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Friday, 29 September 2017

When Bitcoin is accepted by street vendors

Street Vendors Get In On Bitcoin

The above photo became viral on the Malaysian social media networks recently. It shows a lady called "Jijah" who was selling food at her stall. If you look at the basket, it's probably some kind of nasi lemak, the usual fare for breakfast. The lady in the photo isn't that young, probably in her 40's at best. 

What this means is that even street vendors know that Bitcoin is rising in value. And they are trying to get in on it. Does it make sense for them? Absolutely. They are getting paid in Bitcoin and they don't have to deposit it into the local bank. The government won't be able to tell how much money they have made. Best of all it will appreciate in value.

But is it a bubble?

I remember when I was younger, a wise man gave me some sagely advice. He said, "When you get information from bankers and lawyers that nobody else knows about, it is highly sought after wisdom! Treasure it! But when you get information from taxi drivers and barbers that everybody else knows about, it is probably a bubble! Beware!"

Here is the photo of another street vendor, purportedly from Tawau, from one social media post:

And this one from Kuching, Sarawak. They accept Bitcoins for Nasi Kandar.

I am not sure about whether it's a bubble. It might be. When people ask my what my opinion is, I tell them, "This new world is based on everything-Internet-everything-connected-everything-mobile-everything-apps. But it won't last. It might explode. It might go down in flames."

I usually get a few wary looks when I say those words.

And so my usual reply: "When the world is in war, when there is disaster and chaos, where will your Internet be? Where will your electricity be? Will your mobile phone have connectivity or even a line? Can you get data?"

I think there are people making a lot of money from this cryptocurrency boom. It might be a bubble, or it might not be. But those who got in early, and put their money in, have probably reaped huge dividends by now. They have probably seen their investments double, triple or even quadruple. But if they don't cash out, it remains only paper balance.

As a Malaysian, you should know what happened when the Japanese lost the war. A lot of paper money, issued by the Japanese government, became worthless. History books are full of pictures of "banana money". Cryptocurrency could be the next banana money.

And yet there is a boon for society.

With the rise of cryptocurrency, many people who have invested their meagre savings into it have suddenly become enriched. They who placed their faith in the seemingly fantastical are now reaping their profits.

Suddenly, communities of poor people who could not open a bank account can now open an online wallet, and start transacting.

The recent phenomenon, initial coin offerings, or initial token offerings, also has become a boon for cash-strapped startups who are denied access to venture capital funding. For years, venture capitalists, private investors and angel investors were a closed door invitation-only privilege. Startups would also need to give up huge chunks of equity in order to attract funding, mostly in the form of redeemable preference shares. 

ICO's or ITO's or even token crowdsales are now being regulated across the globe. Some countries have begun to ban them; and others have begun to embrace them. Regulation is necessary, because in regulation there is an avenue for genuine startups to start an ICO, with the confidence of the public and the trust of the government. 

There will be conmen and people out to take advantage of others. For that reason, regulations also serve the important role of filtering out those who have no business starting an ICO or an ITO.

My thoughts on ICO's and ITO's

There is a danger that ICO's and ITO's, if continued unabated, could lead to the large unchecked creation of money. In a token crowdsale, new tokens are created, which are then sold for a certain amount of (dominant) cryptocurrency, such as Bitcoin or Ethereum. Eventually, many of these tokens become traded on crypto exchanges, and acquire a value. The tokens can be cashed out for fiat currency. So, too, can the cryptocurrency which had been paid to the token issuer. In that sense, ICO promoters have infringed on the role of banks in creation of new money, through the issuance of new tokens. 

If you can't understand the preceding paragraph, let me explain it like this. 

- Ah Chong has RM100. Ah Chong buys RM100 of Bitcoin.

- Ramasamy runs an ICO.  Ramasamy announces that he will sell RAMA tokens. Ah Chong decides to participate and contribute to the ICO.

- Ah Chong sends Ramasamy RM100 worth of Bitcoin. Ramasamy sends to Ah Chong RM100 worth of new RAMA tokens. 

- Ramasamy can cash out the Bitcoin. 

- Ah Chong can also cash out the RAMA tokens (eventually) when the tokens are traded on cryptoexchanges.

- New money was created, because Ramasamy can now cash out for RM100 and Ah Chong can cash out for RM100.

There is the main problem, on a big picture basis. But that shouldn't bother the man in the street, because governments allow banks to create new money through the fractional reserve banking system. Google online for Basel III and fractional reserve banking. You will see that money is created out of debt, and banks make money several times over from the deposits placed in their trust. 

Your money, deposited in a bank account, is loaned out to others for high interest, who then eventually create new deposits. The whole cycle is repeated ad infinitum, and that is how money is made. Don't forget that the German government in the aftermath of World War I printed out money in excess, to the point that it became worthless. Don't forget Zimbabwe's worthless one hundred trillion dollars, which is essentially worthless money.

That is my main concern about ICO's and ITO's. The economy is at risk of being gamed by fraudsters.

But then again there are many genuine startups who seek to use it as an alternative fundraising vehicle. In this scenario the best thing to do is "caveat emptor".
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