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 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!”