I remember in the 1990s when day traders were the hot thing on Wall Street as scores of twenty-somethings would wake up after a night of clubbing, put on their brightly-colored track suits and trainers, and work with music blasting from their headphone in a downtown Manhattan trading firm. Long are the days of day traders which are today replaced by those who deal in cryptocurrencies, such as Bitcoin.
In recent months Bitcoin, a currency which is not even a “coin” but instead a series of lines of code, has gone from incredible highs to lows. Many people in the past few years have taken interest in Bitcoin, especially given the media onslaught in recent months over Bitcoin and other such currencies. As a result, I have had many friends ask me, “What is Bitcoin?” So, I decided to try to explain what cryptocurrencies are, to include their perceived benefits and pitfalls.
As per the usual “success stories,” the rise of cryptocurrency has followed the allegory of Jack and the Beanstalk where companies and the media show us the potential to get rich quickly and climb to heavens. And an important turning point for Bitcoin was with Sam Sharma, one of the founders of Centra, a company that offers a debit card to translate Bitcoin into useable currency. Simply put, Sharma made a killing from translating code into a currency that can be used outside the computer. However after Sharma, Centra’s former president, and Raymond Trapani, Centra’s former chief operating officer, founded Centra, they found themselves at the center of a scandal in the company’s first months and have since stepped aside for reasons which are not completely clear even today.
Despite the rumors surrounding the pros and cons of Bitcoin which compare this era of cryptocurrency to the California “gold rush,” there are many reasons to consider the advantages of crypto trading, and just as many reasons to be wary of these products. And the newest trend of all is that of the crypto robot and crypto app which is effectively a software that automates online trading, taking out the guesswork and anxiety surrounding online trading. While many YouTubers have focussed on this mechanism over the past year, as such currencies seem to have most confounded, crypto robots are simply not the get-rich-quick schemes nor are they for the faint of heart despite the possibility to mine for Bitcoin.
Given that the media is promoting Bitcoin and other types of cryptocurrency like Ripple as the currency of the future, I think it bears understanding what these currencies are about and what, in reality, they offer, to include their positive and negative aspects. This is especially important today given Bitcoin’s downward plunge over the past two weeks and the fact that Bitcoin was only $.08 in July 2010, rose to almost $20,000 in December, 2017, and as I write this, is currently valued at $8,155.
First it is important to note that there are well over a dozen of cryptocurrencies out there. Here is a quick list of the most popular with brief explanations for each. Secondly, let’s begin with a simple question: what is money? Yes, you might be reaching for your pocket to hold up a paper bill or a coin. But in effect those physical pieces of paper, plastic, cotton, or coins are just the “promissory note” between the individual and the bank, hence the words “legal tender” appearing still on American banknotes. In and of themselves, these articles are pretty much worthless, except that they actually do stand for the symbolic amount which has been agreed to within national and international banking systems. And cryptocurrency is not so different than this system, but it is a lot more technical and complex.
First, some history on this currency. that during the Occupy Wall Street movement large banks were accused of abusing their customers, misusing their money, rigging the financial system, and charging huge fees. Bitcoin was a type of pushback to the banking system putting the seller in charge by eliminating the “middleman” while also cutting out interest and transaction fees. Bitcoin was initially designed to be a money transfer and digital cash system without a central entity. Think of a peer-to-peer network (P2P) for file sharing. But instead of going online to download that now undiscoverable Kenny Loggins album, you are going online to transfer digital cash.
Bitcoin came about quite accidentally while trouble shooting for online transactions when devising the first blockchain database. Satoshi Nakamoto, the pseudonym used by the unknown inventor of Bitcoin, had to address the problem of double-spending of digital currency. After all, go back to the coins and bills in your wallet: you know they are spent when they are gone. With digital money P2P sharing of money, there is no way to keep track of this spend/gain effect because digital tokens could obviously be reused over and over as a meme you share and share again on Facebook. And double spending would create a huge problem for inflation and eventually devaluation of the currency. And when that happens, trust in trading is diminished and the system collapses.
So when the double-spending problem was solved early on in 2008 through a system of cryptographic techniques, Bitcoin was born. It can be used through virtual purchases whereby both the buyer and seller use cryptographic code to exchange currency. In short, cryptocurrency is an exchange of digital information that allows the individual to buy or sell goods and services. Like Skype, or BitTorrent, and other file-sharing systems, each transaction gains its security and trust by running on a peer-to-peer computer networks.
While there are risks to cryptocurrencies, more people are moving towards this system despite the current push by governments to enforce tax on profits or the recent market price caps. There are also fears of Bitcoin being the next frontier of money laundering, worries of hackers illegally accessing accounts, high volatility, and transaction delays. Still, there are advantages where banks are left out in the cold and many in developing countries are finding this currency more profitable for individuals to negotiate financial transactions.
The bigger problem for crypto-currencies is, as Roy Morrison points out, this economic model “is based on a limited quantity that makes it resistant to inflation, but enshrines scarcity and therefore value and the siren calls of greed and desire as it does for scarce commodities like cocaine or diamonds or gold.” The real question is how monetary products of any nature are necessarily dependent upon the vulnerable being crushed and those with power vanquishing the rest.