After I recently read an article in the Guardian that stated 62 of the world's richest people own half the world's wealth my fairness and morality alarms went nuclear.
This disgusting and frankly shocking figure is mostly because as any new money enters the system, taking the UK as an example, only 13% of it reaches businesses and people that really need it, 40% reaches the financial markets and a massive 37% of money is diverted into residential and commercial properties (basically right into the pockets of the rich).
The following disturbing visual shows the number of rich people who owned half the world's wealth in 2010 up until last year 2015. The graph is startling:
Over the last 5 years, the wealthiest who earn the top 50% of wealth in the world has reduced consistently year on year from 388 in 2010, to 62 in 2015 and shows no signs of abating.
In a previous article, I discussed the financial history and subsequent meltdown leading up to the 2008 crash in my review of Yanis Varoufakis' book The Global Minotaur. Ever since the 2008 crash, and even more recently with the slowdown of the Chinese economy, the world has been wondering - what next for capitalism?
How could we let capitalism fail the majority and how are we going to find a way to re-balance the distribution of wealth and it ensure it makes it to those who need it most?
Are we bound to a repeat the boom-bust cycles of the past? Will we ever survive a cataclysmic bailout in the future? If capitalism fails, what's next?
Change needs to come... and soon!
Birth of Bitcoin
Following the financial crash of 2007-8, on a Cypherpunk mailing list tucked away in a quiet corner of the internet, a person going by the name of Satoshi Nakamoto announced the birth of a new form of Cryptocurrency - Bitcoin. A cypherpunks' utopian dream was a world in which it was not governed by a centrally controlled form of currency; it was a true libertarian society with crypto-currencies like Bitcoin at it's centre.
However, forms of digital currencies were not a new concept, so in what way was Bitcoin any different?
Up until 2009, all forms of digital currency that had been attempted before, such as the founding of digicash by David Chaum in the 1990s, had spectacularly failed. This was either because of fraud or because authorities found it threatening enough that they felt a need to shut it down.
In our example, Digicash lost out largely down to the greed of it's owner David Chaum. Chaum wanted too much for his business than investors such as Microsoft were prepared to give. He bet against credit card companies and the credit card companies won...
What is Bitcoin
Bitcoin is like SMTP (Simple Mail Text Protocol) or HTTP (Hyper-text Transfer Protocol). It's a protocol. However, it's also a unit of money, a distributed form of currency and an ecosystem.
There are though, some other major differentiators between Bitcoin and standard forms of currency.
Where does money come from?
Ever wondered how governments are able to somehow come up with funds to prop up failed banks (to the tune of billions) and to fund wars around the world. It isn't because they have money stashed under the mattress ready for such a rainy day.
It's because governments run up deficits and essentially have to borrow money.
Prior to 1914, the UK, France and Germany were using the Gold Standard, which effectively meant that any money they owned was borrowed against gold reserves and meant that the value of an ounce of gold could also fluctuate. They could effectively swap this 'paper money' for an asset such as gold. By tying paper money to something real it gave money a value.
However, the advent of WWI meant that countries such as Britain, France and Germany needed to break free and effectively print and control their own form of currency and so the Gold Standard broke down.
In fact, Americans were still able to swap money for gold up until 1971 after which they then introduced 'fiat currency'; the dollar controlled by the government and printable at the drop of a hat.
Why is Bitcoin different from existing forms of currency?
Bitcoin works very differently to this. There are a limited number of bitcoins available in the world. A maximum of 21 million to be exact (currently just over 15m in circulation right now with just shy of 6m left to be mined).
This eliminates the subtle problem of inflation, which is what happens with the current mechanism of currency cashflow circulation. If money is more plentiful then the value of each pound in our pocket goes down and the value of the thing you could buy last week goes up (because it requires more money to purchase it since it just got easier to get your hands on the £1 in your pocket last week).
One of the major benefits of having a fixed money supply is that countries can no longer fund endless wars, wars are then be forced to conclude more quickly, thereby meaning fewer people were killed than otherwise would have been.
Bitcoin and cryptocurrencies are a force for peace. A force for good.
Where do Bitcoins come from?
If we print a dollar note or five pounds in sterling, we are mining (the term for generating) a Bitcoin. It's actually possible for anyone to mine a Bitcoin as long as you have a computer, an internet connection and have downloaded the right piece of software.
Initially, production of Bitcoins was relatively easy, however, over time it has become significantly more and more difficult to obtain a Bitcoin. Given our current trend of Bitcoin mining, it's predicted the last Bitcoin will be mined in 2140.
Ingenius Distributed Design
Mining a Bitcoin involves allowing your computer to contribute to completing blocks in a 'block chain' (essentially a ledger). By contributing your computer processing power you are helping to resolve Bitcoin transactions (which is why early in Bitcoin adoption this was a relatively easy thing to do since there were very few transactions around). The computer that completes the block in the block chain is the one that is granted a Bitcoin as a reward (we are then said to have mined that Bitcoin).
The integrity and chronological order of each blockchain is enforced with cryptography that has so far proven itself to be uncrackable. The blockchain is publicly available for all to see, the benefit of this is that the entire Bitcoin network can be distributed and Bitcoin Wallets (how we store our Bitcoins and retrieve them) can be used to access this ledger and calculate how much we own.
By inventing a truly distributed ledger and a financial system that effectively cannot be shut down, Satoshi Nakamoto, Bitcoin's architect created a currency system that could withstand scrutiny. By removing a point of central control it shifts the power from governments to the people. People would now no longer be reliant on the government to control the central supply of money (as much) through monetary and fiscal policy.
Whenever crises occur, countries tend to prevent money from leaving the country in an effort to stem a deepening crises. This may involve restricting the amount of physical money you can carry on your person or by restricting how much money you can transfer abroad electronically.
With Bitcoin this is no longer possible because no central government controls the blockchain or the Bitcoin ecosystem.
The Future of Money?
The principals on which Bitcoin is built, decentralisation and simplicity of use, opens up multiple opportunities as a potentially unstoppable force in the future of economics.
One such opportunity is that currencies such as Bitcoin, which are decentralised, require no central governance and can be used as simply as with a mobile device with an internet connection, open up a huge new untapped market to the world of money. Welcoming the world of economics to the Great Unbanked.
If we look at countries such as India, we see that in just 2014 less than half of all Indians held a bank account. This due in part to the fact that many Indians do not have a great need to hold their money in bank accounts, since the cost of travelling the many many miles to the nearest Post Office branch to withdraw the funds greatly outweighs it's benefits.
In Kenya, M-Pesa (or mobile money) has taken the country by storm. Over 53% of those people in Kenya with financial accounts are due to mobile money. This is largely due to the availability of mobile devices and mobile network coverage in Kenya. Only a mere 23% of accounts are made via traditional banks.
With the adoption of modern technologies, third world and second world countries have been able to leapfrog much of the innnovations of the modern world (such as our current banking systems) for better and fairer alternatives.
Cutting out the middle-man
Another huge benefit, and this will be the main draw for multi-national companies (MNCs), is that decentralised crypto-currencies, such as Bitcoin, will allow MNCs to cut out the middle-man when transferring money from one currency to another. Current credit and foreign exchange companies take a cut of the amount being transferred for a small administrative fee (normally anywhere between 0.5-3%). For MNCs or even smaller businesses who perform a lot of high volume transactions in foreign currencies, this can amount to millions if not billions over the long-term.
As a consequence, the advent of a future cryptocurrency such as Bitcoin open up a huge door of opportunity for international business to save significant amounts of money on foreign exchange handling fees. The draw of this alone will make the rise of distributed forms of currency an unstoppable wave.
The title of my article is probably a little misleading. I don't personally believe that Bitcoin or crypto currencies themselves will be the future of money, instead I believe that the practical use of the blockchain will be the next thing to revolutionise the finance industry.
As I previously mentioned, blockchain allows for a decentralised financial system where the middle-man is cut from the deal and fiat currencies managed by the government removed from the equation.
I highly recommend reading Bitcoin: The Future of Money if enjoyed my review.
Even if you're just intrigued by the concept of Bitcoin or if you're enthralled by some of the human stories such as Silk Road and the arrest of Alex Ulbricht (a member of The Dread Pirates) or just the history of Bitcoin, its practical application and how it came into being then it's an interesting read.
Bitcoin, for me, at least in it's concepts, and the basic premise of a decentralised money system, is the future of money...