2017 will go down as the year bitcoin and other cryptocurrencies hit the mainstream.

That’s not a prediction. It’s a fact. It’s happened. Or rather, it’s happening as you read these words.

The most obvious sign of that is the amount of money being made in the crypto market right now. You’ve probably heard about that 1,000 times already. (People who’re making 10,000% gains tend not to shut up about it, which is fair enough I suppose.)

But high profits are just one price signal. There’s a lot more going on under the surface that is going to make the crypto industry the single most disruptive force in the world in the coming years. It’s worth you taking the time to understand that now. I’m not joking. When you’re getting paid in bitcoin, or buying a home with it, you’ll be glad you spent a little time thinking about it now.

Those may seem like crazy claims now. But give it time. You’ll see that I’m right. It was crazy to think of bitcoin hitting $10 once. It’s since soared to $3,000.

With that in mind, I have something a little different for you today. It’s a free extract of a book on bitcoin and other cryptos, from Sam Volkering. The book hasn’t even been published yet. So this is a world exclusive. You’ll find it below this message.

A word about this – Sam’s book will be published in full very soon. Southbank Investment Research will be the sole UK publisher. I can tell you now that the book will cost more than £20. But I’m trying to figure out a way of giving a limited number away for free (or as close as I can make it).

If you’re interested in getting one of those copies first, you need to let me know. You can put your name down to receive one by hitting this link now (you’ll automatically receive details of how to get your copy as soon as it’s available).

Best,

Nick O’Connor
Publisher, Exponential Investor

Sam Volkering

 

Key to bitcoin is to understand the failures of the system


There’s one more aspect of global banking and finance you need to get under your belt to understand bitcoin and other cryptocurrencies.

You see to disrupt the existing system you need to also know how the entire current system works and why it’s prime for disruption to begin with.

There’s no future to bitcoin if the current system works. If it’s fair, efficient and works well then what reason is there for bitcoin to exist, to force change? There is none.

But the current financial system, the global payments system, isn’t efficient. It isn’t fair. It isn’t for the benefit of the many. It’s skewed to favour the elite, the already wealthy; it doesn’t give the average Joe a chance.

And when you break down the current payments system and understand how that works then you see all its deficiencies for all their glory. You see where it’s broken, where it fails and exactly the reasons as to why bitcoin and cryptocurrencies are primed to disrupt the existing system and to take it over.

To understand the current payments system you need to think about your own situation…

How do you get paid your wages today? It’s pretty fair to assume you, like the millions of other people around the world, simply see a number appear in your bank account each week/fortnight/month.

Your employer doesn’t just pull you into their accounts department and hand over a wad of cash to you each month. Nor do they hand you an envelope with a cheque inside for your latest pay.

No. It’s far simpler than that these days. I know that’s how it works for me. I simply log on to my mobile banking app each fortnight and see if there’s an extra supply of money in my account. If there is then I’ve clearly been paid. If there isn’t then I’m straight on the blower to accounts.

All we see is a number. We then typically use our online banking to shuffle that number around. Some people pay bills, some people send it to a savings account, some send it to another separate account for investment. Some go straight to the pub.

I have a routine where I shuffle my numbers around after each payday. Some goes to bills, some goes to savings, some goes to the day-to-day account, and some goes to a currency exchange market.

This fortnightly shuffle of numbers can be a little disconcerting. For many people we’re talking about thousands of dollars going through this “monetary ballet” from account to account, seamlessly and graciously flowing from left to right, right to left, spinning around, jumping and leaping over here and there. Eventually it ends up in a final position where we applaud and cheer for the balletic money shuffle performance on display.

But at the end of the day, the way in which you receive and move your money around is purely digital. There is no physical handling of cash. The only time you typically ever actually see and feel “real” money is when you take it out of an ATM and use it to buy goods, which you receive in your hands.

Let’s get back to the point that today’s money, the wages you receive, the income you generate, really is entirely digital already.

Let’s say you have a daily account and a savings account with Bank A. You want to transfer between accounts. No problem. That’s all done in-house within the bank’s internal systems. It never leaves the bank; it’s just a simple internal shuffle. Simple.

Likewise if you want to transfer $50 to your friend Brad who also has an account with Bank A. Again it’s all done with ease on Bank As internal systems. It will simply debit and credit the figures from the accounts. Again just an internal shuffle and the money never actually leaves the bank’s internal system. Also simple.

Now let’s say your friend Steve has accounts with Bank B. Okay so that’s a little harder to do. Things now start to get a little more complex.

Bank A doesn’t put your money in a sack and march it over to Bank B where it put that money in a big safe. That’s not safe or efficient. Sure that might have been the case before electricity, computers and connected systems. But that’s not the world we live in today.

Instead Bank A reduces the amount from your account ($50) and then increases the amount in Steve’s account with Bank B by $50. But how do they do this?

Bank A doesn’t just have open access to Bank B’s accounts. That’s a massive security and compliance risk. Instead what happens is that Bank A and Bank B share an account with each other. It’s like their own little lovely joint account. The shared account set up is called “correspondent banking”.

So Bank A decreases your account by $50. It increases its correspondent (joint) account with Bank B by $50. It then notifies Bank B with a message that the $50 now in their correspondent account needs to be allocated to Steve’s account. By reconciling the message with their account, Bank B is happy to increase Steve’s account because it can see the funds are there in their correspondent (joint) account.

This process is also relatively simple for banks and their existing network of systems. However even in “developed” countries sometimes this bank-to-bank transfer can take a working day or two. Which really in today’s instant world is also inefficient and slow. In some countries this process is virtually instant however, which is the way it should be.

The fact that banks can make it instant now is thanks to what’s called a “deferred settlements” system. Effectively this just means they do their little balletic shuffling of money in and out and around the correspondent banking system, but they defer settlement until later in the day. They trust each other enough that the numbers match up and they reconcile these later on. Of course sometimes the numbers don’t add up, and that’s where fraud and theft departments start to stick their noses in and figure out what’s going on. So even as big and as “trustworthy” as the banks might be, there’s still plenty of fraud and theft that occurs in the existing “traditional” banking and payments system.

NOTE FROM THE PUBLISHER: If you’re interested in getting a copy of Sam’s book in full, for free, as soon as it’s available, you need to let me know. You can put your name down to receive one by hitting this link now (you’ll automatically receive details of how to get your copy as soon as it’s available).

But again these are all domestic ways that banks shuffle your money around from you to other accounts for you and through merchants, savers and investors.

When we start to go international, well things start to get really manic, really complex, even more inefficient and risky.

Have you even tried to transfer wealth across borders? Have you ever tried to send someone money overseas? Have you ever used your own debit or credit card in another country? Have you ever withdrawn cash from a foreign ATM? If you’ve answered yes to any of those questions, then you’ll know that it’s bloody hard to do.

For all the perceived advances in modern financial technology, the fact is that the system hasn’t really changed since the 70s and 80s. Sure you don’t need to carry around travellers’ cheques like you used to. And you don’t need to withdraw wads of foreign currency before ing abroad. But the reality is it’s no different. It’s just digital. The banks still rip you off on exchange rates. They still take a cut of commission from your transactions. They charge you for using ATMs or even just making a purchase that isn’t the currency of your bank account.

They rip and steal funds from you at any chance they can get. But the problem isn’t always necessarily your bank. They do sometimes have to charge you these fees because they get charged these fees from other financial institutions, other intermediaries, middlemen and banks. They aren’t going to just wear these costs, so they pass them on to you.

And this is where the whole system shows its true colours. They could all work together as a distributed network making the whole system more efficient and streamlined. But they don’t. They’re all in it for isolated gain, to maximise returns to shareholders and investors.

They’re there to simply profit from you. They don’t really like you or care about you. You’re an instrument in the existing “traditional” banking and payments system that lines their coffers, makes them billions in profit and pays for their huge bonuses. Without you they don’t have a business, but if they could do what they do without you, they would.

Part of the reason that the entire international banking and payments system is inefficient is thanks to the incumbent interbank organisation they call SWIFT.

The Society for Worldwide Interbank Financial Telecommunication (SWIFT) is the global system that helps facilitate the shuffling of money around the world.

For example if you want to send $1,000 from your account with Bank A to your cousin Rodney in the UK with Bank A-UK you will need to provide a “SWIFT code” to ensure the transaction goes to the right bank and right account.

What happens then is your Bank A sends a payment transfer SWIFT message to Bank A-UK. When this message arrives and clears and credits the account via their correspondent banking account, the process completes. This is time consuming and can take days to complete and can also be costly. And this is even when the two banks party to the transaction actually hold correspondent bank accounts with each other.

But not every bank in the world holds a correspondent banking account with every other bank in the world. That means in order to get money from Bank A to Bank P that might be in the Philippines, sometimes these payments have to go through financial intermediaries. These are middlemen that help in the processing and transfer of the payments – and they take their clip of fees on the way of course, which all add to the complexity and cost of a transaction.

What’s also important to know is that SWIFT doesn’t actually send payments around the world. It never holds any actual funds. What it does is to actually facilitate payment and transaction messages (communications) between financial institutions to settle through correspondent accounts.

The actual movement of money is still all digital and between banks, financial institutions, middlemen and intermediaries.

Still with me? Good. This can get overwhelming. But stick with it because as complex as this is, it’s all very important to understand and how this complexity plays into the hand of bitcoin and the future of bitcoin so perfectly.

NOTE FROM THE PUBLISHER: If you’re interested in getting a copy of Sam’s book in full, for free, as soon as it’s available, you need to let me know. You can put your name down to receive one by hitting this link now (you’ll automatically receive details of how to get your copy as soon as it’s available).

It’s fair to say that the system we use now for local, domestic and international payments and money transfers is complex, can be expensive and it not easy once you go from one country, crossing a border to another one.

And let’s not forget that it’s not just banks that facilitate payments. Sometimes you simply can’t transfer money through the banks. This might be a situation where there’s a person who doesn’t even have a bank account.

So if you don’t have a bank account how can you send money overseas, or even earn money?

Someone without a bank account probably sounds crazy to you doesn’t it? In developed countries it’s very unusual for someone not to have a bank account. According to the World Bank, approximately two billion people still don’t have a bank account. That’s roughly 27% of the world that still doesn’t have access to the global banking and payments system.

The thing is these people still earn incomes and still work. The “shadow economy” is alive and well around the world. For example, a paper published by the Institute of Economic Affairs, titled “The Shadow Economy”, explains that the shadow economy makes up as much as 10% of GDP in the UK.

And if you look at the size of the global remittance market you can further see that the transfer of funds around the world is only growing in size.

TransferWise, a peer-to-peer currency exchange platform, says,

In 2014 remittances to developing countries totalled a staggering $436 billion, out of a total of $583 billion worldwide.

What this tells us is that the bulk of international remittance goes from developed regions – US, UK, Europe – to developing countries such as India, China, Philippines and Mexico. TransferWise also explains, “in 2012, migrants from China and India sent home a staggering $130 billion.”

When it comes to the major players in the remittance market, companies like the US$9.10 billion payments giant Western Union [NYSE:WU] dominate the existing market.

But as we say, all of these ways to shuffle money around the world are so complex and pass through so many hands now that it adds incredible cost.

For example, according to the World Bank again, using banks to send money costs on average 10.96%. Using a money transfer company (like Western Union) costs on average 6.59% and even using a post office costs 5.14%.

Across the three that’s an average cost of 7.56% to send money around the world. Now if the total remittance market is about $583 billion – that’s costs of $44.07 billion that the global payments system rips from the hands of hardworking people just trying to make a living and just trying to make their way in the world.

We don’t claim that the whole system should be seamless and free… or should it? If you can cut out the middlemen and intermediaries, create a streamlined, simple, easy, borderless, decentralised system to shift money around the world, wouldn’t that be a good thing?

In short, payments are hard. And SWIFT, which has allegedly improved the entire global payments system, has only been around since the late 70s. It’s taken it 40 year working with banks and financial institutions, governments and central banks to create an incredibly complex web of payments infrastructure.

Without it there hasn’t been a way to move money around the world. And that’s the problem. You don’t have a choice. You want to send money; you must use the system that’s been designed for you to benefit the elite.

We’re all heavily reliant on these payments systems to shuffle money around the world. Without it, there hasn’t been another way to shift your money about. But what if there was another way?

Imagine a world with another choice. A choice external to the banks and financial institutions that simply rip people off. And what if we all moved to that new, alternative system. What if we moved because it was fairer, safer, faster, and open to everyone on earth with little fuss?

What would happen to the existing incumbents in the banking system? How would the establishment look upon this threat to their billions in revenues and business? It’s pretty clear that an existential threat to the banking, finance and payments system that’s dominated the world for so long will not go down well with the s of state and power brokers of the modern world.

It’s fair to say they will fight any threat tooth and nail – unless they realise they can’t fight it. Instead by conceding change is inevitable they have a chance to pivot and become institutions that actually put their users first – which in itself would be the biggest change to the banking and payments system ever.

Well bitcoin and the cryptocurrency ecosystem is a direct threat to the existing system. It’s changing and evolving at such a rapid and ferocious pace that banks and financial institutions have no choice but to find a way in – otherwise they know that in the next ten, 20, 100 years they’ll simply become worthless.

However these institutions still operate using fiat currency. That’s currency issued by a centralised controlling entity, often a central bank and government.

So the US has the US dollar, the UK has the pound sterling, Europe (mainly) has the euro, China the yuan, and so on. These central authorities are deeply entrenched in the existing global banking and finance system. They only know one way, their way.

They only are interested in their own currency, their own nation’s wealth; they only want really to be more powerful, more wealthy and more dominant. They do this in the modern world through financial power. In the early parts of the 20th century they did it through military power. But today the dollar has more power than the bullet.

That’s why when the US wants to hurt Russia it doesn’t go straight for the cruise missile shelf, it employs financial and trade sanctions on wealthy Russians, the government and Russian companies.

It uses its financial clout as a weapon. It does this through currency intervention, manipulation and control. This is the currency war of the 21st century. And it’s a war that’s alive and well. But as nation states continue to play these currency wars, all they do is lose the faith and trust of their citizens.

As they drive their economies into the ground, put up barriers and manipulate their currencies, they drive the people out to other alternatives – previously people didn’t have anywhere else to turn to. But now they do, and thanks to government meddling they’ve contributed to the perfect storm that’s allowing bitcoin and cryptocurrency to flourish.

Thanks to the incompetency of government, central banks and the existing global banking, finance and payments system, the people of the world – the average Joe and Jill – now have another way to succeed and flourish financially in the world.

NOTE FROM THE PUBLISHER: If you’re interested in getting a copy of Sam’s book in full, for free, as soon as it’s available, you need to let me know. You can put your name down to receive one by hitting this link now (you’ll automatically receive details of how to get your copy as soon as it’s available).