Cryptocurrency: Engine of the new economy, or emperor’s new clothes?
Note: This is Part 1 of a two-part series. Read Part 2
With thousands of informative articles bouncing around the Internet and billions of dollars worth of transactions occurring daily, cryptocurrencies seem poised to overtake our traditional ideas of money. But while cryptocurrency use is increasing, there remain a lot of unanswered questions about these ersatz spondulicks.
Foremost among them are: What exactly is a cryptocurrency, where did it come from, is it a going concern and, of interest to most people, how can I get a piece of the action?
What is a cryptocurrency?
Let’s begin with the example of a single U.S. dollar and how it works. A dollar is made of paper, oddly, the same material as toilet tissue. A dollar is a medium of exchange that one can give to a vendor in exchange for a good or service. The dollar is honored, or backed, by a central governing authority, in our case, the Federal Reserve (“The Fed”), which is not actually federal or really a bank, but that’s another story.
The Fed is a private institution and it backs each dollar with well … nothing. It does use a ledger to keep track of the total amount of dollars in circulation, but that’s about it. A dollar is backed by faith. As our money says, “In God” as well as in this private federal institution “we trust.”
In the past, each dollar was backed by actual physical gold (a dollar was worth so much physical gold) — we called this being on the “gold standard.” We no longer follow the gold standard. Instead each dollar is backed by the good faith of the Federal Government via the Fed — that unaccountable private institution that has enough “toilet paper” for everyone, and can print more as needed. Laying it out this way may be a bit coarse, but it’s the truth.
The unfortunate aspect of trusting in a government to back your money is that sometimes governments aren’t trustworthy. They can devalue your money by printing more of it or, if they feel so inclined, just take your money via taxes, fines, and any number of devious manners.
Cryptocurrencies do not rely on a central bank like the Fed, or on any other government entity, to maintain value. Instead they place their faith in millions of individuals and their computers. Instead of a bank keeping a ledger of your money, the ledger is spread throughout the world in this shared database secured by cryptography. This worldwide ledger keeps track of all the comings and goings of all the transactions for that currency.
In short, cryptocurrency is just a network of peers with all the recorded transactions in a database, sitting on each peer’s computer. Because each peer has the entire history of transactions and thus the balance of every account, cryptocurrency cannot be devalued or counterfeited. If one were to attempt to do so, every other peer would notice the transaction is not right and kick the failed machine off, much like typing in the wrong PIN on your ATM — it will eventually eat your card.
Why it works
This database of confirmed and irrefutable transactions is called the blockchain. A transaction is immediate, and known to the entire network, and must be confirmed. The confirmation process is done by a “miner” solving a crypto-puzzle and writing the transaction to the blockchain.
In layman’s terms, a miner is rewarded a token or part of a token of a cryptocurrency for being the first to write a transaction to the blockchain. You receive currency for being the first to verify the ledger … kind of like a bank.
As soon as you do, all the other peers know it and your currency is known to everyone. These crypto-puzzles are regularly being solved by large collections of graphic processing units (GPU farms) now, and the average Joe, like me, sitting in my basement in Missouri, can earn the equivalent of a few hundred bucks a month farming or mining.
Since the currency is based in math, it has a finite limitation. Which means it is not like the Fed, where they can print paper until the cows come home. Cryptocurrencies have a set amount and no more.
There are five key concepts to cryptocurrency that everyone needs to understand.
1. It’s irreversible. If a hacker steals it, you can’t call fraud protection at American Express and get it back. If you pay a scammer with Bitcoin to open the ransomware on your network and he fails to perform, then you are out that money.
2. It’s anonymous. Without any physical connections between it, you, and the real-world, it’s impossible for anyone to track crypto-transactions. You would have to be either careless or stupid to be caught using a cryptocurrency. That’s why criminals use cryptocurrencies. Some might remember the “Dread Pirate Roberts” and the Silk Road marketplace site that sold illicit items for Bitcoins.
He was caught not by being tracked through a cryptocurrency exchange, but because he used the same computer and his real e-mail address, in a forum posting and for in-person meetings to receive deliveries.
3. It’s fast and global. You can buy something and miners will solve the hash (crypto-puzzle) within minutes.
4. It’s secure. Unless you can solve P vs. NP (look that up … I haven’t got enough space to write about it), you can’t break the blockchain protecting the cryptocurrency. The only ways a cryptocurrency can get stolen is if someone steals your key or your password.
It comes down to social engineering, phishing and nice people doing stupid stuff. One of my best friends always says that security is to protect good people from doing dumb things, not bad people from doing smart things.
5. It’s simple. Simplicity is one of the best features of cryptocurrencies. Unlike a bank, you need only install software on your computer (called a “wallet”) to use the currency.
One of the first cryptocurrencies in circulation was B-money, a predecessor to Bitcoin. The creator of Bitcoin (whomever you think that is) referenced B-money as its predecessor. Unfortunately, B-money was doomed to failure because the hash for the crypto was server-based rather than peer-to-peer.
In 2008, an individual calling himself Satoshi Nakamoto solved a lot of cryptocurrency’s operational issues by developing the peer blockchain and voila! Bitcoin was born. The weirdest part about this is that no one knows the actual identity of Nakamoto — guesses range from the U.S. Government to Elon Musk.
Since its invention, Bitcoin has been cryptocurrency’s gold-standard. Created in 2008, Bitcoin took two full years for it to be valued enough for people to use it to conduct transactions. One of the more surprising transactions happened in 2010, when an individual swapped 10,000 Bitcoins for two pizzas. For those who are counting, at Bitcoin’s highest value, that’s the equivalent of a couple hundred million bucks for just two pies — at the least, I hope they were delivered.
Bitcoin’s value has since taken off, recently reaching $20,000 per coin before relaxing to its current value of around $11,000 per coin. It’s ironic, that someone selling illegal weed in the late ‘90s for Bitcoin would be a millionaire now, while someone working a 9-to-5 job and saving 20 percent of their paycheck is still cracking the weekly nut.
Bitcoin has not been without its share of problems. In 2014, a popular exchange, Mt. Gox, based in Japan, was hacked and the perpetrators made off with more than $4 billion worth of coins. There have also been other scandals like people surreptitiously inserting malware into video game players to mine Bitcoin on users’ remote machines.
With Bitcoin’s success, other cryptocurrencies soon entered the market. They are surprisingly easy to start — it’s like a cult, you just need people to believe in it.
Cryptocurrencies are increasing in popularity. As of January 2018, there were 1,384 cryptocurrencies available on the internet. The stats on Bitcoin, the most popular, are impressive: 96 countries currently permit unrestricted bitcoin usage, 80,000 bitcoin-related tweets each day, more than 12,000 bitcoin transactions each hour with a daily trade volume of $4.9 billion.
An eventual world currency (yes, it will happen … someday) will likely be a cryptocurrency. Not having physical currency in your pocket or gold buried in the backyard will be the standard for every human on the planet. While most of us may not want a chip inserted into our hand, we overlook that we currently carry one of sorts, and use it multiple times a day. I’m talking credit cards.
Will it really matter if your currency is digital rather than physical? If it’s called a “Zork,” instead of a dollar? So long as people can buy and sell with ease and security, I believe they will be comfortable.
As further evidence of Bitcoin’s potential longevity, it’s now traded as an ETF. This means that you can simply go on E-trade and buy a stake in Bitcoin, or in companies that mine Bitcoin. I believe that we will only grow the opportunities to use the currency in all facets of our lives and with all our regular financial vehicles.
Presently, the hard cap for the Bitcoin Blockchain is 21 million. Miners may not get a reward for keeping track of the ledger, but they will receive transaction fees, much like MasterCard or Visa do with their networks.
The big cryptocurrency unknown is viability, and that is based on how quickly these currencies are accepted and broadly used. Some experts predict that, without mainstream use, cryptocurrencies will dissolve and eventually become worthless. Others are more sanguine, predicting that within a few years, Bitcoin will be mainstream with millions of people daily using it to buy groceries, entertainment and gasoline.
My opinion is that this is all leading to a new and better cryptocurrency, one based in quantum computing that seamlessly takes us into a secure economic future.
Note: This is Part 1 of a two-part series. Read Part 2