a US dollar based bank account. In order to open a US dollar bank account it’s necessary to either be a US citizen or have the means to create a US dollar based bank account in your home country. All US dollar based transactions must also be cleared in the United States.
This requirement allows the United States government to control who can use USD, and when. France’s largest bank, BNP Paribas, was fined in excess of $8.9 billion USD in 2014 by the US Department of Justice for trading with Cuba, Sudan, and Iran in US dollars while these countries were under US sanctions.
If BNP had conducted the trades in any currency other than USD, there would have been no grounds for the fine. The USD is notoriously difficult to both own and transfer.
For most small transactions, merchants are required to use an intermediary platform such as Mastercard or Visa. These platforms typically charge between three and five percent transaction fees. Wire transfers commonly take three to five working days to clear, unless the parties commissioning the transfer are required to pay more. Transaction costs for USD are astronomically high compared to cryptocurrency.
Manageability And Control
Owners of US dollars own only the paper currency that is currently in their wallet or tucked away in a shoebox beneath their mattress. All of the other US currency “owned” by individuals is, in reality, controlled by the banks that hold it. All individuals that hold their currency with a US bank is an “I owe you” statement from the bank to them.
Individuals that use banks to store US dollars are forced to trust that their bank will provide them with their cash when they request it. If a bank fails, these individuals lose their money. The US government currently guarantees up to $250,000 of deposits per individual per bank, but as this mechanism is both not funded and untested, it’s impossible to tell whether it would really work in the case of the financial collapse of a large banking institution.
There are currently more than 100 different fiat currencies around the world. Most of the fiat currencies in the world today have an awful track record, suffering from extreme hyperinflation and replacement when previous iterations fail.
Statistics show that most fiat currencies lose 90% of their value within just two generations. The US dollar is an outlier, and has only lost 82% of its total value since 1971.
If this breakdown was the white paper for a new cryptocurrency, would you buy in?