Many people long for a crystal ball to predict the future. But there is no crystal ball needed. In order to get a glimpse of the future, one only needs to look at what is already today happening at the fringes of societal and economic life. While the fiat world is ever more in decline and fiat money becomes ever more worthless, new money-like assets and economic networks are emerging creating a private competition among different monetary concepts.
Money has become an indispensable part of our lives. August Friedrich von Hayek already noted that we hardly need to think about its meaning and function, nevertheless, we do use it all the time. Money is part of a global division of labor and knowledge. It allows us as a society to become more and more productive, while the individual understands less and less of the production and knowledge processes at play. So if money is again being discussed more intensively in our present time in forums, talk shows and seminars, this is an indication that the nature of money is possibly undergoing a major upheaval. Why else should we be concerned about the future of money?
We mainly associated money today with national currencies. Since the final abolition of the gold standard, these have been in a system of free exchange rates, i.e. the exchange rate of each currency is flexibly determined by the supply and demand behavior on the foreign exchange market. Whereas gold previously served as an anchor of value and price for these fiat currencies, today national currencies are in a battle of constant devaluation. Especially because of exchange rate risks between different currencies, transaction costs for international trade increases.
In order to counteract these international transaction costs, the US dollar, the currency of the world's strongest economy in the post-war period, has politically been chosen as the world's reserve currency. The entrepreneurial response, however, consisted in the unprecedented financialization of the economy. Today, an ever-increasing number of financial players are trading an ever-increasing number of financial derivatives via the financial markets. Many of these derivatives are used to hedge exchange rate and other currency risks (hedging). The explosion in the number of hedge funds is also part of this entrepreneurial reaction, as are the numerous fintech companies. The most popular and successful among them are those that want to remove the barriers in international payment transactions artificially created by national currencies.
In addition to fintechs, tech giants such as Amazon, Apple and Google are pushing their way into the financial sector and want to compete with banks. The announcement of the new digital currency Libra by a consortium set up by Facebook speaks volumes in this regard. Although innovative, this initiative does not fundamentally shake up the nature of money. To a certain extent, they create fiat money 2.0 and are an entrepreneurial response that works within the "system" and can therefore only bring limited change. That entrepreneurial alternative from outside the "system" is Bitcoin. With this, a real monetary competition has been launched, in which governmental and non-governmental currencies duel each other.
Born at the height of the financial crisis, Bitcoin represents the antithesis of the existing financial order. The cryptoasset is an attempt to wrest money as a force influencing the economy, politics and society from the hands of central planning god-players. Money should be scarce and decentralized in order to curb the endless appetite of politicians, functionaries and economic magnates. In the eyes of its supporters, Bitcoin is a counter-reaction to the misuse of fiat money. In the eyes of Bitcoin enthusiasts, the efforts of fin- and bigtech are not the solution but part of the system, while the "system" is the real problem. Whether money is supported by the state monopoly on money and issued by private banks or even corporations, the problem remains the same: it remains in centralized hands and cannot be kept self-sufficient.
Bitcoin is above all a child of technological development. Due to new technological possibilities, the range of possible "money conceptions" for base money has expanded. Roughly speaking, four different concepts can be distinguished: -Politically, legally orchestrated money in the form of national currencies -Money limited in supply by nature in the form of gold -Algorithmically absolutely limited, disinflationary money in the form of Bitcoin -Algorithmic money with constant inflation in the form of another cryptoasset These "money conceptions" are currently in mutual competition. Money has become more versatile and money users have more choices.
As neutral, global settlement systems, public blockchains like Bitcoin function independently of the infrastructure of the traditional financial system. They allow actors to issue stablecoins in the form of digital promissory bills (IOUs) via a public blockchain. As such, these issued cryptodollars are beyond the direct control of the state, just as banknotes in the free banking era were not subject to state supervision. While the free banks of the past issued their physical banknotes in exchange for reserves in the form of gold, bills of exchange and other loans, cryptodollar issuers currently create stablecoins, which are covered either by US dollars or other cryptoassets. The possibilities are endless and the rebirth of a new free banking era seems imminent.
Depending on the use case, money users are likely to use one or the other money. Cryptocurrencies prove useful today, at the respective poles of the financial world. For example, 0.01 cents in bitcoin can be sent in seconds around the world. Microtransactions of this kind never pay off for traditional financial intermediaries. Likewise, billions in bitcoin can be sent in only a few minutes to the other end of the planet. If it gets harder and harder to use national currencies due to stricter KYC requirements, rampant negative interest rates and comparatively slow financial services, the alternative "money conceptions" and their financial solutions will continue to gain importance, popularity and value even beyond their current niche.
The probability that the experience using fiat will decrease, seems rather high. Commercial banks are permanently dependent on new reserves in the form of liquidity injections by central banks. Negative interest rates on financial products are accumulating and spreading through the financial system. Global over-indebtedness measured by the worldwide gross domestic product is also constantly reaching new highs. In the course of today's institutionalized money creations, the following impression is becoming more and more entrenched in people's minds: irredeemable fiat money is stable in price, but increasingly worthless. As a result, the flight from fiat currencies to real values is likely to intensify.
But money is under further attack: The technological development around tokenization, artificial intelligence and robotics could level the advantages that indirect exchange has had so far compared to direct exchange. Real goods could then be exchanged far more efficiently through a "high-frequency bartender" infrastructure, which is ultimately based on technological building blocks such as artificial intelligence and public blockchains. If one day we were to move into a world in which we buy and sell things by exchanging assets in the course of a digital, highly efficient barter transaction, money would become obsolete in its function as an indirect medium of exchange.
The future of money will definitely be different than today. A loss of significance of national currencies seems inevitable. On the one hand, the niches developing thereby might be filled by Bitcoin, cryptocurrencies and Stablecoins. On the other hand, the progressive technological improvements might lead to the fact that direct exchange will become ever more efficient and therefore more relevant. Certainly, national currencies might not disappear any time soon. Attempts will probably be made to maintain the relevance of government money via central bank digital currencies. However, this "fight for relevance" can only be "won" largely through greater coercion. However, it is precisely this increasing open coercion that would make people use other "money conceptions" even more because of their need to diversify.
Investing is a term hardly anyone properly understands today as investing needs to be separated from other forms of monetary activities such as hoarding or saving. As an investor one needs to be careful not to be fooled by the many scammy offers that exist out there. At the same time, it makes sense to have a long-term horizon, while potentially outsourcing the art of investing to true experts that know that they hardly know anything.