why cryptocurrencies will never survive

Why cryptocurrencies will never survive

Why cryptocurrencies will never survive

Cryptocurrencies are all the rage right now… you know Bitcoin? Most people do not know what Bitcoin actually is or how it works, either way here is why cryptocurrencies will never survive.

The short answer

It’s all about control.

The long answer

The central banks of the world (i.e. the US Treasury, the European Central Bank, the Bank of Canada, etc.) have control over the money flow. They can flow more money into the economy or take money out. The central banks are the key players who are calling the shots; and the government for that matter.

Cryptocurrencies on the other hand, through the blockchain technology, is not controlled by one organization or person. Blockchain involves many people, hence a chain. Everyone is a key player within the chain, if a link in the chain fails, the chain fails as well.

History of control

As far back as history can go, currencies were controlled. Kings and Queens of great past civilizations had their faces put on gold coins of various sizes. Each kingdom had its own gold coins. When they found out the edges of the gold coins were being cut the kings and queens took action to add distinct markings and cuts to the edges. If the markings or cuts were missing someone would know the coin is not worth it’s full value.

Modern day governments think and act the same way. How many times have we’ve seen paper money evolve? The “paper” is now some type of plastic and there are more clear areas with a hidden image than we could imagine! As counterfeiters find new ways to make fake money the governments are quickly cracking down. I’d say now a days the governments are a head of the game!

Crackdown on cryptocurrencies

Governments and their tax agencies are cracking down on cryptocurrencies. Governments are cautioning us not to buy due to the high risk of being defrauded. Many of these cryptocurrencies have signs of being a huge bubble and are extremely volatile. If you thought the last week of the stock market was volatile take a look at the price charts. And to boot do know what even three of those cryptocurrencies are! There are 25 of them! That’s like Europe before the Euro and the European Union, imagine travelling even just an hour away and having to haul out another currency to pay for things! No thank you.

Because of the volatility and lack of rules surrounding these cryptocurrencies, tax agencies have been in a mad scramble to come out with how these things are taxed. As cryptocurrencies can be used in a variety of ways, there rules are not simple.

Going forward

Central banks and governments will not lose their control over the money flows of our countries. They have the power to enact law to make cryptocurrencies illegal. Despite numerous attempts for countries to leave one of the most power controlled economical areas, the Euro zone, the Euro zone has still kept its control over the money. If 19 countries can agree to use the same currency despite their vastly different economies and countries like Canada having their own currency despite how closely tied its economic trading is with the United States, how will any of the 25 cryptocurrencies survive?

Did you think the above article was interesting? In case you missed it check out Why Gold is Still King!

What is a bank run and why you should care

What is a bank run and why you should care

What is a bank run and why you should care

Have you ever heard of a bank run? Have you ever seen a bank run? Today you will learn what is a bank run and why you should care.

Take a walk back in history

For some time in our history we would carry physical gold around with us to buy things. It was inherently risky to keep all your gold on your person or in your home, that was not guarded 24/7. Instead of carrying all this gold around with us we turned to blacksmiths. They stored and kept safe our coins and valuables. The blacksmiths issued us notes for our deposits and we on our way trading.

The blacksmiths realized that we would not redeem all our money at once which gave them a somewhat consistent reserve on hand… with the eye towards making money they lent ours out. Now this didn’t cause too many problems, providing the blacksmith had enough reserves to pay us when we withdrew our money. The issue really took hold when gold was converted to paper money.

Long story made short, if you want the long version read this from Investopedia.com, paper currency was created and gold was abandoned as currency. Because gold is a tangible object more had to be mined to bring more money into the world but with paper currency we can just print it. There is no limit to amount of paper money than can be produced, whereas gold is finite.

Paper money is trust and without trust our system collapses.

Bank running

When this trust fails, say for instance people panic over fraud activities at the bank, people run to the bank to withdraw their money. They fear their money is no longer protected by the bank but unfortunately this bank running can snowball.

Because the bank does not keep everyone’s full balance on hand; they have a reserve amount, they will not have enough money and will eventually shut the bank down. This can create further panic throughout the financial system resulting in more bank runs. The end result would be a break of trust in our paper money. If this happens the world economy could collapse.

Can you think of a time when there was a bank run? No? I can and one just happened very recently.

Bank runs in recent history

A subprime Canadian mortgage company, Home Capital Group Inc.  had one in the past few weeks. There were reports that the brokers were acting fraudulently and people ran and withdrew their money which saw their share price plummet.

Think back to 2008/2009, there was a bank run as well. I remembers TV ads in Canada from the Canadian Deposit Insurance Corporation informing Canadians their deposits were secure if a bank were to collapse. These ads were an attempt to quell the fear of Canadians and prevent a bank run. The collapse of our financial world is our own doing, if we believe the system will fail, we take actions to see it fail, like a bank run. If we believe stock markets will rise then we are willing to pay more than the quoted price and once again self-fulfilling our prophecy.

Why you should care

Who do you trust in your life? A handful or two of people, right? Well with all that we discussed before, we are actually trusting every person in this world.

If a bank run happens you could lose your money, a large enough bank run could cause a large collapse. Because of this widespread potential issue there are ways to mitigate this risk:

Your mitigation strategy

Here are some great ways to keep yourself protected from the detrimental effects of a bank run:

  1. Get educated by visiting the CDIC’s website to learn how they protect you in an event of a failure.
  2. Keep insured deposits per depositor per insured category under $100,000 (see website link above). The $100,000 total can include multiple accounts, so beware of what’s covered and follow the rules.
  3. Purchase (yes spend money) on precious metals such as gold. In an event of an entire collapse having physical gold bullion may mean you have something of actual value to buy what you need. I recommend no more than 5% of your investable assets in precious metals as they do not earn income. Precious metals such as gold has been used as an insurance against volatile markets.

Now you know what is a bank run and why you should care.