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It’s a bit strange that this one ended up on this week. The crypto markets have recently been on a pretty heavy downturn, with so many people taking their money out as all of the top coins came crashing down. For the week, the top three coins have lost an average 12-13 percent of their value, while many others have lost more.

Nevertheless, this may be the perfect chance to talk about cryptocurrency in relation to becoming our own bank. Without the distraction of emotional highs, we can rationally assess the uses for cryptocurrency, and how it can potentially fulfill any of our banking needs as defined at the start of this series.

Cryptocurrency is a really interesting asset. It’s extraordinarily new, having only been invented in the last decade. Because it’s so new, it suffers both extreme volatility and hesitant adoption globally. While 2019 has been a hallmark of far better regulation guidance from governments around the world regarding cryptocurrency, we are still in the very early stages of these assets coming into their own.

Again, because cryptocurrency is so new, most of the things I will be writing about in this post are going to be pretty speculative. Also, everything I say will be in reference to banking functions, rather than any specifics on the technology. So please proceed with caution.

The Value of Cryptocurrency

This is probably the big elephant in the room. Unlike fiat, cryptocurrencies do not have governments backing their value. This can be both a positive and negative thing. It’s positive, because being government backed doesn’t guarantee value (i.e. see Iran or Venezuela). But it’s also negative because there are no legal avenues to pursue to recover any lost or stolen crypto assets.

The inherent value of cryptocurrency is in its decentralization and ability to facilitate trustless transactions. Trustless transactions is an easy thing to get behind. It basically means that, in order for me to exchange something with another person, I no longer need to worry about whether that person is trustworthy. I can transact with anyone without the need for oversight from a third party. This is huge, and has never been achieved in the history of mankind until now.

Decentralization is a little bit trickier. It means that, instead of relying on a single third party to verify and authorize transactions, we rely instead on multiple parties to provide consensus on transactions. The idea behind this is to make the system fairer and more secure, because in order to alter or corrupt the data you would have to change every record of transaction from those multiple parties at the same time.

I won’t go into any further detail about this, since that’s not the goal of this post. But in practical terms, it removes the need to have a central authority, and thus the fees required to maintain a single party system—fees which often grow higher over time because that single party can do whatever they want. And so the decentralization and the ability to transact trustlessly work in tandem to provide great inherent value to cryptocurrency. Rather than requiring me to go through intermediaries which demand high fees and determine who I can transact with, I can now instead use this coinage to do whatever I want, when I want.

What Kind of Asset Is It?

However, unlike its namesake, most cryptocurrency coins are not primarily used as currency or any kind of medium of exchange. While initially conceived as digital coinage that could be used for transferring value without needing a bank, most crypto coins are currently assessed by a speculated future sale value. In other words, the primary reason why people purchase cryptocurrency right now is to be able to sell it for a much higher price in the future. However, this speculated higher price is not a guarantee, and unlike stocks, the vast majority of current cryptocurrency coins will probably be completely worthless in the future.

This is because cryptocurrency is more like an evolution of the digital and internet world than like securities or stocks. The way these assets function doesn’t require there to be thousands of different little coins. Rather, for the most part, the cryptocurrencies that succeed seem all to act as bridges between different real world assets and the digital realm.

For example, when Bitcoin, the original cryptocurrency, was first conceived, it was used to transfer value around the world far more efficiently than even present day international bank transfers. Since its efficiency outmatched that of banks, its utility as a unit of transfer became valuable and desirable. Thus, it became an asset, as it is a better bridge to any fiat value than any financial institution could (presently) hope to be.

With this perspective of being a bridge asset, we can see how cryptocurrency has the potential to solve almost every problem with any other assets today. For example, in order to purchase or refinance real estate, you usually need to go through a long loan process with banks, lawyers, and other expensive intermediaries. With cryptocurrency, specifically the smart contract function some of them have, you no longer need those intermediaries to process both purchases and loans. Furthermore, cryptocurrencies are infinitely more divisible than gold or other precious metals, which allows any kind of investor to start buying in with any starting capital. And unlike Whole Life Insurance, crypto has even faster liquidity, which allows it to be used instantly, as long as the merchant allows it.

Any Problems?

Despite all this potential, cryptocurrency still faces quite a few hurdles going forward.

First, currently, the value of all cryptocurrencies are tied to the value of Bitcoin. This can be seen in any trend graphs or charts on crypto markets since the beginning. Whenever the value of Bitcoin goes up, many (though not all) other coins also go up. However, when the value of Bitcoin goes down, almost every single coin also decreases heavily in value. This liability is ironically centralizing, since those who hold vast amounts of bitcoin actually control the entire crypto market as well.

Secondly, there is still no mass adoption. Crypto enthusiasts are still niche compared to the number of people invested into gold and precious metals, real estate, life insurance, and any other asset class. This is mostly due to the fact that it’s still quite new. However, government regulation regarding cryptocurrency in most of the world is still vague, with some even attempting to ban it. Like the Internet, such bans are near impossible to actually enforce, so adoption seems to be inevitable. However, this lack of mass adoption and absent regulation still keeps the industry back, and may actually be contributing to the first problem mentioned above.

The last problem is far more serious: most people don’t want to hold onto any cryptocurrency in the long term, even Bitcoin (for the most part). Instead, many people coming into the market, having heard of others getting rich off of Bitcoin, instead prefer to make a profit off of crypto by buying low and selling high. When such an attitude is mainstream, especially in such a niche market, it cannot yet be truly considered an asset for us, since our idea of an asset is that it is far better to hold than sell.

Current Applications

That doesn’t mean that we can’t use cryptocurrencies as we do other assets though. In fact, the number of products being built around crypto, especially financial products, is growing extraordinarily fast.

It is already extremely easy to exchange many forms of fiat for any kind of crypto at online exchanges around the world. Again, since crypto is easily denominated, almost anyone can afford to trade in to buy percentages of those coins. After that, it’s easy to transfer your coins to all kinds of available hardware wallets, including ones you can make with paper!

Using your crypto as currency is also becoming easier, with plug-ins like Moon allowing you to purchase things on Amazon with the crypto you have. There are even debit cards which can be used to spend crypto like fiat currency around the world. There are also services we can use to earn interest on our crypto, simply by storing it in those services. Most of these services are earning far greater interest than the current inflation rate, let alone the paltry interest offered by most bank accounts.

As far as collateralizing what you have, many services now exist where, like gold and precious metals, you can collateralize your cryptocurrencies for a percentage of their worth. The interest rates on these loans are often far lower than that of other assets (except perhaps PWLI), and will allow you to get multiple uses out of the crypto you hold.

With these services, it’s easy to imagine the central role crypto has to being our own bank. I can trade my fiat income for different cryptos on exchanges, and then transfer a portion of them to a paper wallet for security purposes. I can keep some in a service which pays me higher interest for keeping my crypto there. With the coins that have lower interest, but high historical growth, I can collateralize for loans with low interest. With coins that have both low interest and low historical growth, I can use for my spending and purchasing habits. And in doing so, by simply using this single asset class, I’ve become my own bank.

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