Cryptocurrency is all of the rage right now, what was once the realm of tech nerds and crazy uncles is now becoming part of the mainstream. The maturation of this technology, as well as the attention given to it by celebrities and billionaires, combined with concern about inflationary monetary policies has created a wave of crypto mania on social media. It is now something I’ll talk about with friends or coworkers who aren’t especially geeky. Very soon even grandma will have a crypto wallet.
So, what is cryptocurrency?
To understand cryptocurrency one first must understand what the money in their wallet is. Money is a store of value. It is something developed thousands upon thousands of years ago as means of exchange and make trade easier. If there was no money we could barter and yet that would be cumbersome.
Imagine someone wanted two ears of corn from their neighbor and only had pigs. Two ears of corn is worth far less than a whole pig, but it is rather difficult to divide the pig into fractions without killing the animal. So to barter for the corn one would either need to take corn that they didn’t really want or give the pig away for far less than it’s actual value.
As a solution to this problem eventually someone got the bright idea: Let’s trade a shiny (and rare) metal in exchange for our goods rather than barter. These metal tokens of trade would eventually become standardized coins.
In the corn and pig scenario this means that the person with the pig could sell the pig for ten coins and then buy the ears of corn without having to divide up the pig. It was also far easier not to need both the pig and corn to be together at the same place and time. These coins were made of non-perishable metals, could be stored and used at any time.
However, shiny metal coins are heavy and very soon institutions offered to keep the coins safe and then give the owner of the metal a special note saying that they owned the metal. This “bank note” itself became the means of exchange. And the banking or government institutions with the actual metal also learned that they could simply print more of the notes, without having the metal to back it, then have all of the pigs and corn that they wanted.
Paper money has value based upon trust in the system that has produced it. Prior to a certain time, exchanging a pig or corn for paper would be sheer lunacy. The paper in your wallet only has value that is derived from faith that it can be exchanged for things of practical value.
So, again, what is cryptocurrency?
First and foremost, cryptocurrency, like the dollar in your wallet, is a store of value. And it gets it’s value from the collective faith of those who believe it has value. Like shiny metal replaced the impractical bartering of pigs and corn, like paper notes replaced heavy shiny metal, cryptocurrency is now ready to replace paper notes and for a variety of reasons.
The Federal Reserve Inflation Scam
Most people notice that the price of goods and services is always going up. But not enough can give a good answer as for why this inflation occurs. Some price increase is due to increase in costs, such as employee wages or more looters helping themselves to items. There is also supply and demand, if there’s only so much land, and more people who want it, then price will price will go up as more people bid against each other for a limited resource.
However, the biggest driver of this upward trend is inflationary monetary policy or the fact that central banks continue to print more money and, right now, at an ever increasing rate. Of course, since paper is basically worthless, the value of this new money has to come from somewhere and that somewhere is your grandma’s savings account. In the United States the Federal Reserve (a private bank) inflates the currency supply through printing, then loans this newly minted cash to the Federal government.
That’s right. The Federal Reserve (a private bank) creates money out of thin air, the value of it coming from shrinking the value of the money in your own wallet, and then loans it to the Federal government where it is distributed to the cronies of politicians, which is eventually must be paid back by taxpayers. If this seems like a scam, you’re correct, it is. Only those at the top benefit and then they placate you with ‘stimilus’ crumbs off their table.
There are no limits to how much paper money government and their private bankster partners can print. The more money they print the less valuable the money that you earned is worth. They rob us blind, and then claim to have our best interests at heart when they give back some of what was taken from us. If most people understood this, how much the current system is costing them, they would revolt and put an end to the robbery.
How does cryptocurrency work differently?
The most important thing to understand about cryptocurrency is that supply is limited. What this means is that value, at least related to the dollar, will increase over time.
Cryptocurrency, unlike printed money, has a set amount of virtual ‘coins’ or digital tokens that can be produced. Bitcoin, for example, has a maximum number of coins set at 21 million. This compared to trillions of US dollars in circulation. And, as more dollars are produced the number of Bitcoin only decreases in relation. And, as more people use their dollars to buy this limited supply of Bitcoin that comparative value will only continue to rise.
But what would stop Bitcoin from making more coins?
This is where things get technical, here’s what Forbes says:
Bitcoin is a decentralized digital currency that you can buy, sell and exchange directly, without an intermediary like a bank. Bitcoin’s creator, Satoshi Nakamoto, originally described the need for “an electronic payment system based on cryptographic proof instead of trust.”
Each and every Bitcoin transaction that’s ever been made exists on a public ledger accessible to everyone, making transactions hard to reverse and difficult to fake. That’s by design: Core to their decentralized nature, Bitcoins aren’t backed by the government or any issuing institution, and there’s nothing to guarantee their value besides the proof baked in the heart of the system.
The short version is that Bitcoin is not a centralized bank, not a corporation, it is a code and the security provided through blockchain technology or cryptology and direct user oversight rather than by an institution. The transactions are the currency and it is pretty much impossible to counterfeit or fake. Someone would need simultaneous access to every one of the digital ledgers to create more. Even if this were possible it would cost way too much, require far too much genius, to be practical as a scheme.
The end result is that cryptocurrency is more secure. The dollar being printed into oblivion is robbing many people blind with the inflation it produces. Even tokens, like Dogecoin, which have a set percentage increase of supply (to make it more viable as an actual form of currency) doesn’t even come close to the amount of new dollars put into circulation every year. What this means is that cryptocurrency will continue to increase in dollar value even if there was no increase in demand for the tokens.
Add to this the many people who are only now discovering the crypto revolution, the development of platforms like Coinbase, Webull, Robinhood and others that make it easier for retail customers, and the sky truly is the limit. Those who missed the opportunity to become millionaires by getting into Bitcoin early now can ride on the Dogecoin phenomenon. It is a true modern day gold rush.
What are the risks?
This blog would be incomplete without getting into the potential risks. First of all, not all cryptocurrencies will gain value like Bitcoin, Ethereum, Dogecoin or others. It seems likely that eventually the market will become saturated with new coins and prices will remain stagnant or even drop with established brands. And, second, with so much new interest, there are going to be an ever growing number of straight up scams. So, if you don’t know much, play it safe and talk to that nerdy friend before making an investment.
The other risk is that what goes up fast can also go down as fast. Dogecoin has gone up 400% in a matter of days and could go up by the same amount in coming weeks. And yet, sentiment could change, some of the big ‘whale’ investors could pull out with their profits, and there be the equivalent of a bank run (look at the 1920s) as those invested see a rapid decline and sell in a panic. In the opinions of some, the gains of value amount to a speculative bubble, like the “Tulip mania” that swept the Dutch Republic in 1700s, and eventually the price will collapse.
Also, seller beware, cryptocurrency profits are taxed differently than other income and trading too often could end up putting you in a hole as the IRS demands their slice.
Add to that the possibility that governments, like Turkey, fearing the loss of their currency monopolies, lost tax revenue and control over markets, will decide to crackdown and make life difficult for those already in the game. Even the threat could drive prices through the basement.
My own advice?
1) Do not put all of your eggs in one basket, diversity is usually a strength when it comes to investments.
2) Secure profits along the way, cash out your initial investment as soon as you are able, and that way you’ll never lose.
But, most of all…
3) While seizing opportunity, always be aware of the risks and never EVER use money you need very soon.
Still, with those warnings out of the way, I believe cryptocurrency is here to stay and will be a rare opportunity for many early adopters to see tremendous gains. It doesn’t matter what the skeptics say, what matters is that a billion people in the world (like me) do see the value of this, we don’t want to see our hard earned savings ruined by hyperinflation, and will continue to pour money into this decentralized bank of the future.
So, dip a toe, then jump on in, the water is great, and the tide is rising!