Us versus Them. That’s a familiar theme; yet we know there are grey areas between the two. Finance is the same. There are “The Big Institutions” and “the rest of Us.” Alternative economies try to make clear distinctions, but if there’s a financial advantage The Big Institutions will try to use it – just like people are glad to step back into a conventional mortgage if they can get a low enough rate. Both sides are affecting both sides. Society is diversifying, just as we should.

The Big Institutions are easy to stereotype as the massive stock brokerages and mega-banks that are physically and culturally removed from mainstream life. Either housed behind anachronistic granite colonnades or modern steel and glass, they are the entities that were too big to fail. They’re so easy to stereotype that they’re personified as characters in movies like Wall Street and Trading Places.

Alternative economies are less easy to stereotype because their recent incarnations are new, and most people don’t recognize the heritage behind barter economies and alternative currencies. When in doubt, people apply the familiar labels of hippie or socialist, ideas as individuals that can be treated as nuisances and fads.

Ideas within the alternative economies are growing enough to affect businesses, communities, and investments. Communities are developing their own currencies, like BerkShares (the Berkshires in Massachusetts), or cryptocurrencies like MazaCoin (for the Lakota Nation), as a way to encourage community development. Individuals are switching some transactions to cryptocurrencies, like BitCoin, as a way to do business without involving banks or central authorities. Microlending organizations like Kiva.org, or LendingClub.com mean people can invest in each other; effectively taking the place of local banks (if there are any.)

Alternative economies are growing because they are more community-focussed, are more likely to deal on a personal level, can paradoxically generate better rates for both borrowers and lenders, and because they aren’t The Big Institutions.

The Big Institutions read that last line and ignore everything except the better rates. If they can get better rates of return and reach new markets, then they can make more money. They got that big by not ignoring such opportunities. The grey area gets greyer.

It is now possible to participate in the alternative economy by dealing with conventional businesses and institutions. Hedge fund managers are creating portfolios that invest in peer-to-peer loans, somewhat ignoring the definition of peer. BitCoin, the cryptocurrency developed to be a “Currency of the people, by the people, for the people” can be bought and sold anonymously, which means it could also be traded by traditional currency arbitrage professionals without anyone knowing about it. Just the way travel was changed when Priceline challenged Expedia which challenged online travel agencies which challenged travel agents, taxis and hotels will see new business models because of the disruption championed by Lyft (“taxis”) and AirBnB (“hotels”).

Lyft – photo by Matt Earnest

Growth in the alternative economy has spawned a backlash. Sharing services like Lyft or airBnB are running into municipalities that are imposing new restrictions at the urging of existing taxi and hotel companies. The IRS is definitely taking notice, and issuing notices about how to pay taxes on any exchange of value, whether that is a cryptocurrency or a bit of bartering at the farmers maket.

Reality becomes more entwined.

Some people will only invest and manage income and expenses only via conventional banks and brokerages. Some people will avoid them entirely and attempt to operate solely within alternative economies, with the major caveat that the tax authorities continue to expect taxes to be paid regardless of the currency.

Most people though, are increasingly using both the old and the new. Paychecks come in via regular currency, probably to a conventional bank. A lot of bills, including taxes, will be paid right back out with that same currency. Without exchanging currency, some will go off to microloans, shared services which are really alternative pay-for-hire, or even directly helping the community by buying local. Farmers markets are grateful. Inevitably, though, people are turning to time banks, closed community currencies, and traditional barter.

At the one end, conventional finance continues to be The Big Institutions. At the other end, alternatives continue to distance themselves as much as possible from centralized authorities.

The fact that most people live in the middle is a good thing. Diversification is one of the most powerful personal finance tools, and collectively without design, we are witnessing the development of a supportive web that extends from The Big Institutions to the farmers at the markets. A person may invest via direct deposit with a match from their employer, while also investing peer-to-peer, and contributing time in the community, whether for charity or trade. The better the diversification, the less severely we will be impacted by the next, inevitable upset.

Our diversification isn’t happening by design. Our diversification may be happening by accident. In any case, our diversification can be strengthening us and redefining conventional, alternative, and stereotypes.