The economy is booming. After the financial crisis of 2008, smart economists at central banks and governments stepped up their game. They implemented complex measures to ensure the well-being of our economy. “Trickle-down economics”, “quantitative easing”, and “buy-back program” are some of the buzzwords involved you may have seen around. And it worked! At least, it looks like it did. But opinions are scattered on the matter, particularly in the cryptocurrency space, where many question these measures. So what’s the deal?
Let’s talk market economic cycles
We have the tendency to view our history as a sort of irreversible linear progression instead of it being cyclical in essence. It seems that we are just all becoming more wealthy as time goes on, right?
Economic history shows that the market economy is cyclical. There are periods of prosperity and there are periods of poverty. The economy goes through phases in which prosperity increases as individuals start gathering more and more wealth and inequality starts to rise, setting the stage for a drawback.
To elaborate, the process of wealth centralization initially further increases the growth of wealth in general, as the individuals or entities use their accumulated wealth and power to create a more beneficial environment for growth. Later on, this behaviour tends to have a more destructive effect on the economy. This is because the wealth centralization causes these entities to get an overly strong position in the market and their self-preserving behaviour no longer benefits the economy as a whole.
Where do we stand now?
It’s incredibly difficult to judge where we stand in our current cycle. Historic analysis of these cycles uses whatever information is available to make estimates of the past environment, but this approach is obviously not fool-proof. What we can see is that our current western world economic cycle started somewhere around the industrial revolution. Ever since, wealth has been increasing. Higher living-standards, decreased mortality and higher disposable incomes are some indications of this.
However, some think we are approaching the end of this cycle and that the crisis in 2008 was a sign that the end is nigh. Increasing debt, hyperinflation and increasing inequality are very much real things occurring right now. Fingers are pointed at those smart economists at central banks. Because no matter how smart you are, the market economy is so incredibly complex that the economic measures are like shots fired in the dark.
Many of these measures rely on “trickle-down” economics. The central banks distribute fresh money through financial markets. Many of these investments are held by the rich and powerful. The idea is that the new money eventually ‘trickles down’ into the lower parts of the economy. What actually happens in a lot of cases is that the rich re-invest their profit into financial markets, partly preventing the circulation of the created money.
This sounds strikingly familiar to the self-preserving behaviour I talked about earlier, doesn’t it?
But…Bitcoin will save us!
Many seem to believe technology, and specifically blockchain technology, are saviours from this system, and perhaps are even ways to break the cyclisism of the market economy. Crypto puts the wealth back in your ownership. It removes trust from transactions, can improve economic efficiency and can protect against hyperinflation. While I agree that it offers significant economic benefits, in the current state it is not going to save us. Why?
Because the development of human society is not determined by technology, but rather by human action. The rules that decide how a certain technology is or is not applied, divided or financed are the guideline for how it affects us. In the case of crypto, this means that whilst it may have the potential to change our economy drastically, it is extremely important to very consciously make choices as a market on how we want to shape this change. We have seen pump and dump schemes, airdrops, scams, fragmentation of development and corporate-led centralized mining. I think we can all agree that these are issues we need to solve.
Being the change
Cryptocurrencies are indeed capable of disrupting the financial markets. History has repeated itself over and over again. Centralized economies have shown that people are prone to mistakes, which can result in economic collapse. Cryptocurrency can decentralize key parts of the economy, free from human interference.
Take for example the process of mining. Cryptocurrency mining places the authority of creating new money in the hands of the users. As new coins are created, they are (ideally) created at the level of the user instead of that of a government or central bank level. You no longer need to rely on complex financial measures to try and get new money to trickle down into the actual economy. Money is created at all the levels of the economy.
BUT, this doesn’t take people out of the equation. As I said, people are the decisive factor here. For crypto to make the impact it aspires to, there is still a long way to go. While smart people are working on innovations that are yet to come, we have to realize that there are certain rules we have to follow to be successful in achieving the crypto vision. If all of us go for the short-term gain, we will be making the same mistakes countless have made before.
What can you do? Call-out problems you see. Address issues in cryptocurrencies and provoke the discussion instead of screaming “FUD” or resorting to tribalism. Do not participate in protectionism but strive for progress. Contribute positively where you can.
We can create a bright future, but only if we work together to solve the issues we see.