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An analysis of Donald Trump’s Crypto-Tweet (1/2)

On Thursday, 12 July 2019, U.S. President Donald Trump communicated via Twitter several statements regarding Bitcoin and other cryptocurrencies. Donald Trump’s passionate statements contain truths, assumptions as well as dubious hypotheses about future developments of the newly emerging currencies. The overall notion of those tweets being straightforward, he however does not offer any form of reasoning. Except for the second point, that entails at least partially a reference to the argument whether cryptocurrencies are money, each subsequent point as presented in the following is merely an isolated statement.

United States President Donald Trump

As such, these points can be true or false, which implies that since there is no line of reasoning, the burden of proof lies with the audience.

Because of the novelty of crypto-assets, there is no unanimity regarding their impact in socio-economic developments. In a two-part series, the Future Citizen Institute will contribute to provide insights and clarification on this matter.

Donald Trump tweeted,

“I am not a fan of Bitcoin and other Cryptocurrencies, which are not money, and whose value is highly volatile and based on thin air. Unregulated Crypto Assets can facilitate unlawful behavior, including drug trade and other illegal activity....

….Similarly, Facebook Libra’s “virtual currency” will have little standing or dependability. If Facebook and other companies want to become a bank, they must seek a new Banking Charter and become subject to all Banking Regulations, just like other Banks, both National...

…and International. We have only one real currency in the USA, and it is stronger than ever, both dependable and reliable. It is by far the most dominant currency anywhere in the World, and it will always stay that way. It is called the United States Dollar!”

Eleven statements may be obtained from the above tweets.

1) Cryptocurrencies are not money

2) Their value is highly volatile

3) Their value is fabricated out of thin air

4) Unregulated crypto assets facilitate unlawful behaviour

5) Facebook’s stablecoin Libra will have low dependability

6) Facebook and companies with similar intentions must seek a new banking charter, therefore becoming subject to standard banking regulation

7) The U.S. has only one real currency, the US dollar

8) It is stronger than ever

9) It is dependable & reliable

10) The US dollar is by far the most dominant currency in the world

11) It will always stay that way

In “An Analysis of Donald Trump’s Crypto-Tweet (1/2)”, the focus will be on the first four statements, part two, published later, will see the list completed.

1) Cryptocurrencies are not money

According to Mankiw’s classic orthodox macroeconomics textbook, the main functions of money are to serve as medium of exchange, store of value, unit of account, and regularly as a standard of deferred payment. Applied to cryptocurrencies, they are already employed as medium of exchange for online payments and are a volatile store of value. Problematic are their functioning as unit of account and as standard for deferred payment for interrelated reasons. Since the cryptocurrencies’ value is so volatile, using them to interpret prices of other goods and services is highly inconvenient.

This aspect is trumped by the even more fundamental reality that, even if one wanted to purchase a good using a certain cryptocurrency, the price would be given in the most dominant and relevant currency. This means it would be factually measured in units of an already existing and more fundamental currency. Therefore, one might argue, only if another function of money will reveal itself over the course of time that a cryptocurrency fulfills or if their properties change and become stable, the world will accept them and implement them to the benefit of one or more interest groups.

2) Their value is highly volatile

A quick look at the charts of all unpegged cryptocurrencies suffices to confirm that their value is indeed highly volatile. Slumps of 11% over night as only recently are not exceptionable. This volatility does not only hinder high acceptance of proven cryptocurrencies; it also shifts wealth from unsuccessful traders to successful ones who are betting on price movements. Usually, retail investors overwhelmingly lose against established institutional players. While this is well known amongst traders, factors like the desire for wealth or gambling addictions play a large role in keeping this machinery going. This is further exacerbated by institutions such as the Commodity Futures Trading Commission in the U.S. which grants permissions for new cryptocurrency-based products despite a lack of knowledge of this new field.

3) Their value is fabricated out of thin air

The money in circulation is called fiat money, from the conjugated Latin verb “fiat” for “it shall be” or “let it be done”. It is the acknowledgement of governments and banks that money as we know it is an artificial construct without an underlying commodity from which it could derive real value. Therefore, it is an agreement between the issuer, usually a country’s central bank, and its population that it’s measure of value and concomitantly its own value are accepted and deemed real. In front of this backdrop, the value of cryptocurrencies is neither less nor more credible, the difference being that in the case of fiat money, politics are tailored with the money’s price stability in mind, while with cryptocurrencies such a stability is not yet desired. While this might sound surprising, speculators promising themselves fast short-term profits are interested in this volatility, because new financial products allow them to also take profits by short-selling the market in anticipation of a price dip.

4) Unregulated crypto assets facilitate unlawful behaviour

There are many accounts known to the public where cryptocurrencies such as the Bitcoin have been employed to buy illegal drugs and weapons online or even support terrorist groups like Islamic State, as Nikita Malik from Forbes points out. Since there are in fact cryptocurrencies that facilitate anonymous transactions, for instance Monero (XMR), Trump is rightfully claiming that unregulated cryptoassets facilitate undesired behaviour. This aspect will be a long-term thorn in the side of both regulators as well as honest blockchain developers.

According to researchers from the University of Technology Sydney and the University of Sydney Business School,

“[…] approximately one-quarter of Bitcoin users and one-half [46%) of Bitcoin transactions are associated with illegal activity. Around $76 billion of illegal activity per year involves Bitcoin, which is close to the scale of the US and European markets for illegal drugs.”

With a 24-hour Bitcoin trading volume of $180 billion in mid-June, this implies that about 40% of transactions processed on the Bitcoin blockchain are payments for black-market activities. Understandably, this poses a threat to future developments of crypto-assets.

Author: Patrick Lehner

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