You maybe did an Economics 101 course at your university. Economics has become so relevant for any professional that many universities around the world make all their students take at least a most basic semester in Economics even if their specialties have nothing at all to do with it. It’s not a bad idea. If you’re involved with cryptocurrency trading, even the most rudimentary economic notions can help you a great deal to negotiate the cryptoverse which is incredibly hard to navigate.
Among the main ideas in Economics is the cycle. All national economies in the world develop in cycles. Sometimes they’re expanding, sometimes they’re contracting. An expansion ends up in a crisis that we call a recession in which a lot of the value achieved during the development is lost. But then it recovers, and it starts growing again. Then the cycle begins again.
That idea holds the status of dogma in Economics, and it’s the cornerstone (direct or indirect) of almost every other thought in the area. It implies that economic growth can’t possibly be sustained indefinitely and that expansions inherently hold the seeds of recessions.
Insane amounts of ink have been spilled on that subject as economists have tried very hard to do all kinds of intellectual contortions aimed at proving that recessions are not such a bad thing after all. That’s how we get, for instance, the idea of “creative destruction” also called Schumpeter’s gale. It’s a contradiction in terms of course, but it’s not rare to find such glaring paradoxes in Economics.
We’re telling you all this because right now we’re experiencing two different cycles at the same time. The cryptocurrency market encountered a crisis on Dec. 18th, 2017 that’s cost more than 85% of the value in all assets available. On the other hand, the world’s traditional economy has been doing reasonably ok since the last global crisis in 2008, which was among the worse in history.
If you go by the traditional cycle theory, then there are two conclusions to be drawn for each case. For crypto, the receding cycle will stop sometime in the future, and the market will start growing again. Some analysts are even saying that last week’s events in Bitcoin pricing are proof that the growth cycle (a bullish run) has already started. We believe that to be premature, but that’s material for another article.
The world economy, on the other hand, is headed towards yet another global financial crisis. Nobody knows when it will happen or how it will start. But everybody knows (or at least they should) that winter is coming again for the world and making preparations wouldn’t be the worse of ideas.
The question is: can the next global crisis be avoided? More importantly, can it be avoided using cryptocurrencies and new financial technologies? Some observers think so, mainly because of Ripple’s technology and cryptocurrency (XRP). Let’s follow their reasons to feel like this.
Liquidity in a crisis
When a crisis hits, money is needed everywhere. More in some places than in others, but the point is that a good injection of capital in some strategic locations could lessen the effects of a crisis and prevent it from running amok.
If you (well, the banks, the governments) can’t fill a money void with actual money, such void becomes larger it begins to create terror and to influence other zones in the economy (geographical and industrial) thus propelling the crisis forward. It becomes a vicious cycle. The mess gets worse because you don’t have the money available to stop it. The crisis prevents you from getting the money to stop it, so it keeps getting worse. It becomes an egg and chicken kind of thing.
The problem is that transferring value all over the world is a slow, expensive and challenging process. Even as the worse crisis develops, there is money and value somewhere in the world. But because the procedures required to bring that money to the right place are so awkward, it rarely happens that the badly needed cash finds its way to the area where it’s needed most. In other words: the problem is lack of liquidity when the world faces a new crisis.
By that token, if liquidity could be improved significantly, the next crisis could be avoided or, at least, its effects could be controlled before it becomes too severe. This line of reasoning continues by saying that the perfect tools for that are none other than cryptocurrencies, specially XRP.
Why XRP? We’re glad you asked. XRP is Ripple’s cryptocurrency, and Ripple is a private company that’s obsessed with international liquidity transfers. Ripple wants money to move freely all around the world quickly, cheaply and reliably and it’s been working hard at achieving that for almost seven years. Because that’s been Ripple’s use case of choice for XRP, the coin is now incredibly efficient when it comes to international value transfers. In that regard, it has no real competition in the crypto verse.
Crypto as the crisis begins: The capitalization issue
So if you want liquidity for money to move around the world, XRP is the way to go. We agree with that wholeheartedly.
But let’s dig just a little deeper.
As a global crisis starts, stopping it in its tracks would require insane amounts of money. Trillions of dollars to be available in a matter of seconds so that the critical weakest links in an economy can be strengthened. Could that really be done with cryptocurrencies? We fear the answer is negative.
So why not? Because it’s all about volume. XRP’s market capitalization is about USD 13.5 billion. That is a lot of money, of course, but it’s also peanuts compared to the amounts you need to have available if you’re going to stop a crisis from going rogue. You just can’t change a national economy’s direction with 14 billion. That amount is not enough even to buy Amazon, Apple or Microsoft which are all valued at a Trillion dollars currently.
The highest market capitalization in cryptocurrencies is Bitcoin (surprise, surprise!) which is worth 88.7 billion. That’s also not nearly enough even to start a bailout in the scale needed to prevent a global crisis.
So no, the numbers are cold, discouraging but clear. At the current capitalization levels, the cryptocurrency market is a drop of water in the ocean of money that global crises move when they happen.
Cryptocurrencies are useless in preventing a new crisis as things stand. The question is, will they remain useless forever in this regard? Not necessarily.
Let’s say that at some point in the future Bitcoin’s success (or XRP’s) is such that it reaches a capitalization level that is similar to the amount of USD available in the world. That would be a completely different scenario. In such a case, there would be enough value in Bitcoin or XRP to stop any crisis as it starts, and the added liquidity facilitated by fast transfer times would indeed make all the difference in the world.
So yes, it’s possible in principle, for a handful of cryptocurrencies to reach a capitalization level that would make them useful in preventing the world’s next economic holocaust. But we’re not there yet.
Chances are that when the next global crisis arrives, we’ll have to face it without any help from crypto. On the other hand, if such a disaster should materialize at a time when the cryptocurrency market has a good cycle, then that will help digital asset investors to face the music without so much stress.
Satoshi Nakamoto created the blockchain and virtual currencies with the explicit aim to get rid of the traditional financial system. He (whoever he is) was very vocal about that. And it’s not an impossible goal. But before it becomes viable, Bitcoin’s price must go up a great deal. And if Bitcoin really eliminates banking as we know it, that itself would go a long way in preventing a further global crisis. Let’s not forget that the 2008 global crisis came about because of the mixture of sheer greed and incompetence prevalent in Wall Street regarding the real estate market.
We hope for the blockchain and cryptocurrencies to really help the world be a better place and prevent the pain that comes with every global crisis, affecting the weakest people in all countries primarily. But crypto is still too young, and before it can really make such a significant difference, it has to grow up and mature.
Image courtesy of Pixabay.
Disclaimer: The presented information is subjected to market condition and may include the very own opinion of the author. Please do your ‘very own’ market research before making any investment in cryptocurrencies. Neither the writer nor the publication (TronWeekly.com) holds any responsibility for your financial loss.