If there is one thing in today’s world, that makes everyone feel a "fear of missing
out", that's cryptocurrency and bitcoin. Cryptocurrency is the buzzword of our times and has been
called everything from “future currency” to outright gambling, scam, a Ponzi scheme,
and a bubble ready to burst. But it remains a hot topic in the news and online conversation.
This makes everyone wonder if they should jump on the bandwagon, or play safe. If you
are not tech-savvy and you don’t know enough about money either, well, cryptocurrencies
are a combination of both. Let’s explore what it really is.
Suppose, you are an artist, OR, you work online OR, any job that does not involve 9-to-5 office
work. You tell your parents or someone else how you make money, and you get a reply, ‘that's
not a real job’. You could run into a similar situation with cryptocurrencies with statements
like “that's not real money”. While you can certainly argue what is real and what
isn’t, these expressions do hold some truth. A cryptocurrency by definition is a virtual
currency, OR, a digital asset. It's a string of characters online, which you can’t physically
hold or pull out of your wallet. This provokes many people’s traditional understanding
of money.
There are literally thousands of cryptocurrencies out there like Bitcoin, Litecoin, Ripple,
Ethereum, etc. These can be purchased through cryptocurrency exchanges like Coinbase, Cash
App, Binance, Bitpay, etc. A cryptocurrency WALLET which is web or app-based is required
to access your account.
Bitcoin happens to be the most popular cryptocurrency and has become synonymous with cryptocurrency.
It was launched in 2009 by “Satoshi Nakamoto”, which appears to be a pseudonym, and this
mystery person or group’s identity remains unknown to this day. Satoshi Nakamoto owns
nearly 1 million Bitcoins, which are A LOT, considering only 21 million Bitcoin would
ever be mined. This surely gives this elusive figure a spot in the list of richest people
in the world. If these coins are ever traded, they will have a significant effect on the
price of Bitcoin.
Before we go any further, a disclaimer first! We at EconomicRaven, do not hold any coins.
This video is neither to encourage or discourage you to buy any cryptocurrencies. We are merely
discussing it as a topic in economics. You can share your experience with cryptocurrencies
by writing in the comment section below.
We have seen various forms of money throughout history. As the economies became more complex,
so did the types of money. The earliest method was ‘Barter’ that involved the exchange
of goods directly without any medium. Let’s say, person A has apples and Person B has
oranges, they could exchange apples for oranges. This form of exchange had its limitations,
for example, it's really hard to tell which item has more value, or try exchanging a little
number of apples with a live animal and you will run into all sorts of problems, for example,
a live animal can’t be divided. Another issue is that you probably don’t need what
someone else is selling. For example, farmer X is growing soybean and farmer Y is growing
potatoes. X needs potatoes and offers Y soybeans but Y does not need soybeans. To solve this
issue, societies started putting values on certain items that everyone agreed to have
some value. These valued items or commodities were seen as a medium of exchange. That was
the first type of money also known as Commodity money. Examples of commodities used throughout
history are salt, tea, alcohol, cigarettes, cocoa beans, barley, etc. The commodities
eventually became more complex like metals including gold, silver, copper, etc., and
metallic coins were introduced in many societies. Gold remained an important commodity for a
very long time. The second form of money is Representative
money. It involves a currency like a banknote
issued by the government or a bank. A banknote does not have any value of its own as it's
just paper but it REPRESENTS the value of a commodity. More specifically it represented
the value of gold. While representative money is issued and controlled by the government,
it was still backed by gold.
This all changed when we moved to the third type of money, also known as Fiat money. Although
fiat money was tried in some societies earlier, its widespread use started back in 1971 when
President Nixon announced that US Dollar won’t be backed by the shiny yellow metal (gold)
anymore. This is also known as the Nixon Shock. Other countries adopted the same practice
and the banknotes we see today are just backed by the government word and trust without being
backed by any commodity. With the advent of the internet, it was no
wonder that the next type of money had to
be online. It is to be noted that fiat money did offer online use like your debit/credit
cards, online bank transactions, which are actually digital payment systems but they
are virtual in their own way. We also have other virtual options that involve no cash
like Apple Pay, Amazon Pay, PayPal that helps us exchange money or purchase goods online.
So Fiat money did offer virtual variants. BUT, If the cryptocurrencies are not the first
to offer virtual purchases and it's not backed by any commodity either, what difference does
it have with Fiat money? Well, cryptocurrencies are not backed by the government, which is
the biggest difference there is and the most important reason why they have become popular.
Proponents believe that the cryptos are the currencies of the future and buying them early
is better and makes them in a good financial position before they become a norm. They are
presenting it as a Noah ark that has offered them a chance to be in the boat while the
flood is on its way.
Money has always been a private matter. Swiss Banks would totally agree to this! Anonymity
is a big factor when it comes to money and that is where cryptocurrencies have gained
widespread attention. Proponents of the crypto choose anonymity over the constant government
intervention that sometimes can go too far. Some cryptocurrencies offer more anonymity
than others. Cryptocurrencies are said to be a preventative
measure against the devaluation of assets
in times of war, pandemic, or government collapse, etc. They have been deemed as a cure against
inflation. As there are no central banks in the world of cryptocurrencies, so no one can
intervene to reduce its value over time with inflation. In an earlier video, we discussed
how governments print money, and if this practice is taken too far, it could lead to hyperinflation.
While this may not sound like a big thing in a country like the United States, but this
is of great concern for other countries like Venezuela and Zimbabwe, which have gone through
hyperinflation due to their governments printing trillion dollar notes. Cryptocurrency is an
attack on the monetary policy!
You must have heard or seen fake banknotes incredibly hard to judge if they were bogus,
but, unlike banknotes, cryptocurrency is almost impossible to counterfeit. Cryptocurrencies
are made secure using encryption methods called CryptoGRAPHY, and that's where cryptocurrency
got its name too. Want to hear a crazy fact? Some cryptocurrencies are using the types
of cryptography originally made for military applications and the rights for civilians
to use this technology were made possible on grounds of freedom of speech.
Most of the cryptocurrencies are using a technology named Blockchain, which makes it nearly impossible
to counterfeit or duplicate, unlike conventional banknotes. What the heck is Blockchain? It's
a technology behind many cryptocurrencies that acts as an online ledger for all the
transactions. This virtual account book is the technology that allows cryptocurrencies
to stay decentralized instead of a central authority controlling them from one place.
Blockchain allows the ledger to be spread across the entire globe across several computers.
Transactions go through only if they are confirmed by everyone on the network, making it decentralized,
secure from cyberattacks, and nearly impossible to counterfeit. This technology is believed
to upgrade many industries in the future including finance, law, crowdfunding, real estate, voting
system, etc.
The decentralized nature of the cryptocurrencies allows the transaction to go through DIRECTLY
and WITHOUT any money handler like a bank or credit card company. Cryptocurrencies eliminate
these financial middlemen by saying “move witch, get out of the way.” That makes the
transaction a peer-to-peer exchange using public and private keys. How is the elimination
of banks or any other trusted financial institute beneficial? 1) It cuts the transaction costs
to a minimum. 2) It solves all the issues with cross-border payments including the ridiculous
time and bank charges required to send money to another country. Cryptocurrency is a question
mark on the whole banking industry we know today.
A cryptocurrency is a form of money without any government, without any country, and without
any borders. It would not be wrong to call it an attack on the governments and central
banks. No one can stop you from using it, no one can stop you from sending or accepting
payment.
Enough with the advantages, let’s talk about some of the disadvantages and criticism cryptocurrencies
have received. The biggest criticism of cryptocurrency stems
from the same factor that contributed to its
popularity. That is the anonymous nature that allows it to be used for illegal purposes
including money laundering, tax evasion, purchase of illegal items, etc. While it appears that
the governments can’t regulate cryptocurrencies directly, they can use their power to regulate
crypto exchanges. The second biggest criticism of cryptocurrency
is its volatile nature as its price fluctuates
like CRAZY. Cryptocurrencies have been termed as a way to store wealth even though the high
volatility and safe investment don’t along. A currency also requires stability for buyers
and sellers to determine the price of goods. On the other hand, Bitcoin and cryptocurrencies
are anything but stable.
Another criticism cryptos have received is that it's not backed by any material good,
but so is the paper currency that we use today.
While everyone praises blockchain for its awesome security features, the fact is that
other aspects of cryptocurrencies are exposed to the risk of theft. Hackers can get hold
of your virtual assets by penetrating your computer network or tricking you into giving
them your private key. Not only the users but the cryptocurrency exchanges can be attacked
too. We have seen plenty of examples where crypto exchanges have filed for bankruptcy
after hundred of millions worth of bitcoins were stolen.
Bitcoins have also been criticized for utilizing the high amount of energy it requires to produce
a bitcoin. Cryptocurrency transactions are not reversible. There is no mechanism for
disputes and refunds. In case if you have a trusted seller, you should learn how they
calculate refunds because of the fluctuating prices of cryptos.
You also can’t recover your coins if they are stolen. And yes, if you lose your private
key in Bitcoin, you lose all your Bitcoins. We have heard plenty of stories about people
losing money because they locked themselves out of their digital wallets.
It's a good idea to understand and investigate what currency you are investing in because
there are hundreds of options out there. Anyone with an investment and a team of programmers
can start a cryptocurrency of their own. It can’t be ruled out that a big number of
failed cryptos were just scams.
Many investors think of cryptocurrencies as speculations instead of investments. If you
invest in a flourishing business, it increases its value over time with profits and cash
flow. Cryptocurrencies, on the other hand, don’t generate any cash flow. For you to
profit, someone else has to pay more for it. Another difference is if you invest in a company’s
stocks, you own a piece of the company and you have certain rights that come along with
it. On the other hand, buying coins does not make you an owner of anything except for what
you bought. It's like you visit a casino and you turn your money in and they give you some
chips and you get to use them and that's all. This brings more
and more speculators and no wonder cryptocurrency
trading has been called gambling as well as a bubble many times. While you may hear stories
of people becoming millionaires and living their lives on yachts, you should understand
that the ones who have lost their money have never gotten publicity, because they probably
shouldn’t. Much of the interest in cryptocurrencies is
to trade for profits instead of using it to
buy and sell products or services. The truth is as of now people are into bitcoin not because
it will become a currency of the future, but because it's a speculative investment and
they hope for a retired life on an island. There have been numerous people who have advised
against buying cryptocurrencies including
Warren Buffet who said cryptos have no value. Charlie Munger called it a "rat poison”
Peter Thiel went from being a pro-crypto to wondering if it is a
part of the Chinese financial weapon against the U.S. Mark Cuban highlighted similarities
between cryptocurrencies and gold. Carl Ichan said he does not understand cryptocurrencies
because he is too old for them. The Rocket guy went from being a skeptic to allowing
customers to purchase Tesla cars with bitcoin. Bitcoin and cryptocurrency’s future rely
on its widespread use in everyday transactions.
The more platforms offer it as means for the
exchange of goods, the better it's for the
whole crypto business. Till then you can hope for your crypto investment to go “to the
moon!”