Here is our talk from the CryptoFin Conference from October 2019 in Tallinn about how to disintermediate the banks:
Here is the short summary. We need:
- More tokenization
- Crypto credit-money
- Wealth management automation
Here is the talk:
Here is our talk from the CryptoFin Conference from October 2019 in Tallinn about how to disintermediate the banks: Here is the short summary. We need: More tokenization Crypto credit-money...
Oct 16, 2019 . 20 min read
Here is our talk from the CryptoFin Conference from October 2019 in Tallinn about how to disintermediate the banks:
Here is the short summary. We need:
Here is the talk:
In the previous article, we looked at what influences the fiat economy's interest. The focus of this article is the crypto economy. We have three parts here: 1. We look...
Aug 19, 2019 . 10 min read
In the previous article, we looked at what influences the fiat economy’s interest.
The focus of this article is the crypto economy. We have three parts here:
1. We look at the same factors, which are influencing interest in the fiat monetary system:
2. We calculate how much should be the base interest (interest without the credit risk) in the crypto economy.
3. In the end, we compare the fiat monetary system with the crypto monetary system. We see as well, which system benefits which segments of the population.
Consummation preferences are presumably the same as in the fiat economy.
However, crypto users are rather younger generations / Millenials, which are characterized by relatively low saving rates and higher consummation preferences. i.e. the demand for borrowing is bigger than the demand for lending. This factor translates into higher interest.
Time preferences for crypto users are very similar to consummation preferences. This factor translates into higher interest as well.
Rate of base-money production/destruction – Bitcoin, Ether, Dash, Litecoin, etc. have built-in growth mechanisms/inflation mechanisms, where miners are getting paid with the freshly minted crypto-coins for providing the infrastructure for the decentral networks.
These platforms are open source platforms, but the costs for running network infrastructure (hardware, bandwidth, and power) are real and they need to be financed. The built-in inflation mechanisms are the solution for financing the real network infrastructure costs.
This crypto-monetary expansion is at the moment following:
For example – Bitcoin monetary inflation is 4.29% per year and Litecoin monetary inflation is 8.41% per year.
Rate of credit money production/destruction – today’s fiat credit money – the commercial banking money, which is 90% of the total money – this is missing at the moment in the crypto economy. The crypto economy has only base-money. The crypto sector does not have credit-money yet.
The credit money has been around for the last 5’000 years, the first instances of the credit money are known from Mesopotamia and it was created in the peer to peer transactions. Credit money was created in peer to peer way for the first 4’700 years until the commercial banks started to emerge ca 350 years ago.
Then the “private credit money” of the commercial banks emerged and after the introduction of central banking, we arrived into our current “central credit money” incarnation.
Let’s put this in the perspective – our current fiat monetary system is 100 years old; the credit-money exists in different incarnations for the last 5’000 years. As credit-money has been around so long, we support the thesis, that it will emerge as well in the crypto sector.
The store of value is very strong in Bitcoin. It’s called as well the “digital gold”. Store of the value function is present in other crypto-currencies as well, but less strong than in the Bitcoin.
Crypto-currencies are not manipulatable by the central instances as the base-money or credit-money in the fiat economy. This missing manipulation is the basis for the store of value in the crypto monetary system.
As there is no-manipulation compared with the fiat monetary system, then this results in higher demand for the crypto-currencies, which translates into higher interest.
Proximity to money creation – base-money is created by decentral means and it finances the miner’s operations. Decentral credit-money is still missing in the crypto sector, but it should be the only question of time until it will emerge.
If we decentral credit-money will emerge, then the proximity to money creation will equalize between the wealthy and the un-wealthy. It’s not only corporates and wealthy, who will be privileged, but everyone will be privileged to receive crypto credit or credit-money.
Here is the summary of the factors for the crypto-interest:
Results in higher interest than the equilibrium
Results in higher interest than the equilibrium
Rate of base money growth
Bitcoin base-money is growing 4.29% per year; other main crypto-currencies are in the same area. It is less compared to the fiat world.
Rate of credit money growth
Credit money is yet missing in the crypto sphere. The total money growth ratio is therefore equal to the base money growth ratio.
Proximity to money creation
Market participants will have the same proximity to money creation. No-one has an advantage compared to the others
Store of the value function
High store of the value function, especially for the Bitcoin
The following will answer the key question of this article – how much should be the base interest for the crypto sector – we look at this at the example of Bitcoin and Ethereum.
Younger population results in higher interest
Younger population results in higher interest
Younger population results in higher interest
Younger population results in higher interest
Rate of base-money growth
4.29% per year
4.64% per year
Rate of credit-money growth
0.00% – it’s missing at the moment
0.00% – it’s missing at the moment
Store of the value function
High store of the value function drives the interest higher
Medium store of value function has a positive impact on the interest
Base interest per year
7% – 8%
6% – 7%
These would be the estimated base rates for the crypto base interest rates. I.e.if lending crypto, then the interest rate should start from this area.
This table summarizes the above discussion:
Less impact than in the crypto sphere
Rather younger populous implies higher consummation preferences, resulting in higher interest
Less impact than in the crypto sphere
Rather younger populous implies shorter time preferences, resulting in higher interest
Rate of base money growth
300% to 1’000% depending on the central bank in the last 12 years
4% – 8% per year depending on the crypto
Rate of credit money growth
6% of total money growth per year
Proximity to the money creation
The ones with high proximity to the money creation have preferred terms
No preferred segments
Store of the value function
Low store of the value due to continuous monetary inflation
High store of the value
Fiat money is inflationary money, with a low store of the value function. It’s the money, which benefits the ones, with high proximity to the money creation, but not the general population. It benefits the few and not the many.
The benefitted ones have better credit conditions and are paying less interest than the required base-interest in the economy. This results in the continuous wealth transfer to the benefitted ones (at the cost of all other segments).
Crypto money is at the first-hand high store of value money. There are no preferred segments, the proximity to the money creation is the same for all. This money benefits the general population. It benefits the many and not the few.
In every monetary system, there is interest - the price to be paid for using someone else money. In this article, we focus on the “base interest” - i.e. how...
Aug 19, 2019 . 10 min read
In every monetary system, there is interest – the price to be paid for using someone else money. In this article, we focus on the “base interest” – i.e. how much should be the interest, if there is no credit risk.
We focus here on two topics:
The drivers for the interest are:
First, we analyze these factors and then we conclude how much should be the base interest in the fiat economy.
The output of the economy is expressed as GDP – Gross Domestic Product. There are multiple ways to define what the GDP is, but for this article, we use the following definition – GDP the sum of all income paid to persons (not to the companies, but the natural persons). So, the persons are receiving an income and then they decide how much to consume or to invest/save.
The interest is the price for the money, it’s the price, which has to be paid to someone else for delaying his consumption.
High interest would imply, that rather a small number of persons would like to delay their consumption – this results in the shortage of money in the economy – therefore the price for money – the interest – will be higher than equilibrium.
Low interest would imply, that rather a big number of persons are confident to delay their consumption – this results in the over-supply of money in the economy – therefore the price for money – the interest – will be lower than equilibrium.
By adding all these different wants of different individuals together we will get the fixed income markets, which intermediate between the “endpoints” – between the natural persons.
The time factor has his influence too:
If the amount of money in the economy would be constant, then the consumption preferences and time preferences would determine the price for the money – the interest – in the economy.
But as we see in the following – the amount of money in today’s fiat economy is not constant, but continuously growing.
Central banks are creating/destroying base-money. It exists:
The amount of base-money is not as stable as you might think. Federal Reserve increased the amount of base money after the 2008 financial crisis by 350%. Swiss National Bank did the same, but by 1’100%. This was called Quantitative Easing. We think Quantitative Perpetuity would be a better term to describe this.
If we look at the total base money growth of all central banks over the last 40 years, then we see the following:
We see continuous world-wide base-money production of ca 12% per year since the 1970s. If one asks, where is the inflation coming from, well – that’s one of the reasons here.
Increasing the amount of base-money lowers the interest rate – there is more supply of money in the economy, and the price of money – the interest – will go down.
Decreasing the amount of base-money decreases the interest rate – there is less supply of money in the economy, and the price of money – the interest – will go up.
Central banks influence interest as well with the interest they pay for the reserves of commercial banks on their central bank deposits. For example, in Switzerland, this rate is negative – 0.75%. Commercial banks have to pay interest to the Swiss National Bank (and not vice versa as one would think).
The hypothesis is that negative interest rates will stimulate bank lending – the idea being that banks would rather put the money into the circulation instead of paying interest to the central banks for their deposits. Well, the reality is, however, that these costs are just passed over to the consumers.
The biggest part of the money is not the base-money but the credit-money. The amount of credit-money is changing even more than the amount of base-money.
Commercial banks create credit money when the loans are issued; commercial banks destroy credit money when the loans are paid back. In the relative terms – 90% – 97% of the money is credit money, created by private organizations – by the commercial banks.
The money that you have on your bank accounts is not the base-money from the central banks, it’s the credit-money created by the commercial banks. The only way for the non-bank-entities to use the base-money is to use the coins or the notes (they are issued by the central banks).
The amount of credit-money can grow and can decline in the economy.
If more loans are issued than paid back – then the amount of the credit-money is growing in the economy. This means there is more money supply, which leads to lower interest – the price for the money.
If more loans are paid back, then issued – then the amount of credit-money is declining in the economy. This means there is a declining money supply, which results in increasing interest – the pice for the money.
The amount of total credit money (so-called M3) is growing by 5% – 6% per year. One could say that every unit of credit-money is then devalued by the same ratio year by year (there is rather a constant amount of the real assets and continuously growing amount of the credit-money).
This continuos devaluation of the money-units means from another side the inflation for the end-users. The interest paid to the lenders should compensate for the continuous devaluation of money.
The store of value function derives from the other parameters. It’s listed here because it’s very different for the fiat monetary system as compared to the crypto monetary systems.
The world economy had mainly deflationary scenario 1870 – 1910. After WWI it’s mainly the inflationary scenario. The deflationary scenario benefitted the savers – their money was worth more and more, the deflationary scenario enabled the middle class to emerge.
The inflationary scenario – our current fiat system scenario – benefits the debtors – they have to pay back less and less real value. This scenario hurts the middle class as well via pension fund mechanisms. The value of the pension funds should grow at least as much as the loss of value through inflation. But as this is not the case, then the pension funds pay-outs will be much smaller as required for keeping the life-standards of the middle-class.
Benefitting the savers is the store of value function of the money. Now, if the amount of credit-money in the economy is growing ca 5% – 6% per year – meaning every unit of credit-money is devaluing by the same ratio – then how is it possible to have a store of the value function in today’s fiat money?
Well, it’s clear, the current fiat monetary system does not possess any store of the value function. It’s an inflationary monetary system, where the wealth creators of the economy – the middle class – will discover latest by their retirement that after working all their life, they have not created any wealth for themselves…
If a debtor has to pay less interest, then the fair interest in the economy, then we have hidden wealth transfer to the debtors. It’s because of the following – if inflationary money is losing more value than the interest, which the debtor has to pay than the debtor is benefitting financially from this transaction.
The wealthy have to pay little interest, which is less than the fair interest in the economy. This results in the hidden wealth transfer to the wealthy.
The non-wealthy have much higher interest, which usually higher than the fair interest in the economy. This results in the hidden wealth transfer away from the non-wealthy.
Why are there different interest rates for the wealthy and for the non-wealthy? Well, it’s the proximity to the money creation, it’s the proximity to the commercial banks’ lending, which counts. The wealthy, which are closer to the commercial banks, will do better and the non-wealthy, which are definitively not close to the commercial banks, will do not so well.
Wealthy individuals and big corporations have easier access to credit creation via commercial banks. They have to pay much lower interest. Consumer segments, however, have reduced access to the credit. They have to pay much higher interest for the same nominal values.
Central banks quantitative easing, which started after the Lehman crisis, set the goals to facilitate the lending. But it didn’t work – the QE landed in the bank accounts of corporations or big banks. Little of this trickled down to the general population, to the non-wealthy.
It’s the proximity to money creation, which counts in the current financial system. If commercial banks don’t want to lend to the Small Medium Enterprises or consumers, then they will not do this. Pushing QE into the economy, will not force private organizations (banks) to do more lending. Pushing QE means only, that the wealthy are becoming more wealthy.
Inflation is defined as a loss of purchasing power of money. Mainstream macroeconomy presents the orthodox view that healthy inflation is always required and healthy for the economy. U.S. Fed for example targets 2% inflation per year.
This struggles us because the productivity increases continuously due to the innovation, which should lead to the decline of the prices, i.e. to the deflation (opposite of the inflation). This healthy deflation is beneficial to the savers because they will be able to consume more real assets (opposite to today’s situation, where money buys less and less).
However, as central banks are using monetary instruments to create inflation, then we have inflation in the economy.
Back to the interest – the base interest in the economy should be at least as much as the inflation, i.e. it should compensate for the loss of the purchasing power of the money.
This leads us to the question – how much is the inflation in today’s economy? We have to distinguish between the:
Official inflation calculation is “kind of optimized” – let’s think here on the transfer costs (health insurance costs are not included) and substitution effects (one should eat chicken if beef prices grow too much). The fact is that the official inflation calculation was changed in the 1990s. It is now circa 2.5% in the U.S.
Real inflation, based on the before 1990’s method, should be around 6% per year in the U.S. (please have a look at the www.shadowstats.com for the backgrounds).
This implies that the base interest should be ca 6% in today’s economy.
There is a total output of the economy (GDP) and there is a total amount of the money in the economy (so-called M3).
There are two scenarios for the base interest:
The first scenario helps the party’s with huge liabilities – for example, our governments. Having higher inflation allows to reduce nominal liabilities, it allows to “inflate” the debt away.
The second scenario helps anyone, who is borrowing for investing in the real assets – either for buying a house or for the retirement or for the kid’s education. This scenario is the best for the middle class.
The rate of credit money growth is circa 6% in the U.S, based on the discontinued government M3 statistics, however, recalculated by ShadowStats:
This implies the base interest should be as well ca 6%. Otherwise, the money would lose his value just by staying on the bank account.
Central banking is driven by the philosophy that there has to be inflation in the economy. Negative inflation (or deflation), which would be actually beneficial for the savers, is considered something very bad by the central banks…
Central bankers will explain their view in the following way – if the value of money will increase over time, then the consumers start to delay consummation decisions; enterprises will not invest, and all economy will become to the standstill.
Well, central bankers forget that, for example, the U.S. economy before the creation of Fed was a deflationary economy – it was economic boom time and it was the time where the savers become wealthier.
But why then this misconception in today’s central banking? Well, the trigger is the amount of credit money in the economy. Today’s economy is significantly over-leveraged by debt. The pre-Fed economy had much lower debt ratios. There was a clear separation of the base money (gold) and credit money in the pre-Fed area. Credit money was temporary and was always reversed back into the base money (gold). This system didn’t allow to create debt bubbles.
It’s not the fear of deflation, it’s the fear of the debt bubble, which keeps the central bankers inflating the system. Our current system doesn’t have a clear separation between the base-money and credit-money. Credit-money was supposed to be temporary and always reversed back to the base-money. But this is missing – we have not temporary but a permanent credit-money, which leads through inflationary policies to ever-growing bubble.
By lowering the central bank short term interests, by Quantitative Easing, by lowering the balance sheet requirements to the commercial banks – all these instruments are there to create an additional amount of credit-money and via this additional inflation and to prolong the status quo.
Let’s reflect the key points from here:
The current fiat money intermediation system is “kind of de-functional” in the current state.
It is not designed to keep and expand the middle-class. It’s current design and implementation leads to a continuous wealth transfer from the non-wealthy to the wealthy. It leads to a society with 1% and the rest.
We were presenting at the Blockercon Conference in Bristol (https://blockercon.com) in June 2019 about our favorite topic - Crypto Credit-Money - Why do we need it? Here are the Slideshare...
Jun 5, 2019 . 2 min read
We were presenting at the Blockercon Conference in Bristol (https://blockercon.com) in June 2019 about our favorite topic – Crypto Credit-Money – Why do we need it?
Here are the Slideshare slides of this presentation
SmartCredit.io is close to launching our platform. This platform shows in real life how to create decentral crypto credit money. Decentral credit money is created in the same way, as it has been created in the last 5’000 years – via the lending process. And it’s destroyed in the same way, as it has been done in the last 5’000 years – via payments of principal and interest. Everything is the same, as it was for thousands of years – but this time it’s empowered by blockchain.
In this scenario there are no banks involved – it’s peer to peer platform. Today’s banks earn high profits from credit money creation, it’s called seigniorage. It is estimated to be 3% of the principal. Now, let’s imagine this seigniorage will not belong to the selected view (commercial banks), but it will be distributed via decentral lending into the society. Just imagine what would be the effect of this for the wealth distribution in society.
We would be very happy if you look at our conference presentation and our pilot demo as well.
We were hounoured to give a deep dive lecture at the HWZ Zürich Blockchain course (https://fh-hwz.ch/produkt/cas-blockchain-economy/) Here are our slides: About the monetary systems and the credit-money About SmartCredit.io (https://smartcredit.io)...
Apr 23, 2019 . 10 min read
We were hounoured to give a deep dive lecture at the HWZ Zürich Blockchain course (https://fh-hwz.ch/produkt/cas-blockchain-economy/)
Here are our slides:
World today is to a big extent influenced by the wealth pyramid so that 1% of people own 46% wealth in the world. It is known, that the rich become...
Apr 23, 2019 . 3 min read
World today is to a big extent influenced by the wealth pyramid so that 1% of people own 46% wealth in the world. It is known, that the rich become richer and we have got somehow used to it. We don’t question it, we see it almost as normal.
But why is it like this? Why is the wealth in the world distributed so unevenly? How did it come that 3.7 billion people have only 2.7% of the world’s wealth?
One of the main reasons is our current banking system — the fiat money system. It creates the impression that stable money is available in the world, right? But behind the scenes, the amount of money is continuously expanded and the unfortunate side effect is that from the money creation profits rich class and poor class sees only inflation of prices.
Even if the poor class has an impression of stable money, relatively they can buy less and less for their money as profits from the fiat money creation accumulate to the rich class.
Why does it happen so? Key drivers here are the proximity to the money creation (commercial banks do this) and having access to the credit on favorable terms. We can summarize this as follows:
Let’s illustrate the effect of the fiat money system with the following simulation which considers the current wealth pyramid, world annual inflation 3.2% and profit from money creation (seigniorage) 2% annual. The inflation applies here for everyone; the profits from the seigniorage are available only to the rich class.
The effect of the fiat money creation system on the wealth pyramid is clear. Rich become richer and the poor become poorer.
What can we do? Cryptocurrencies created non-government controlled money. It is a big step forward. But it is not enough. We need more. We need to distribute profits from money creation (seigniorage) evenly in the world.
Therefore, we created SmartCredit.io. To make the world a better place, to have more even wealth distribution in the world, to give chance to the non-included people in our world and to reduce inequality in our world!
Join the revolution.
In the previous article, we looked at the two dimensions of money — base-money and credit-money. We also looked at the different kinds of monetary systems that existed in the last 5’000...
Mar 26, 2019 . 5 min read
In the previous article, we looked at the two dimensions of money — base-money and credit-money. We also looked at the different kinds of monetary systems that existed in the last 5’000 years and possible scenarios for the future.
The key question is — will it be different this time? Will we enter a phase of crypto-based money without having some form of crypto-credit money or will credit money be included in the crypto sector?
Here is the summary of the monetary systems from the last 5’000 years.
The first conclusion from the previous article is that monetary systems are not static, but are ever-evolving:
The second conclusion is that the decentralized credit money system has existed for thousands of years without central intermediaries.
As we are in the crypto age, let’s analyze how decentralized credit systems worked in the past.
It was all based on the bill of exchange — these are legal documents enforced by the court system. Anyone can issue a bill of exchange, it has only 8 attributes, including the wet signature of the borrower. The borrower has to pay, not to the issuer, but to the owner of the bill of exchange. This gives value to every bill of exchange as they are backed by the borrower’s obligation to pay. This allows the use of bills of exchange as a mean of payment:
Bills of exchange are enforced by the court system — there is no court hearing, there is only validation of the evidence, analysis of who has to pay whom, and a court decision. It is as simple as that.
The bill of exchange system is a P2P system backed by the court system. Every lender can create new credit money — the bills become the credit money, till they are paid back to the holder. One doesn’t need banks to create the credit money, every person can do this via a bill of exchange.
This system works as well today, even without the blockchain. This system has been the basis of all decentralized credit money systems in the last 5’000 years.
But there are limitations to this system:
Bill of exchange networks could become arbitrarily complex, with multiple borrowers, lenders, and holders. But without central middlemen:
Here is a more detailed view of how it could work:
It would work very similar to the bill of the exchange system, but it has to address the weaknesses of the previous systems:
Our forecast for the future is the following:
This future does not depend on a central bank based money creation or commercial bank credit money creation. Instead, it will be an alternative financial system. However, it’ll not really be a new system as it has existed for the last 5’000 years. Only this time it will be empowered by the blockchain.
Our forecast roadmap:
This time will not be different, there will be crypto credit money as well. It’s not yet there, but it might be there faster than anyone is anticipating.
During presentations about money, we usually hear that money has to be durable, portable, divisible and fungible. We fully agree with this distinction. However, there is a bigger picture. Money...
Mar 26, 2019 . 9 min read
During presentations about money, we usually hear that money has to be durable, portable, divisible and fungible. We fully agree with this distinction.
However, there is a bigger picture. Money doesn’t have just one dimension, it actually has two — the base money and the credit money. The notes and coins in your wallet are the base money. The money what you have in your bank account is actually the credit money.
Below is a picture of the first known credit money, from Mesopotamia, from ca 2’500 B.C., now in the possession of the British Museum in London:
The intuitive answer to the key question of this article will be — yes. Since credit money has been around for so long, it will be around in the future as well.
The crypto sphere today does not have any form of credit money. Bitcoin, Bitcoin Cash, Ether, etc. can only be used as base money because credit money has to be dynamic. Credit money is elastic; it is created and destroyed every time we perform economic transactions.
Let’s start with how they work today. Base money is created by central banks and credit money is created by commercial banks. Base money constitutes about 3% — 7% of today’s money, the rest is credit money.
Credit money is elastic, it’s amount grows and declines together with economic transactions. More economic transactions result in more lending which results in more credit money and vice versa.
This elasticity parameter is the key reason why we say that Bitcoin, Ether, etc. are not a form of credit money, but base money.
The supply of credit money also rises and falls — additional economic activities lead to additional demand for credit and reduced economic activity to reduced demand.
Credit money is, by principle, rather temporary. However, in our current monetary system, we create more credit money than we destroyed, resulting in the continuous growth of the total credit money available circa 5% — 7% per year.
Credit money is created by commercial banks in the lending process (no, commercial banks are not lending your grandma’s deposits, they create credit money by the so-called “balance sheet extension” procedure).
Credit money is created every time you receive a loan from a bank and destroyed every time you pay back a loan. The money, which you have in your bank account, is not as durable as you might have thought — there are continuous cycles of destruction and creation happening in the background.
Banks create credit money and protect it with their reserves (for example, the Deutsche Bank which has a balance sheet to equity ratio of 100:1) and there are national deposit insurances as well (for example, the Swiss deposit insurance, which has reserve funds to cover 4% of all Swiss deposits).
In practical terms, banks do the following:
Banks protect the value of the credit-money which they have created with this mechanism.
Well, what happens if this mechanism fails? No problem, it’s fixed by creating more of the same (creating more credit money):
Obviously, this mechanism will result in inflation (sooner or later) or in deflation (if no-one wants to borrow anymore), but as this happens later, then this is someone else’s problem.
Some people say that this system reminds them a little of the “musical chairs game”. We think that’s wrong — it IS the musical chairs game.
Monetary systems have always been made up of base money and credit money. The differences lie in:
Our current fiat monetary system is actually not very old, it started in the time period between the Federal Reserve creation (1913) and the gradual gold standard abolishment (1933 — nationalizing gold in U.S., 1944 -Bretton Wood agreement, 1971 — removing gold backing from USD base money, 1992 — removing gold backing from CHF base money).
Our fiat system looks as follows:
How did it work before our fiat system? Through the following:
This system started to emerge around the time period of the creation of the first central banks (in Sweden and England in 1660’s) and lasted until the Federal Reserve was created in 1913.
There were several sub-phases during this time — free banking areas, gold-based systems, some countries introduced central banks earlier, some later. In some cases, the central banks were “independent”, in other cases there were state treasuries, etc.
The key to this phase was however
The earlier phase started around 500 B.C. and lasted until 1660. The first coins were created around 500 B.C. — this was the time when the standing armies in Europe, India, and China had to be financed — they were financed with sovereign minted coins.
In the beginning, the coins were usually 100% gold or 100% silver. Then later the kings started to reduce the ratio of precious metals in the coins — this caused hidden inflation in base money. However, the coins were legal tender and one had to accept them.
In the time period when the Phoenicia, Islamic Trading Network, Mediterranean and Hanseatic Trading Networks existed. Decentralized credit money was created, in peer to peer transactions. Obligations to pay were used as bearer notes which could be used to pay third parties, who could pay fourth parties and so on. In the end, the borrower had to pay to the owner of the bearer note.
So, the key to this phase was:
But how did it all work before 500 B.C? There were many blossoming civilizations during that time and the following are common to all of them:
However, governments and sovereigns were not involved in the definition of what the base money had to be — the people decided it. Neither did they define how credit money had to work — the people also decided it. There was no government involvement. But there was a court system for enforcing contracts. And there was a government system for enforcing the court’s decisions.
The first known credit money is from Mesopotamia, from about 5’000 years ago. It was created decentrally, in peer to peer transactions. Mesopotamia used grain as their base money — the unit of account was a barrel of grain. On top of this was the decentralized peer to peer credit money, in this case, clay plates with the stamps of the borrowers.
Obviously, the barrels of grain were not easy to use in daily transactions. This facilitated the usage of clay plates based credit money even more.
By using base money and credit money dimensions we can classify the monetary systems of the last 5’000 years as follows:
The current crypto sphere doesn’t have the credit money approach, but none of the civilizations in the past has survived without credit money. Which leads us to the next question:
The first conclusion is that credit money has been always there. It has been created either as:
The second conclusion is that we are presented with two different possibilities to create base money:
Uncontrolled creation of base money means that a commodity, which cannot be manipulated, will be used as the base currency. The Swiss National Bank has increased its amount of base money by 10x in the last 10 years since the Lehman crisis. One cannot do this with commodity-based base money.
U.S. Courts have defined Bitcoin as a commodity. Some people are unhappy about this. However, we are very satisfied with this — it allows us to move back to the commodity-based monetary systems (which are then by definition, non-manipulatable).
But what’s about the crypto credit-money? If we use the Bitcoin as our base money, who will create crypto credit money? In the end, there are 3 possibilities — decentralized credit money, privatized credit money or centralized credit money.
Credit-money has been around for the last 5’000 years. No key civilization from the last 5’000 years has survived without using elastic credit money of one form or another.
But credit money is currently missing in the crypto sector. Bitcoin, Bitcoin Cash, Ether, etc. have the characteristics of base money. They are missing various characteristics, the elasticity, the continuous creation, and destruction, and more of credit money.
So, who will create elastic credit money for the crypto sector?
Our thesis is that the pendulum will move back to where we started:
It will be the same as it was in Mesopotamia 5’000 years ago. But this time empowered by the blockchain.
I was presenting on 28th of November 2018 at the moontec.io conference in Tallinn, Estonia about the monetary systems and about why one will need credit money in the crypto...
Nov 28, 2018 . 1 min read
I was presenting on 28th of November 2018 at the moontec.io conference in Tallinn, Estonia about the monetary systems and about why one will need credit money in the crypto sector.
I was happy with the participants of the conference, not only could they understand what the others were telling them, but they could as well synthesize new ideas!
Here is a one pager of the presentation:
Here are the slides of the presentation:
Here is our pitch from the Swiss Fintech Investor Day in Zurich: If you have only 10 seconds — here is the 10 seconds version: Here is the transcript: Hello,...
Nov 15, 2018 . 10 min read
Here is our pitch from the Swiss Fintech Investor Day in Zurich:
If you have only 10 seconds — here is the 10 seconds version:
Here is the transcript:
Hello, I am Martin. I’m Co-Founder and CEO of SmartCredit.io. We are crypto credit marketplace and we are creating programmable elastic crypto credit money.
Let’s start with the use-case. It’s about credit-markets. On one side we have Luiza from Poland, she needs credit. On the another side, we have Walter from Germany, 48 years old, established, a little bit gray hair – lucky one who invested early into the Ethereum.
These are the want’s – by putting all these wants together we will get the crypto-currency credit-market. And it’s a global credit market for lending and borrowing.
What are the problems? We see the two key problems:
The first one: the current market, as it’s implemented is very over-collateralized. It’s a margin calls market with a very high probability of margin calls. We call it cripple credit market. Although it’s a cripple credit market – the lending volume has been 1 Billion USD.
The second problem – if we speak of lending, if we speak of commercial banking, there is always the question – it’s lending and it’s creating money. In Switzerland, 97% of the money has been created by commercial banks.
Let’s look at the Federal Reserve. It provides the base-money supply and on top is the credit-money. Let’s look on ECB – it provides the base-money and on top of it the credit-money. The same in Switzerland.
The big question is – how is it working in the crypto sphere, who will create the credit-money for the crypto sphere. Are the commercial banks creating credit-money for the crypto-sphere or is the crypto-economy creating the crypto-sphere crypto-money? That’s where we are.
Let’s speak of the past. The credit-money has been there for 5’000 years. Created first in Mesopotamia, used in Phonecia, used in Hanseatic network, in many times in history. It has been decentrally created credit-money. That’s what we want to achieve.
So, our solution – SmartCredit.io – is a two-step system – from one side decentral credit marketplace for ether and stable coin lending; from another side, we are creating programmable elastic crypto credit-money in the lending process – we call it Smart Money tokens.
What does this programmable elastic credit money mean? With respect to all our competitors – there are two boxes here – and all our competitors are here in the left box – they are lending, borrowing, they are just intermediating between them (between the lender and borrower).
On the right side, there is a bigger box – that’s where we are. That means we are in all these together – we are a marketplace and we are creating liquidity for the lenders, which they can pass on to the next persons, and so on and so on. We are creating decentral credit money.
So, how does it then work in the crypto? We take the loan agreements, we tokenize them, and these tokens can be passed on to the next persons, One Smart Money token is worth at least one Ether or one stablecoin, underlying currency, which we are using. We have a protection mechanism, it’s a decentral community-based protection mechanism. And this means the Smart Money tokens can be passed on to the next parties, next parties, next parties – we are creating credit supply for the lenders.
The market – there are now 130 million crypto users, by the end of this year it’s 150 million, by the end of next year it’s 500 million. It’s an exponentially growing market. We are focussing on millennials – these are 55% of this. And from them, it’s 10%, who have the financing needs. So, our market size is like 6 million people and exponentially growing.
Our Competition – with all respect to our competition – we did a lot of number crunching – the existing business models are over-collateralized, there are long processes, there are no insurance or protection mechanisms, no-one is providing the crypto credit-money. We are doing all of this. That’s a small difference.
The Go-To-Market – it’s three pillars. The first one is the community. If we are building decentral systems, then everything is about the community. We are building it through he ICO marketing, we are building it via airdrops, community market. Second, it’s viral marketing – because Smart Money tokens are free marketing for us. It’s are the lenders who are doing marketing for us, to create liquidity for themselves. The third one – the credit marketplace – it fits with any wallet, with any marketplace, it’s an integration.
Our Roadmap – we started one year ago. We have our Whitepaper, we have our Pilot running, actually now the Pilot Phase II, we are completing our MVP in December. We started with whitelisting to start to build up the community. And we are focusing now to get 10’000 whitelisting, to start with the ICO.
The Team – these are some of our pictures. It’s me – I have been working 10 years in banking, my twin brother – as well 10 years in the banking. There are many other people in the team – we have 100+ years of finance experience, 50 years crypto experience, 10 years of artificial intelligence experience. That’s our team – we are the experts.
The Summary – the Bitcoin defined the base money for the Internet, the monetary systems don’t need only the base money, but they need the credit-money. So, what we will do is – we will create credit money for the Internet. We will create decentral programmable elastic credit money. Meaning our impact will be the same to the commercial banks as the impact of Skype to the telcos.
Thank you. I was a little bit faster. So, let’s move to the questions.
Here is the Youtube video explaining the idea of SmartCredit.io Here is the transcript: Hi guys, this is Tarmo speaking. Hi guys, I'm Martin, I'm Co-Founder of SmartCredit.io. We are...
Aug 12, 2018 . 10 min read
Here is the Youtube video explaining the idea of SmartCredit.io
Here is the transcript:
Hi guys, this is Tarmo speaking.
Hi guys, I’m Martin, I’m Co-Founder of SmartCredit.io. We are here in Zurich in one of the financial centers in the world. And we are in the heart of the financial center in the old town of Zurich.
Martin, you are Co-Founder of SmartCredit.io. What is the idea of SmartCredit.io?
The key idea of SmartCredit.io is to create credit-money for the crypto sphere. If you are thinking of Bitcoin, everyone speaks about the Bitcoin, but Bitcoin is just the base money-in the same way the base money, as central banks are creating the base money.
But let’s think on the economy. In the real economy, people are using credit-money. Base money is 3% – 7% of the money and 90% to 97% is the credit-money.
If you are thinking of Bitcoin and Bitcoin economy then we have only base money. Real economy needs credit money. It has not been so in the last 5 years or in the last 50 years. It has been so for the last 5’000 years.
There is a simple reason for this – production, farming – it needs time. We have to pay for energy, we have to pay for the labor, we have to pay for the time. Everything needs to be financed. And this financing, in the last 5’000 years, has been done with the credit and credit-money.
Back to the Bitcoin – Bitcoin is missing the credit-money approach. What we want to introduce is the credit-money approach into the crypto sphere and to achieve this enabler of higher penetration of crypto technology and decentralization of the economy.
How does the credit-money creation work today?
Let’s speak about the base money creation – created by central banks like Swiss National Bank, European Central Bank or Federal Reserve – the base money.
But the credit money is created by private companies – these are the commercial banks. And credit money has to be legally accepted as a mean of payment. Private companies are creating fiat money and public people have to accept it.
How is it created – it’s created in the lending transactions. If I am taking a loan from the bank, then the bank is actually creating new credit-money and he is lending me this credit-money. Bank does not own the money, what they are lending to me; they are creating it and this is a legal mean of payment in the respective national economy.
You mentioned lending, but lending is a risky business?
Everyone is saying that lending is a highly risky business. Now, let’s look from this way – commercial banks have most of their business created through lending.
If we are taking a traditional bigger commercial bank, then 40% or so of the profits are through the lending business. The lending business is a money creation business.
Commercial banks are doing the risk analysis of the clients, they are calculating how much a client can borrow and all other parameters. Commercial banks are doing this for many years, they are doing this for hundreds of years. They have developed the systems and like said – around 40% of commercial banks profits are created through the lending business.
Do you want SmartCredit.io to become a decentral commercial bank?
We have commercial banks, they are creating credit-money, and in SmartCredit.io our aim is as well to create credit-money for the crypto sphere. But we do not want to be a bank.
We want to be a marketplace – we want to be a marketplace, where we are connecting borrowers and lenders globally. So that people can provide to each other the credit and from this credit, we create the credit money to pay the next persons.
Actually, we are doing everything that commercial banks are doing. But we are doing this without being a bank – we are doing this by being a marketplace.
Very interesting! Let’s take customers viewpoint – what can customers get from SmartCredit.io?
Let’s take a borrowers viewpoint and let’s take a lenders viewpoint. For the borrowers, it means a very advanced credit process. We are doing automated credit risk rating by the registration, so we know credit risk and borrower gets fast process. Compared to our competitors we have many advantages and much less collateral and so on. So, that’s for the borrower.
If we are looking on the lender – the key advantage of our system is – when I’m lending Ether to another peer-to-peer person in the world – I’m lending out my Ether and I’m receiving Smart Money tokens, which is the crypto credit-money and I can use this crypto credit-money to pay the next persons.
So, I’m lending out my money, my Ether; and I receive crypto credit-money – Smart Money tokens, which exists as long, as the loan exists, and I can pay next persons with this.
Sorry, do you mean that I can earn profit and in parallel I am liquid?
Exactly. That’s what the commercial banks are doing at the moment – they are liquid and they earn a profit – because they are creating credit-money.
So, I can earn profit from my Ethereum funds and still have liquidity. It sounds like a miracle?
Again, commercial banks are doing this. When I am a lender, I’m lending out my money, I’m receiving crypto credit-money. And this crypto credit-money, the Smart Money tokens, are the mean of payment to pay the next parties.
Commercial banks are creating credit-money, I’m as a borrower- I’m receiving it. In SmartCredit.io as well we are creating the Smart Money tokens and through this the lender has liquidity. He has immediate liquidity.
And not only that he has liquidity – who is keeping Smart Money token, will receive as well interest. If I am passing my tokens to the next person, then he will earn the interest; if I am passing to the fifth person, then he will earn the interest. So, it’s pro-rate interest is earned from the holders of the tokens.
So, it’s not only that I have liquidity – we distribute as well the profits from credit creation to the peer-to-peer network.
It sounds wonderful! Can you tell a little bit more about these Smart Money tokens?
SmartMoney tokens represent the claims. There is a borrower and there is a lender. The lender is receiving Smart Money tokens. If the lender is lending 5 Ethers, he will receive 5 Smart Money tokens. And the owner of Smart Money tokens is as well the interest.
Smart Money tokens are backed up with the respective claim, with the respective lending contract. Smart Money tokens are protected, that means their value is always one Ether. We have a protection mechanism, it’s a unique protection mechanism, which is protecting the value of Smart Money tokens.
If commercial banks are creating the credit-money, they are protecting the value of credit-money through their balance sheets and reserves. The same way SmartCredit.io is protecting the credit-money through own protection mechanism.
So, this means – Smart Money token represents the claim, it can be used as a mean of payment, it collects interest to the holder and its face value protected.
Sounds really like a break-through innovation?
What we are doing – we are just mirroring what commercial banks are doing today. Commercial banks are doing this in a centrally. It has been so because of scale effects and lower transaction costs.
Thanks to the blockchain it will become possible to do all this what commercial banks are doing in the lending business, where they generate 40% of their profits to the view instead of the many. Thanks to blockchain technologies it will be possible to decentralize all these logics – for the benefit of many instead of the benefit for the few.
What are your future plans?
The first step is to create a decentral marketplace for the credit, then we create credit-money. The second step is to create a crypto credit- card. But this is not the credit-card or debit-card, which are connected with the huge existing credit card businesses.
We want to create virtual crypto credit card, without having any connectivity to existing credit card businesses, but having only SmartCredit.io account, which you can use the in online shops and by the online merchants.
So, you can buy from an online merchant on credit and it’s all backed up with the Smart Money tokens in the same way as in lending transactions.
So, the first step is – we are creating a peer to peer decentral lending and the credit-money; the second step is – we are creating virtual credit cards, what can be used in the online processing.
In this video, we discuss the essence of the credit-money - of different incarnations of the credit-money in the last 5'000 years and about what will happen as next. For...
Aug 12, 2018 . 10 min read
In this video, we discuss the essence of the credit-money – of different incarnations of the credit-money in the last 5’000 years and about what will happen as next.
For the beginning, let’s recap how our current fiat monetary system works. We do have:
Base money has existed in different incarnations (commodities, gold, minted coins, and our current central banking money)
Credit money has existed in different incarnations as well (decentral credit money, private credit money and our current highly centralized credit money)
Credit-money is actually not so young, as one might think. Some think, that credit-money exists since the Federal Reserve was created in 1913, others think that credit money exists since central banking was created in 1660s. Actually, credit-money started 5’000 years ago in Mesopotamia.
On this picture we see different combinations of the credit money:
The pendula will move now back from high centralization into the decentralization:
Our current credit-money is heavily centralized through the issuing process via commercial banks deposit insurance and central banking system
Here is the transcript:
Hello guys, I’m Martin, Co-Founder of SmartCredit.io. We are here in Zurich, in the heart of one of the biggest financial centers. We will speak today about credit and credit-money.
Martin, how do world credit system work currently?
It’s actually a pretty simple system, but it’s made very-very highly complex, so that’s it difficult to understand. But let’s explain it in this way:
One one side there are central banks, they create the base-money and they try fo control the speed of monetary expansion. On one other side, we have commercial banks and commercial banks are creating the credit-money.
What is the exact role of central banks in this system?
Central banks are creating base money – these are the coins and electronic base money. In parallel, central banks, what they are trying to do is to control the speed of credit-money creation. Credi-money is created by the commercial banks, it’s ca 90% – 97% of the total money. The base-money is 3% – 7% of the total money.
And what central banks are trying to do is to manage this system.
And how successful are central banks in controlling the growth speed of credit-money?
That’s a point of a view, depending on whom do you ask. If you ask central bank guys, there are many of them, then they will tell you obviously that it’s very successful.
My comment on this is – economies are living systems. And to control living systems from a part of the living system is quite difficult. We see that the credit-money growth has been actually the cause for the most of economical crisis – the Russia economical crisis or Asia economical crisis. If credit-money is growing too fast, then there will be as well the phase where credit-money will be declining. The decline will result in a recession.
Obviously, central banks are saying that they are doing a perfect job, but there are different views about this topic.
You speak about the credit-money and you speak about the credit. What is the difference between these two?
Credit is so that anyone can give credit to anyone – it’s our basic right, it’s basic law – I can give credit to anyone. Credit is becoming credit-money if my counterparty is giving me a claim (I’m a lender in this scenario) and I can use this claim as a means to pay the next persons. That was the way how the earlier monetary systems worked.
Practically the credit-money was created decentrally, it was created peer to peer. And there was the base-money, which was then created by the kings, the sovereigns. On top of the base-money, was the credit-money, which was created by people for people.
And concerning credit-money – the amount of credit-money, why is the amount of credit-money important?
We have a base-money, that’s what central banks are creating. The economy is growing, it’s like a living organism – if a living organism is bigger, then the organism needs more blood in his body. If a living organism is smaller, then he needs less blood.
And the credit is like the blood in a human’s body. If there is fast economic growth, then we need automatically more credit. If there is low economic growth, then we need less credit. This problem cannot be solved with the base-money only, this problem has to be solved with the credit-money. That’s why the credit-money is very important for economic development.
If there is no credit-money, if there is only the base-money, then it will probably end up in the deflationary economy, because the price of the money will be too high for the fast growth phases. That’s the reason for the credit-money.
In today’s world, we have commercial banks and central banks. When did the commercial banks emerge?
People think that commercial banks have been there forever. Actually, it’s not so. The commercial banks started to emerge like 350 years ago. The first central bank was created in Sweden, it was around the 1660s; the second one was created in London around the same time.
And the first commercial bank was Netherlands Wechsel and Handelsbanken, the role of this bank was to trade the wechsels, because peer to peer money creation was based on the wechsel, in English: bill of the exchange system. That’s the first commercial bank was created.
However, the economy worked as well before, and it worked pretty nicely before the commercial banks were created.
And how did it worked before?
Commercial banks – they cam 350 years ago. But the peer-to-peer credit systems and credit-money systems they were there already 5’000 years ago in Mesopotamia. They were there in Phonecia 3’000 years ago, 2’500 years ago. They were used in the Islamic trading network, they were used in the Mediterranean trading network, they were used in the Hanseatic trading network.
So, peer-to-peer credit money has always been there in human history. And interesting is, that the peer-to-peer credit-money, which is actually 5’000 years old, is olden that the coins-based money, which was created by Greeks, by Romans, by Chinese and by Indian civilizations, at the same time – ca 2’500 years ago. But the peer-to-peer credit-money is older than the coins-based money.
Your question was – how did the economy then work before? It was a prosperous economy, we know the renaissance in Europe, we know how good the Hanseatic network developed, how good the Mediterranean network developed. We know as well Phonecia, how strong was their economic system; Mesopotamia – the very old country. So, these were the phases of pretty nice economical development.
But if the economy worked without the commercial banks, why did these commercial banks emerge at all?
Initially, when the commercial banks emerged 350 years ago, then at that time the peer-to-peer money system had some short-comings. For example bill of exchanges had different loan tenures – one can have one week, one can have one month, one can have one quarter. Additionally, there are different nominations.
It wasn’t standard money like it was today, where we have standard units of money. The units were arbitrary at this time, as well the loan tenures were ar at this time.
So, the commercial banks were like a marketplace to exchange different loan tenures, to exchange different nominations – 1 gulden in Holland, 5 guldens or 99 guldens – that was the first role of Netherlands Handels- and Wechsel Bank.
What happened after that?
raryInitally commercial banks were created to enable the wechsel (bill of exchange) system, then the system developed so that the commercial banks started to issue their own fiat money, their own credit-money. So, it wasn’t anymore the peer-to-peer credit-money, but the commercial banks took over.
Nowaday’s commercial banks taking over is very much connected with electronic money. If you have older systems if you go even back 50 years ago or 100 years ago, the peer-to-peer systems, the peer-to-peer credit-money systems, they were still used. But the more and more electronic money has appeared the less the peer-to-peer credit-money systems have been used.
That means the credit business is consolidated into the commercial banks.
So, you imply that all these central credit money systems emerged as a result of standardization?
It emerged as a way to deliver the scale effects. From one side you had this wechsel system with the limitations, which btw, can be solved very easily with the blockchain system and from another side the commercial banks had their scale effects.
These were scale effects, these were the effects of the transaction costs. They were able to process credit and credit-money much easier than the peer-to-peer systems. And that’s why the commercial banks emerged this way as they are. They just did this in a more effective way.
What if there is some other way to achieve this standardization you mentioned? With blockchain?
If you are looking back, then there are always these two competing systems – one is the peer-to-peer system (decentral credit system) and the other is the central credit system like it is today with the commercial banks.
The current commercial bank’s based credit system is more effective to create credit – there is a scale effect, there is processing the information and the transaction costs are lower.
However, if we are adding now the blockchain technologies, then this will enable the peer-to-peer credit networks and credit-money networks, it will give the same information to every participant. It will enable the alternative monetary system, which has been there much longer, than the coin based money.
Does it mean that with blockchain technology we can bring more emphasis again to the decentral credit-money-system?
Exactly, blockchain will be an enabler for the peer-to-peer decentral credit-money system. It takes away the advantage of commercial banks, the advantage being the scale effects and the lower transaction costs. These advantages will be taken away from commercial banks as dis-intermediaries. Probably they are not so much required as they are required now. And the credit can be created in a peer-to-peer way and credit-money can be created in a peer-to-peer way.
Are you saying that we are going back to a decentral future like we had decentral past?
Human history has been pretty much the decentralization fight with the centralization fight. There have been cultures, which have been more decentral and there are more central cultures. Central cultures try to control more things, than the decentral cultures, where the degree of freedom is higher.
There is always this question of how you process the information. If you are centrally processing information, like commercial banks are doing this today, then they have an advantage. But thanks to the blockchain technologies we can go again on this decentral route, we can start to do more and more in the decentral systems, meaning the degree of centralization of big organizations will go down.
SmartCredit.io is a Swiss-based project launched by veterans in the cryptocurrency, finance, technology, and artificial intelligence fields “The Bitcoin whitepaper defined the base money for the Internet. SmartCredit.io defines the...
Jun 12, 2018 . 3 min read
SmartCredit.io is a Swiss-based project launched by veterans in the cryptocurrency, finance, technology, and artificial intelligence fields
“The Bitcoin whitepaper defined the base money for the Internet.
SmartCredit.io defines the credit-money for the Internet.”
In the traditional banking system, credit money earns interest for the commercial banks. Our mission is to create the first decentralized system of crypto-credit money in the world, empowering people to take back control over their own money — without the commercial banks and fees.
We have been in this space for a long time and would, therefore, like to share some of our expert insights — from articles in our blog from recent years.
We published our first Bitcoin price forecast in the Swiss CFA Magazine in January 2014, where we forecasted a Bitcoin price of USD 10,000. Our price forecast was accompanied by some dismissive laughter. So, we used every opportunity to transfer the message of blockchain’s key values.
We are convinced about the upcoming massive disruption to the traditional banking industry, which is why we published another analysis in the Swiss CFA Magazine in November 2015. Naturally, we attempted to spread the message from within Credit Suisse, where we worked at that time. But, well, private banks are not exactly places for “out of the box” thinking…
Our next article is based on the Swiss banking unit of Credit Suisse and analyzes how much revenue Credit Suisse will lose as a result of blockchain disintermediation. I tried to present this analysis to the upper echelons of Credit Suisse, but you might be able to imagine how it was received…
Up next is the analysis of how core banking processes will change as a result of blockchain disintermediation.
This article and previous analyses provided the key triggers for the idea behind SmartCredit.io.
We analyzed how to combine traditional banking with crypto finance based on the Swiss banking ecosystem one year ago. There have been some minor changes in the landscape during the last year, which serve to confirm our position — crypto businesses will not face any competition to speak of from the traditional banks. Indeed, the playing field is reserved only for new crypto entrants. A huge thanks here goes to the traditional banks!
Once ICOs really started to boom around 12 months ago, we analyzed what could be the best way to invest in ICOs. And we came up with the “lazy approach” — for all of us who lead busy lives… Incidentally, at that time we viewed Antshares/NEO, Ark, Komodo and Singular to be investments worth considering. Interestingly, these crypto-assets subsequently performed in line with our rather positive view. Disclaimer: We also valued a number of other tokens that performed less well.
We realized that more and more investors are streaming into the crypto space. So, last summer, we published an article on how to use modern portfolio management approaches for crypto assets investments. As some of our readers here are from crypto investment funds, we hope to share some valuable insights for your investment fund strategies as well! 😉
We will continue to publish our thought leadership articles and we hope you enjoy reading them.
By the way, our new website, the prototype (with our pilot coming soon), as well as our intro video, are also available. Please take a look and visit SmartCredit.io.
Bitcoin is a digital currency that enables instant payments to anyone and anywhere in the world. There are many differences to other currencies: · Other currencies are issued by Central...
Jan 10, 2014 . 12 min read
Bitcoin is a digital currency that enables instant payments to anyone and anywhere in the world.
There are many differences to other currencies:
· Other currencies are issued by Central Banks and have the role of legal tender. Bitcoins are issued de-centrally; there is no Central Bank, and they are not legal tender.
· Other currencies have some physical representations (bills). Bitcoin exists only digitally.
· Other currencies have central authorities. Bitcoin has no central authority; validation of transactions is done from Bitcoin Network.
· Monetary Base of other Currencies is continuously increased, which translates into inflation in the long term. But in Bitcoin Network will contain only 21 Million Bitcoins (the smallest transferable unit being 0.00000001 Bitcoins), which translates into deflation in the long term.
Bitcoin is based on a combination of several existing technologies:
· Peer to Peer Systems (like BitTorrent)
· Private / Public key Cryptography
· Application of this combination for creating a currency
First Private / Public key cryptography algorithms were published in 1977. The first famous Peer-to-Peer system was Napster, published in 1999. However, it took till 2008 when Satoshi Nakamoto (pseudonym) connected peer to peer systems with state of the art cryptography to create the first cryptocurrency — Bitcoin.
Bitcoin has properties of currency — it’s unit of account; it’s portable, durable, divisible and fungible. However, Bitcoins are much more just as a simple currency. Satoshi’s ideas went much further — Bitcoin Network is a mean to describe economic contracts and transactions between the participants of the Network. Additionally, the distributed storage of transactions (Blockchain in Bitcoin terminology) can be considered as a public general ledger, but not only simple payment transactions but many more complex economic contracts can be stored and easily distributed/published to any node of the network.
Bitcoin price development from Aug 2010 till Jan 2014 is described on the following graph. It follows a linear trend on the logarithmic graph.
There have been several price corrections, which have received quite some media attention:
· In 2011 from 31 to 2 USD per BTC
· In 2013 from 266 to 50 USD per BTC
· In 2013 from 1242 to 455 USD per BTC
However, we hardly recognize these price corrections on the logarithmic scale.
Will this logarithmic growth continue? Where will be the price of one Bitcoin in one year? How to calculate the fair value of Bitcoin? This article evaluates approaches for Bitcoin valuation.
Bitcoin Network has currently 2’400’000 addresses. One person can have more than one address.
The value of the network is not growing linearly but in the square with the growth of network members (Metcalfe’s law). I.e. if we have 2 times more participants, then the value of the network grows 4 times; if we have 10 times more participants, then the value of the network grows 100 times and so on.
Currently, the network grows by 7000–8000 addresses per day. If we assume the same constant growth for the year, then the number of addresses will double this year, implying the value of Bitcoin Network will grow 4 times this year.
As we are speaking of ca 2 million people using the network then we are still in early phases on the Bitcoin Network development. It can be compared to the “pre-Mosaic browser” phase of the Internet — there were many enthusiasts on the Internet, but most of them were “techies”. The breakthrough happened when Netscape introduced the Mosaic Browser. The rest is history.
There are several discussions about the intrinsic value of the Bitcoin Network. One side has the opinion that Bitcoin Network does not have any intrinsic value; the other side has the opinion that there is high intrinsic value.
Bitcoin Network is like an Internet network. It’s not the Internet that has the value, but its diverse products and services on top of the Internet network, which creates the value of the Internet. It’s the same with Bitcoin Network — it’s the products and services on top of Bitcoin Network, which create value for Bitcoins.
The most exposed intrinsic value is the Bitcoin Network as a Payment Processor:
The additional intrinsic value of Bitcoin Network is the “base money” functionality and “value-added services”.
Bitcoin enables payments just in time between any countries in the world it practically no fees. Bitcoin is the current 9th biggest payment processor worldwide. Additional adoption of the Bitcoin Network will result in reduced demand for the services of companies like Visa, Mastercard or Western Union.
Visa’s market capitalization is 140 B USD, Mastercard’s capitalization is 100 B USD, and Western Union is 9 B USD.
Let’s assume the total market cap of these payment processors is 250 B USD, If Bitcoin Network would replace 1/3 of their businesses, then this result in the price of 3929 USD per BTC.
Payment Processors total Market Capitalization (in B USD) 250
Substitution ratio with Bitcoins 33%
Total Bitcoin Network Valuation (in B USD) 82.5
Final Number of Bitcoins (in B USD) 21'000'000
Value per 1 BTC (in USD) 3'929
Bitcoin can be considered as “base money”, it can be considered as gold — “crypto gold” in this case. One way to value Bitcoins is to compare the money supply of Bitcoins to the U.S. money supply.
The current market capitalization of Bitcoins is 12 B USD. The current monetary base of the U.S. is 4’000 B USD.
If Bitcoins would substitute U.S. monetary base, then their value should increase 4’000 / 12 times. However, let’s assume 10% of the US monetary base will be substituted with Bitcoins. The money velocity of Bitcoins is much higher (let’s say 10 times higher than the velocity of fiat money); this would reduce the demand for the Bitcoin base money. This would result in the following valuation:
U.S. Base Money (in B USD) 4'000
Substitution ratio with Bitcoins 10%
Increase in money velocity (in times) 10
Total Bitcoin Network Valuation (in B USD) 40
Final number of Bitcoins 21'000'000
Value per 1 BTC (in USD) 1'905
However, Bitcoin is not a national currency; it’s a supra-national currency. If we repeat the same exercise for the world monetary base and if we use the substitution ratio of 5% then we get the following valuation:
World Base Money (in B USD) 26'903
Substitution ratio with Bitcoins 5%
Increase in money velocity (in times) 10
Total Bitcoin Network Valuation (in B USD) 135
Final number of Bitcoins 21'000'000
Value per 1 BTC (in USD) 6'405
Levers for valuation:
Bitcoin is not only a payment mechanism; it allows building a stack of additional services and products on top of the Bitcoin protocol.
It’s the same as the Internet — what started initially as simple web browsing with Netscape Browser, developed into Google search and Web 2.0 — Facebook, LinkedIn, and Twitter. All these products are based on Internet stack. However, it took 10+ years, till these Web 2.0 products emerged.
Bitcoin protocol allows moving asset ownerships into the Bitcoin network — for example share registries and custody solutions can be implemented as part of the Bitcoin network. Ownerships of any assets (real estate, shares, and cars) can be stored in the Bitcoin network. Most public registries will become obsolete as all this information can be mapped into the Bitcoin network.
We are still in the very early phase of Bitcoin adoption; we are in the “pre-Mosaic Browser” phase. We can expect many new applications on top of the Bitcoin network — in the same way as it happened with the Internet network. However, we are not able to quantify the value of these additional services. We just say — there will be many additional services.
We looked at three valuation approaches. All of them are complementary.
Ergo Bitcoin valuation is:
Bitcoin as Payment Processor 3'929
Bitcoin as Base Money 6'405
Bitcoin as Additional Services NA
Value per 1 BTC (in USD) > 10'334
We foresee continuing network growth (based on Metcalfe’s law) and we foresee the significant potential for Bitcoin price appreciation.
We recommend allocating part of alternate assets in investment portfolios into Bitcoins.
(This article was first published in Swiss CFA Society Magazine 2014 January Edition)
· Bitcoin live market data: https://www.tradingview.com/x/0JIHqWR4/
· Bitcoin Wiki: https://en.bitcoin.it/wiki/Main_Page
· Daily transaction volume of payment networks: http://www.coinometrics.com/bitcoin/btix
· Monetary base of national economies: http://www.coinometrics.com/bitcoin/bmix
· Exchange volume comparison by Currency: http://bitcoincharts.com/charts/volumepie/