It’s helpful separate crypto into two different concepts: as a means of payment and as an investment vehicle. It is useful as a means of payment since it is virtually anonymous. This facilitates commerce in things that would typically be illegal. Like this:
Wallet 1234 trades someone $100k for 5 quatloocoins
Wallet 1234 sends 5 quatloocoins to Wallet 4567
Coincidentally, Joe sets fire to a factory owned by Pat
Wallet 4567 trades someone 5 quatloocoins for $100k
Since the quatloocoins are anonymous, the authorities don’t know who the parties are in the transaction. If this was with a bank or CC transactions, the authorities could figure out who the parties were. When Pat’s factory burns down, the authorities don’t have a traditional money trail to follow to see if arson was involved. And unless the authorities are lucky enough to figure out that Pat uses quatloocoins, they may never even know to look at the quatloocoin ledger.
If people want the coins, the value of the coins may go up. The more people trying to use it, the more people can charge for their coins. This leads to people looking at the coins as an investment vehicle. People don’t care what the coins are. All they know is that the coins are going up in value. They jump in hoping to buy low and sell high. And that worked for a lot of people. If you can ride the enthusiasm rocket, you can make a lot of money. The difficulty is knowing when to get out. Loss of enthusiasm means the value drops. Now people are trying to get out of the coins and their value is dropping.
People can still use the coins for real-world commerce, but things may take more coins than they used to. In the above example you could get 5 coins for $100k. If the price drops, it may take 50, 100, or 1000 coins to equal that $100k. That’s not a problem if you’re buying and selling for a quick transaction, but if you have wallet with existing coins in it, those coins lost value. If the factory owner bought 5 coins long ago when they were going for $20k each but today they are only worth $2k each, then the factory owner won’t be able to meet the arsonist’s price. The arsonist wants $100k worth of coins at today’s value (50 coins at $2k/coin). The factory owner will need to buy an additional 45 coins at today’s value to meet the arsonist’s price of 50 coins.
Has anyone mentioned how much we missed you when you were on the down-lo Stranger? We did.
/hijack
As for crypto, the way I treat it - it has just as much (or little) value as when the board makes a bet in quatloos - except it’s actually tracked. It’s a currency that exists (like many) because we ascribe a value to it. But unlike here, it has millions who have bought into the value, and are willing to exchange IRL mediums for it. So it’s a success (to the extent it is) because people are willing to treat it as a real thing.
But like anything else, people can one day decide that they’ve had enough, and if enough persons do so, it can and will crash. I’m reminded of times over a decade past when people were buying ‘limited edition’ comics / beanie babies / etc out of a desire to capitalize on the perceived rarity and value, only to watch the fad die and be left with a glut of near-valueless dreck.
And while the believed lack of controls / gov’t oversight is seen as a boon to many, others are finding that it means those managing such things can walk off with everything, or the loss of a key player with the keys to the kingdom brings down everyone. Personally, I consider it a form of shared madness, but hey, governments, religions, and the like can be considered the same!
The difference is that all the national currencies, even hyper inflated ones like Zimbabwe, Venezuela, etc. have things of value backing them. The farmer trying to buy a suit of clothes with a wheelbarrow full of cash got that cash by selling their crops to someone. The tailor who sold the farmer that suit of clothes who is using that same wheelbarrow full of cash to buy some gas for his car also added value to the economy. The oilfield workers who eventually end up with that cash used to buy gasoline can then trade that cash for potatoes or whatever other food the farmers are growing. Even if the whole process is inefficient and the money hyperinflated due to corruption, there are still goods and services of value backing the money in this scenario (the crops, clothes, gasoline, work put in by the workers to grow those crops, sew the clothes, get the oil out of the ground, refine the oil into gasoline etc.).
With crypto there are no such things of actual value underlying the currency. It seems to me like it’s no different than if a bunch of people all of a sudden decided that Monopoly money is just as good as dollars, euros, or yen, and then solved the problem of counterfeiting by using the blockchain. All the blockchain does is solve the problem of counterfiting. It doesn’t add anything of value to back the currency. At least that’s my understanding, which is why it makes no sense to me how people got into it in the first place.
Kinda reminds me of that episode of The Simpsons where the nuclear plant installed an electronic signboard on the highway advising motorists of current conditions. The entries were in order of increasing seriousness, ending with “CORE EXPLOSION - REPENT SINS.” Homer sees that and chuckles “Joke’s on them! If the core does explode, there won’t be any power to light that sign!”
So, while it is true that national banks can issue new currency (or “raise the debt ceiling”, which is a different thing but in effect has similar if less direct consequences) it is well recognized in modern monetary theory (or any other modern theory of macroeconomics) that doing so results in devaluing the existing monetary base (M0 in monetary theory parlance) so trying to spend your way out of a monetary crisis is basically trying to dig your way to the bottom of a pit. I think the real problem that cryptocurrency advocates—at least those of the libertarian bent, which frankly is most of them in my experience—is that this gives governments the power of monetary policy in service of political or personal goals instead of best serving the market. The counter to this is that, at least for the US government and the European Union, the Federal Reserve and the European Central Bank is that the governing bodies are at least ostensibly and functionally independent of directly control of political authorities. This isn’t to say that fiscal policy isn’t managed by political fiat to some extent, but for the US President this is by either making requests to the chairman and board of the Federal Reserve, or through secondary means such as releasing strategic reserve, increasing US discretionary borrowing and lending (within the constraints of the budget passed by Congress), or otherwise using executive policy to curb or advance economic growth.
Cryptocurrencies, on the other hand, while ostensibly valued at what the ‘free market’ deems them to be worth, can and typically are controlled by a few superstar speculators or advocates and are subject to the dramatic swings of valuation. Because they aren’t tied to any specific fiscal policy, national product, or any other basis of ‘real value’, their market valuation can change wildly, with little warning and no real reason aside from some billionaire going on a comedy program and admitting that his favorite ‘crypto’ is just a big scam, and if it turns out that he ‘shorted’ on it before doing that there is actually little that can be done if the exchanges didn’t go through a federally regulated exchange or bank. Like most * laissez faire* economic theory it falls apart at the first real challenge.
Nobody can quite seem to figure out what cryptocurrency is (An extra-national currency? A commodity? A ‘mining’ stock? A breakfast toping?) and so regulating it turns out to be really convoluted and difficult. That it really has no physical or labor basis in value makes it kind of like investing in fine art or energy ‘futures’, i.e total speculation. Until ‘crypto’ is converted into actual dollars or other ‘real’ currency, you can store t on a hard drive in your luggage or transmit it across the internet to a foreign country and there is essentially nothing that regulators can do about except waive their hands in frustration.
Regardless of coin prices, processing transactions takes increasingly more energy without producing anything of real value. Some cryptocurrency schemes have attempted to ameliorate this to an extent but it is just a consequence of blockchain operations and the only way to prevent it is to periodically ‘rebaseline’ the existing ‘coins’ in circulation.
This is mostly correct, although I think if you dig into the fiscal policy on most national currencies you’ll find that the “things of actual value underlying the currency” are only a small fraction of the overall money in circulation, hence the 2007-8 mortgage crisis and various other debt-funded monetary expansions. You are correct that the only real value in cryptocurrencies is the security of the blockchain, and even that only prevents direct counterfeiting but does nothing to limit errant speculation or a dishonest user issuing cryptocurrency as a scam or ‘trading’ it on an exchange but actually using the money to fund other investments or to actually hedge against it as was apparently going on with FTX. At least the dollar and the euro have national or pan-national economies behind them that nobody wants to see fail, not even their enemies like China because they are so heavily invested in them. Crypto is basically moist air; saturated one moment, precipitating the next, suddenly a derecho and next a dry cold breeze. You can’t catch it, hold it, or keep it, and it goes wherever the vagaries of chaotic perturbations and the whispers of financial moguls send it.
At one time I tried to figure out what crypto was and what NFTs were, but the more I read, the less sense it made to me. In the end, I chose to ignore it all because I will never invest in something that can’t be quantified and has no backing in the real world. It’s not that I don’t have any interest in the world and how it works, but this just seems dangerous and stupid.
Some people have trouble with this because they think all of these terms are mutually exclusive. They are not. Is a tomato a fruit or a vegetable?
Cryptocurrencies are currencies for some purposes. Cryptocurrencies are commodities, whether or not they are currencies. Transactions in cryptocurrencies can be securities transactions. People transacting cryptocurrencies can be operating a money services business, dealing in securities, brokering securities, or acting as a securities exchange, depending on the circumstances. Just like I can have morphine in my pocket and be doing nothing wrong, illegally possessing drugs, or illegally dealing drugs depending on the circumstances.
Again, I understand the math to mine crypto coins based on proof of work involves increasingly complex calculations. What starts taking an outsize amount of energy is when the price of a coin is so high that there are tens of thousands of GPUs running mining programs simultaneously so that one of them can crack it first and win the lottery. If the price of crypto drops precipitously, a 1 in 10,000 chance of getting a coin is a lot less valuable and miners take their rigs offline because the the odds of winning are too high and the prize too small to justify the cost of running the rig. That means we go from tens of thousands of rigs fighting to be first to some much smaller number of rigs running, causing power consumption overall to drop. You posited a world where miners continue to burn energy to mine nearly worthless crypto. That won’t happen.
There kind of is, though. The thing of value is the ability to turn the cryptocurrency back into a currency you can use to buy things of value. Or, increasingly, the ability to use the cryptocurrency to buy things of value directly. That may seem like a house of cards (this money is only valuable because someone else will accept it as payment because they think it’s valuable because someone else will accept it as payment because…) and it probably is a big reason cryptocurrencies are less stable and subject to big swings in value depending on users’ faith in the system, but that’s really how all fiat money works.
Absolutely nothing! That’s why there are in fact thousands upon thousands of cryptocurrencies out there.
It’s just that they aren’t Bitcoin or the tiny handful of others that people actually use in any capacity. Just as if you had printed up tiny slips of paper with your picture on them, if no one at the supermarket will accept them, they have no value. Values comes from there being somebody out there to exchange the money for something real.
The schedule for mining new coins, etc. is specific to the protocol, and can’t be changed without a majority of miners agreeing to it. If the currency is popular, that means there’s a reasonable guarantee that it won’t be devalued by simply conjuring up a zillion new coins. Everyone else would be hurt by that, too, so no one will vote for it.
I do not see what incentive anyone would have for creating a new “blockchain”, either for research purposes or to engineer some sort of online payment system intended for people to actually use. At least make it interesting/better and prove you have not been ignoring research in computer science for the past 15 years.
I recently read an article in Wired about using Bitcoin tracing to take down a huge child porn ring. I get the feeling that with the popularity of Bitcoin and other crypto currencies, people are caring less about the anonymity factor or at least being way more sloppy about it. This gives authorities a lot more little loopholes to grab on to to find bad actors. Heck it’s almost as if you’re using crypto, it puts you on The Bad Guys List. Not that it is an immediate indicator of doing something nefarious, but I’d assume the crypto-sphere is small enough to keep an eye on everyone.
I agree that is how all fiat money works, but that isn’t what I am confused about. Money itself has little intrinsic value. There is some value in the metal in coins. There could be some rare situations where paper money might have intrinsic value, like if you happen to need kindling and some bills are the only thing around. Other than that, money itself isn’t inherently valuable except as a means of exchange. The difference is, as I noted, when a dollar or euro or even a bolivar comes into existence, there’s something of value that money represents. That money comes from the economic output of the nation in question. It could be a tangible commodity like oil or wheat. It could be a service, like the labor of all the people who planted and harvested the wheat or the ones who worked the oil rigs. But there’s something there. With bitcoin all there is is a hash or blockchain or some such thing that generated the coin.
That’s not actually true. You might think it’s true, and that would certainly make the distinction you’re seeing make sense to you. But it isn’t strictly true.
What is true is that the existence of a real actual tangible US economy and a real tangible (semi?)-reliable US government give you some confidence that your dollars won’t suddenly vanish or massively lose value unless you drop your wallet into a sewer or your mattress catches fire. Honest Bob’s CryptoCoin doesn’t have those confidence-inspiring features.
But that’s all they are: confidence inspiring features. Your dollars are in no sense a claim on the economic output of the issuing country.
Plus, the confidence the economy and government inspire in you (any you) may be misplaced. We have certainly seen in countries such as Argentina and Turkey that have real tangible economies and real tangible governments that they can still destroy the confidence and at the same time destroy the value of the currency.
Lots of people out there hoping for a new get-rich-quick scheme. And creating a new blockchain is trivial. At one point I recall seeing some kind of automatic build-your-own-blockchain installer that just required filling out a few details about the max number of coins, etc. Totally useless but attractive to the ignorant.
Wired had an article on a rather odd example of one of these people:
He created a new cryptocurrency and somehow exploited a bug such that it looked like the new currency was incredibly valuable, like over a trillion dollars. It wasn’t true of course, basically just a bug on the website, but the guy seemingly wasn’t in possession of all his marbles and thought there was some legitimacy to it. It, uh… didn’t end well.
What he did is referred to in the stock market as “wash trading.” It is a form of prohibited manipulative trading in securities markets. He used many accounts that he controlled to trade with each other. This created the appearance of active trading and liquidity, in his case with the goal of reporting higher prices on the “Incognito” service. I assume that the reason it didn’t work for him was because there were no actual traders in his many cryptocurrencies so all the reported prices were his. When he tried to trade at his inflated values, he learned that there were no other traders willing to trade with him at those prices.
Yeah, ultimately the problem is always the same thing: it doesn’t matter what number you put on something, what matters is if you can find someone to trade you for it. And, well, that’s not going to happen for some newly-formed cryptocurrency unless you come across a true sucker.
Am I wrong in thinking you can track the $100k deposited into W1234, and track the $100k taken from W4567? If that’s the case, then when Pat deposits his money, investigators into the arson have a chance to find W1234, and the Blockchain can tell them that there was a subsequent transaction with W4567, and they can perhaps then find who took the money out of W4567?
I suppose if the money just stays in the wallets it can’t be tracked, but an arsonist’s gotta eat, right?