Today we will explore digital currencies and debt forgiveness.
So, what are digital currencies?
According to the definition of Investopedia, “Digital currency is a form of currency that is available only in digital or electronic form, and not in physical form. It is also called digital money, electronic money, electronic currency, or cyber cash.”
Fairly straightforward. Money that is only available in an electronic support which requires internet access or a designated network. One of the biggest benefits of digital currencies is the removal of intermediaries, thus reducing the cost of transactions. Two parties in a common network can send and receive funds directly without having to go through a bank or any other channel. Let’s explore some of the types that we can most often come across.
Digital currencies are understood to be those that are controlled or regulated by a recognized entity such as a country or central bank. Virtual currencies are those created by private entities which can include the developers of a technology, a company or association. And lastly, cryptocurrencies are virtual currencies that use blockchain technology (a digital ledger) to give transparency, traceability and security to transactions. Although blockchain is outside of the scope of this episode, it is the element that is truly revolutionary in the technological space. Its uses are limitless and the current market applications are barely scratching the surface. The most notorious cryptocurrencies to date are Bitcoin and Ethereum. Traditionally, one of the benefits of cryptocurrencies was the anonymity that it provided users, but that is increasingly less so with countless financial regulations being passed in many jurisdictions. This may seem irrelevant to some, but considering that our economies are driven by data, our data, that privacy is not protected rather exploited, eliminating options to be truly anonymous even if it’s just to buy a bag of potato chips should matter to all of us. With big data and AI, anyone that can access your information can know more about you than you know about yourself. We’ll leave privacy and data for another time.
The beforementioned types can serve different functions depending on who is enabling it. A country may use a digital currency to replace its standard fiat currency. A private company may incorporate a virtual currency as a reward system for its employees and customers. Cryptocurrencies can be used, depending on the type, for everything from paying for upgrades in video games to buying a home.
All in all, the mayor benefit of digital currencies is the removal of intermediaries and in some cases, the anonymity that is similar to cash. The drawbacks, from my point of view, is that it combines all the disadvantages of current fiat currencies plus exclusive dependence on electronic networks. I generally think of worst-case scenarios in which there is no internet and power, but there is still a need to transact. In those cases, strictly digital currencies certainly don’t pass the test. Many would argue that those circumstances are rare and generally undesirable for all. It’s true, but it doesn’t mean that eliminating other options of transacting that don’t rely exclusive on electronic means is advisable.
Now on to debt forgiveness, debt relief, debt cancellation are also some of the names that it goes by. There is a lot of talk around this subject in recent months due to the increasingly complicated economic climate for most of the world’s population. Continuous restrictions increase the pressure on governments to provide financial assistance and in some cases consider Universal Basic Income. The latter is hotly debated, and for now, I will skip it. Debt cancellation is an ancient concept that has formed part of organized societies since the formalization of commerce. It was often implemented by rulers in a set frequency, for example every 7th year to free people from debt slavery and other state burdens. This has been applied to private citizens and businesses in the past. In theory and on paper, it’s a merciful act to relief someone of the shackles of debt. And I’m still for it, but now more than ever the small print must be taken into account. What is taken in exchange for that relief? Does it compensate? Are personal freedoms at risk for the sake of temporary reprieve? Are there long-term impacts to receiving such aid? For instance, in non-recourse leveraged equity loans (or stock loans) that relief comes at the expense of the stocks and nothing else, an excellent exchange considering most lending instruments in the market. The same cannot be said for other debt cancellation schemes. For example, if my mortgage is forgiven is wonderful on one side, but if I become a renter for eternity then it’s no longer appealing. If it equates to not being able to own my assets, it is a bad trade. Some analysts indicate that the rollout of government digital currencies will soon be implemented. This is not bad in in of itself as long as cash remains in circulation. Having no other option to digital money is not an ideal scenario.
Clearly the markets and economies are undergoing many changes. How each of us prepares for it will depend on your access to information, level of interest and priorities. As with everything in life, an open mind, critical thinking and varied sources to choose the best path forward for your particular situation is recommended. A good dose of common sense and observation are also useful. As some of my favorite analysts state that regardless of how society evolves in the coming years there are some basics that will always be necessary. Following that line of thinking and that of others can give you valuable insight on how to allocate and diversify your assets, plus shield against the unexpected.
Regarding bitcoin and gold, it basically depends on who you follow. I’ll leave that research up to you. As a general rule of thumb, depending on your level of comprehension of the markets that control these assets, it may be wise to stay out of them or limit your exposure greatly to not put too much at risk if you aren’t willing to do the work to be well informed. Take into account that bitcoin regardless of how optimistic the particular analyst you are following states, it is still a speculative asset. That is neither good nor bad, just something to keep in mind as you move resources to this asset class. For some varied points of view, I recommend taking a dive into Capitalist Exploits, Peter Schiff, Real Vision Finance, Ray Dalio, Lynette Zang and Jim Rickards.
Until next week, when we will explore the nuances of stress management through the story of Marie. Ciao