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Does Bitcoin cause capital outflows from nations or does it add to the GDP?

btc

The Question

There has been a debate raging in most countries where citizens invest in cryptocurrencies. Governments that enforce capital control, think of Bitcoin and other cryptocurrencies as a means, to siphon off money outside the borders of the nation.

Cryptocurrencies move money outside their monetary control – possibly from their entire economy.

  1. Can investment in a crypto-currencies lead to a credit crunch – because people stop holding money in zero balance accounts?

2. Can capital exit banking systems that lend for other economic activities?

OR

Can cryptocurrencies add to a nation’s GDP( nominal/PPP)if they appreciate (e.g. gold or other assets)?

A few caveats to consider are as follows…

a) global money flows –  Crypto-currencies do not differentiate amongst nations – because all cryptocurrencies are transferrable amongst peers globally, without the need for any intermediary agency (like a bank or a wallet or any other service).

b) relative size of the monetary system  – currently the total market capitalization is about 0.5 Trillion dollars. Compare this to the size of the monetary system (i.e. cash in circulation, stock market capitalization and other forms of liquid assets). Economists (monetary) have classified this into M0-M4 systems. For nation-states like the US, the 0.5 Trillion dollars is small enough and not as yet significant to cause major swings in the M0-M4 system. However, for many other states, the M2, M3 and M4 systems could see significant reduction owing to the short-term attractiveness to attract higher appreciation.

c) relative size to the nation’s GDP-. For many smaller nation-states with smaller nominal (or PPP) GDP’s, the crypto-economy is large enough to cause (either a positive or negative) swing in the economy. As an example, holding crypto-assets that are valued internationally can increase the nation’s GDP.

d) Volatility – The extremely volatile nature of crypto-currencies, and sometimes totally unknown currencies such as BTCC, cause enormous risk. For example, the direction of monetary flow, demand and supply is completely not controlled by a single entity.

 

Blockchain Q & A

Blockchain

Bockchain is one of the world’s top technology trends in 2020.Here is some important Blockchain Q&A.

In your opinion what do you think is responsible for Bitcoin’s dominance?

The network effects i.e., the number of people globally using bitcoin, the number of exchanges accepting bitcoin, the ease of use, the stability of traffic, the stability of the network, the number of nodes supporting bitcoin, and the predictability of supply, the predictability of demand and standardized mining support

Effect of COVID on cryptocurrency

If at all covid19 has bought about 1 understanding  – it is that bitcoin is a store of value. If you observe the stock market before and after the March 2019 crash – BTC’s value has recovered most of its value.  The price of Bitcoin over the past 1 year – has relatively been stable – despite the market crash.  Compare this with the NASDAQ, DJI, and S&P500 i.e., refer the 1 year horizon plot from Yahoo! Finance, and you can see the difference. Bitcoin has – over the last 1 year remained mostly at the same price. In fact – during the crash Bitcoin price crashed as well, but has increased significantly more.

what is better? Proof of Work Vs. Proof of Stake

Proof of stake is ASIC resistant, and ensures more or less equitable participation by users. There are many variants of proof of stake such as Distributed proof of stake, Delegated Proof of Stake, True proof of stake, etc. Each of these have their own advantages and disadvantages compared to Proof of work. However, on the overall the True Proof of Stake algorithm that is being added to Ethereum as well already live on production in the Algorand cryptocurrency provides an equitable, decentralized mechanism to prove consensus.

In what ways do you think the crypto space will evolve this year?

We will see a huge increase in applications in decentralized finance. The innovations in decentralized finance using smart contracts are proceeding at a tremendous pace. Already, we see that firms such Celsius.network , compound finance, DAI and Maker protocols are creating such a financial environment where they are able to unlock a lot of value using cryptocurrencies. This year will be the year of decentralized finance, in my opinion wherein newer modes of creating borrowing and lending at a much more equitable position is going to be possible.

What’s your take on Central Bank Digital Currencies?

Central bank digital currencies will possibly make the mint irrelevant in the future. It is also possible for governments to track currency flows ,usage and such much more easily with central bank digital currencies. However, these digital currencies are going to take time for the society to adopt. They obviously are much more secure than regular currencies. It can eliminate a lot of black money hoarded in currency notes

In your opinion will other decentralized ledger technologies (DLT) replace blockchain technology?

DLT and blockchain are synonymous in many – ways. However, you can have DLT without consensus or without byzantine fault tolerance. For example, distributed cloud based noSQL databases could be considered as DLT. However, blockchains are specific more technically adept form of DLT and have their own uses.

Do you think governments all over the world are going to accept cryptocurrencies? If so why? if not why not?

At the current moment, many governments are worried about capital flow. I have written extensively about this on my blog. Here:

As a result many governments heavily regulate this asset.

what is the single factor that is preventing the adoption of cryptocurrencies?

There is are many factors e.g., usability of the system, trust in the system, etc…. we have found about 21 different factors that affect adoption and have documented these in our paper. https://aisel.aisnet.org/cais/vol45/iss1/27/

Refer to table 3

If you had three wishes for the crypto space and a Genie who could make them come true, what would the wishes be?

1. Mass adoption 2. Legalization of ETFs and 3. High transaction speeds.

Why Emerging Economies need to invest in, legalize and regulate Blockchain and Major Cryptocurrencies?

Brics flag image

In this article I shall focus about the BRICS nations as they are the largest emerging economic bloc.

There have been talks of banning, opening up and re-banning the crypto-sector in India. Similarly there have been ambiguous laws about cryptocurrencies in china – which for the most part controls the entire mining network of Bitcoin, and possibly many other networks with the largest mining companies and hardware producers, exchanges operating from China or by Chinese nationals. In fact the largest crypto-exchanges both by daily trade volume and by market capitalization are operated by Chinese nationals (or former Chinese nationals). Some of the largest cryptocurrencies are operated by Chinese nationals as well. Another case is that of Russia, that has invested a lot of time in legalizing and to some extent regulating cryptocurrencies. Similarly Brazil hosts some of the most innovative blockchain experiments including legalizing land records on blockchains. With all such innovations happening,

Why should BRICS economies care about this technology?

  • Firstly, Cryptocurrencies are slowly becoming an alternative financial asset, similar to gold, diamonds, platinum – only that its properties make it more difficult to detect, control and ban. Even if countries were to legally void out cryptocurrencies, the ease of owning these assets for any individual or citizen would make it difficult to detect or control. In India during the 1980’s and 1990’s the government had imposed tremendous amount of taxes on importing gold, which led to an increase in gold prices, while giving birth to a whole range of gold-ornament firms – some behemoths worth more than several billion dollars just because they were able to “bring in” or “arbitrage” gold prices from international markets. Such legal requirements often – at the cost of preventing – normal retail customers from acquiring an asset will create an elite set of individuals who will possibly monopolize this market. Banning any economic asset for ever – has never been a possibility historically….
  • Secondly, stifling innovation in sectors that are heavily corruption ridden or asymmetric information driven, with virtually no legal oversight creates a bane to society. For example, the real estate sector and property registration issues in the emerging economies have long been an eyesore to the efficient functioning of markets due to heavy policy dependence. Decentralizing and plugging in blockchains has demonstrated significant efficiency into this sector.
  • Thirdly, being home to the largest technically capable information technology specialists in the form of programmers, designers and creators of software, these economies can rapidly scale to true products as has been demonstrated by many large exchanges and DeFI innovations that are shaping today’s world. If governments were to ban this technology or its associated crypto-currencies, they would be denying this huge population of technology professionals a true first chance at the leap. For long, hugely regulated telephone networks, service delivery systems such as utility had bought India and Brazil to a bottleneck. By the time liberalization happened – overnight after realizing the benefits of these technologies, it led to rampant “renting” by few vested parties denying ordinary citizens of the true right to access.
  • Fourthly, proper regulation and appropriate enforcement of financial instruments in this sector will lead to a huge tax collection for the government. An outright ban would leave huge amounts of money on the table. Not only that, properly regulating exchanges and using intelligent platforms such as chainanalytics and other financial tracking systems, money flows can easily be tracked back to owners much more easily than physical assets that are often hidden behind layers of owners. Thus proper financial regulation will bring in the necessary control and enhance government tax collections.

The Staking Business

money, finance, business

Traditional Financial Models

While we have written quite a few articles about Defi, the risks they pose, the challenges it poses, and such – we have never really written about Defi in terms of deep linking with the blockchain protocol. Traditional financial institutions use forms of money to loan out, and in the process earns interest. However, this is not necessarily because the lender is truely earning value for the money – through an investment that returns a positive outcome. Very often the borrower can be taking a loss on the borrowed investment, and might inturn be returning the interest because of the contract involved. There is often no ascertainable way in traditional financial modes of earning interest to be sure that the borrower is making positive returns on the borrowed capital.

The Staking Financial Model

Staking is a financial model wherein a participant (who operates as a lender) can make a deterministically positive return on his investment. For example, a staker on a network can earn a positive interest determined by the network protocol. Stakers on the blockchain network are assured of deterministic returns when they submit their deposits to intermediary platforms or directly participate in staking pools for the sake of confirming and mining blockchains. On the overall, staking is a low risk positive return and cash flow business, where one can deterministically determine the returns on ones own investments. Staking for proof-of-stake derived algorithms is a positive step since it reduces the carbon footprint on networks, and enables a steady supply or limits supply to the means.

Staking platform support

While staking is slowly becoming a competitive business, with smart contracts written by many wallet-based platforms such as Coinbase, there are entire businesses such as staked.us that are dedicated to staking one’s crypto holdings for mining. As time goes by and as staking becomes increasingly profitable, more and more crpto-exchanges and wallets will support it. Very often on platforms such as staked.us, users can earn anywhere between 10% and 4% for just staking their cryptotokens. This is a low risk/medium return business dependent entirely on the price of the cryptocurrency so involved.v st.

Cryptocurrency owner types: commercial user and speculative user

Types of Users

Most users of Bitcoin and Ethereum are of one of the two types: the commercial user and the speculative user.

The commercial user uses bitcoin to purchase stuff from either physical or online store. Similarly, the commercial user of Ethereum uses Ether for staking against contracts such as the issuance of initial coins. Other applications could include supply chain payments, betting contracts and prediction markets.

The speculative user holds onto the crypto-currency in the hope that its value would continue to rise.  The commercial user pays a small fee each time he spends Bitcoin/Ether. This fees could be as low as 0.0001 BTC  (the median transaction fees is about 18 cents). You can look at how to calculate and choose your transaction fee here.

Supply and Demand

Bitcoin and Ethere, unlike any other form of asset e.g. Gold or diamonds or cash, is limited in supply. The table here provides the schedule for production of Bitcoin.  New Ethereum issuance would stop when Proof-of-stake is enabled by the nodes.

The total number of Bitcoins produced reduces exponentially, as time passes, and by about 2041, almost all new Bitcoin production would stop. New Bitcoins are produced as a consequence of mining. Each miner, who creates a new block after validating a set of transactions is rewarded in Bitcoin by the network. Over time (approximately 2-4 years time), these rewards halve.

As the number of merchants such as Microsoft X box store or Overstock starts accepting Bitcoin, the number of commercial users for Bitcoin would increase. Imagine remitting money or purchasing a digital good from a non-local store without needing to pay a 30$ transaction fee to the bank.   Here is a list of US merchances accpeting Bitcoins. Simultaneously, as awareness about Bitcoins and Ether increases, the number of buyers purchasing these for speculation increases.

Economics works until regulation

Given these facts i.e.

  1. A limited supply of bitcoin and Ether.
  2. Increasing commercial usage  (by means of increasing number of global merchants accepting BTC and using Ether).
  3. Increasing number of speculative users ( by means of real time trading and buy-and-hodl investing for BTC and Ether).

It is almost a no-brainer to see why conversion rates (for BTC-Ether) are increasing. We’re not accounting for the lost BTC/Ether per year.

However, these laws of economics hold only until some external event (what economists call shock) happens. For example, a regulatory authority decides that it is too risky for its citizens to bypass financial controls and engage with a global market. The regulator could then entirely ban BTC/Ether and make it illegal to hold/trade in the same within the country. This is what we saw during the past week in China. Venezuela another country that saw massive deflation of their local currency banned bitcoin earlier.

But most global markets that want to encourage a free flow of capital to their economy would not ban any asset, in the name of protecting it’s citizens from speculation. (For example, would any country prevent its citizens from collecting art, or vintage cars or any other antiquity in limited supply.)

How LinkedIn Is Taking Over the World

The above article sums up LinkedIn’s aspirations. With their ability to create an economic graph, they will be able to, as Jeff Wiener says “  We want to step back and allow capital, all forms of capital, intellectual capital, working capital, and human capital to flow, to where it can best be leveraged and in doing so, help lift and transform the global economy.“

Linkedin, at this point, is the one global company which knows most about the geographic demand/supply patterns for job-related skills. With Lynda’s acquisition – they will be able to provide targeted skill development across regions where demand, and supply are not balanced.

Let’s take an example here. Let’s assume that in New York, there is a huge demand for computer graphic designers.  Very few people searching for a job either on LinkedIn or from one of their partners in New York have those skills. This means that there is a surplus of jobs needing computer graphics skills, while very few people have those. In the current economy- these jobs would probably be transferred out of New York (probably permanently).

LinkedIn, now with Lynda can refer people to  certain specific courses and job training for a fee. Job seekers can then subscribe to these courses for a fee (an important revenue stream for LinkedIn). Upon completion of these courses, these new skills can now get advertised to recruiters (or firms). LinkedIn + Lynda will now form the new hotbed for recruiters to search for people having trained in certain technologies and accredited too. Combine this with the ability to predict job skill requirements from existing data .. There is a killer combination. LinkedIn can potentially detect job skill requirements – ahead of time and facilitate training of job seekers in those skills by the time these jobs actually become available. This cycle would retain jobs and skills in geographic regions.

It will be interesting to watch how Lynda, in addition to (or in competition with ) Coursera, Mit-X and other e-learning platforms figure in LinkedIn’s large vision of the Economic Graph.  It will be interesting to note how a large software platform which offers a multitude of services can influence all kinds of capital (intellectual, working, human, social) flows in a globally connected economy.

How LinkedIn Is Taking Over the World