The Great Financial System Realignment of the Early 21st Century - What's Bitcoin's Role?

Bitcoin Has a Role to Play In an Interconnected World.

The global financial system has experienced three substantial upheavals since 1900: 1914, 1934-1939, and 1971. Geopolitical unrest, economic instability, and financial market volatility accompanied each period. As part of my ongoing analysis of financial markets and complex adaptive systems, we conclude that 2008 marked the opening chapter in the next major global monetary and currency realignment. I expect this to reach fruition by 2024, if not earlier. This time, the fundamental issue is the constitution of “money.” Money has evolved from ancient times through gift and barter systems, to barley, to receipts, to fixed reference points measured in ounces of gold. The most recent evolution is a fiat system impacted by the proliferation of credit-based “money,” asset-backed securities, and derivative instruments.

Bitcoin is among the first digital currencies introduced in the peer-to-peer framework and has disrupted the traditional definition of “money.” As the global financial system evolves, Bitcoin may make headlines for reasons not obvious right now. It may not achieve widespread use, but may influence the definition of money itself, and thus the development of a new global currency system by 2024.

Our current financial and currency system is a world in which traditional centers of money creation have an unlimited capacity to run monetary “printing presses.” The unbridled proliferation of monetary aggregates and thus the size and leverage of the total liquidity pyramid far outstretches total GDP. This situation increasingly contributes to the volatility experienced in currency markets, and via a complex transmission mechanism, the volatility in all asset markets. Since the global financial system is a complex system (like earthquakes or infectious diseases), this increasingly instability is not surprising. These types of systems, due to its widespread interconnectedness, are extremely susceptible to dramatic changes from seemingly innocuous actions. We are likely to witness increasing bouts of market volatility as the global financial system realigns and seeks a new, higher level of order.

Currently, Bitcoin accounts for approximately 0.00004% of the world’s total M3 (broad money) supply. As demonstrated over the past few years, Bitcoin is a digital store of value. It is highly volatile in part due to its emerging status and can act as an electronic cash-like currency with a very low cost of use. Highly prized are Bitcoin’s “blockchain” characteristics that allow no single point of failure and its decentralized status. However, it has received criticism from monetary authorities for its lack of control and accountability. We cannot speculate on who will win this debate. But what is increasingly clear, is that currencies like Bitcoin will impact the debate on what kind of currency system the world needs, a world more interconnected and complex than at any time in human history.

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Any opinions or forecasts contained herein reflect the subjective judgments and assumptions of the author only. There can be no assurance that developments will transpire as forecasted and actual results will be different. Accuracy of data is not guaranteed but represents the author’s best judgment and can be derived from a variety of sources. The information is subject to change at any time without notice.