Why Ethereum is More Sound Than Fiat Money

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Guest Post from Taki Tsaklanos

Is Ethereum a form of money?

 

Many are asking this question after the official Ethereum price went up 3000 percent in recent months. Even with such a steep rise there are analysts which are able to come up with a quantified Ethereum price forecast of $1000, a threefold rise from today’s price.

Let’s go back to the fundamental definition of money. Money has 3 characteristics: it is a store of value, it is a medium of exchange and it has a unit of account.

We should not argue that Ethereum is a medium of exchange and that is has a unit of account. However, we would like to challenge that thought. We strongly believe that Ethereum is much more honest than fiat money for three fundamental reasons outlined in this article.

We recently read an analyst saying that Ethereum is not a store of value because of the fact that it has an infinite supply, as opposed to fiat money which has a finite supply. That triggered a deeper analysis on whether that is a correct thought or not.

First, the idea that fiat money is honest money is a big farce, based on a misperception of many people. Fiat money may have theoretically a finite supply, but the reality is that central banks decide whatever they want and they believe is good when it comes to the money supply. In the last two decades the monetary supply has risen in a parabolic fashion, with an unimaginable acceleration since the 2009 crisis.

The monetary supply in the U.S. (base supply), represented by the blue line on below chart, makes the point. Technically, the monetary supply will be finite, but the reality is different as evidenced by this chart.

 

The key question is: are central banks doing what is best for society or for the banking system? That is a totally different objective, because, visibly, their primary driver was to rescue the banking system. No central banker ever confirmed what exactly the impact was for society.

In our view, honest money supports society first.

Second, “your money” in “your bank account” does not exist. It is not there. All money in the bank is electronic currency, and the money in physical format is just a very small fraction of what exists in bank accounts.

The proof is there as well, on the chart shown above. The red line represents M2 which basically is a measure of the money supply that includes base money plus cash and checking deposits plus savings deposits, money market securities, mutual funds. The point is that M2, which includes “your money” held in “your bank account” is largely deviating from base money (the monetary supply which is said to be finite).

Ethereum is registered on the blockchain. Ether, the coin, is a known block in a ledger on the blockchain. Every coin of Ether (or Bitcoin for that matter) that one buys has a unique code and is known on the whole network. It is really assigned to a certain person or entity. Moreover, the owner decides whether he/she wants to stay anonymous or whether the Ether (block) can be made public.

How much more sound can money be?

It is clear that the current fiat money system is not as sound as cryptocurrencies like Ethereum. If fiat money was registered, similar to cryptocurrencies, then would we not see confiscation as we have seen in recent years (think Cyprus, Greece, and the like).

Third, Ethereum is decentralized. Participants decide what happens with their cryptocurrency, not a central bank. Demand is a leading factor, as opposed to centrally managed fiat money. In the fiat money system, it is a central bank that makes all decisions: interest rate, supply, decisions to manage demand, the number of physical bills versus ‘real’ volume of money, etc.

These 3 reasons lead to a rational conclusion that Ethereum is a much more sound form of money than fiat money.

The biggest drawback of Ethereum is potential security holes, which, arguably, will become less of a risk over time as more and more participants move (in an open source fashion) to make Ethereum a more secure platform.

Thanks to Taki Tsaklanos

Gary Christenson

The Deviant Investor

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