Scary Money: Everything You Need To Know
Bitcoin, Etherium, Ubiq, even “Titcoin” (reputedly, nominated for an adult film industry award), surely by now, you have heard of crypto currencies. They’re all the rage. In fact, it’s such a rage that if you had invested one dollar in July of 2010 in Bitcoin (call it 12 bitcoins at .08 per bitcoin), today, that investment would be worth $67,200. Not bad. But, why? Well, Bitcoins are limited in supply and people want them to invest or to use so the price goes up. It’s worth noting if you had invested your dollar a bit earlier (say 2009), you would have lost your dollar.
Madness, you say, well maybe so, I don’t feel very trusting of cryptocurrency myself but the other part of me says, “This hundred-dollar bill is worth one hundred dollars because the government says so.” The Benjamin is really just a piece of paper which has value because some entity says so. Considering how much people trust the government, well…cryptocurrency may become more popular because of that and maybe this mysterious network of computers is really no more ominous than a mysterious network of central banks, a creepy network of banking families, or a politician telling you they can fix all the problems in the world if you just elect them to office. Still though, I haven’t asked the university to start paying me in cryptocurrency either.
So, how does this cryptocurrency work? Various people (some shadowy, well…mostly shadowy) decided to develop a currency that was not traceable by central banks, governments, the IRS, etc. so that transactions could be conducted just between you and me. Now, as you might guess, central banks, governments, the IRS, etc. didn’t like this very much because for all sorts of reasons, they like to keep up with your bank account. For instance, if your employer paid you in Bitcoins instead of a check, well, there wouldn’t be any record of the transaction to report to the IRS and then you wouldn’t pay taxes and then, well, some congressman wouldn’t be able to fund that spittoon museum in Hapschat, LA that he was trying to get and then the whole thing just kind of comes to a screeching halt, nihilism, anarcy, end of days, hoo boy. Or, of course, you also might use it to buy illegal stuff that the government doesn’t want you to have, drugs, guns, books. You get the idea.
So, how does this work? Well, all currencies in the world have some sort of “value”. Hard currencies, float and their value is determined by the marketplace and soft currencies have “set” values by their issuers. So, if a dollar will buy a cat, then through black magic and other bizarre necromancy, we determine that .5 British Pounds will buy a cat, so the exchange rate is 2 to one in favor of the pound. Ok. It’s a lot more complicated than the price of a cat in Trafalgar Square. It’s really based on the supply of currency, so if the US Government prints more money and puts it in circulation, then the value of each individual unit starts to fall (this is called inflation). At this point, you really might want to question my knowledge of economics or run out and hire an economist or something, so you can better explain international exchange rates, macroeconomics, and world politics, not to mention the worldwide price of cats.
The point is, cryptocurrencies work the same way. For example, there are only about 21 million possible total Bitcoins that can be generated (mined) mathematically by their algorithm. So, the value of them is determined by how many are in circulation currently and how many people want them. This means, that just like dollars or pounds, their value can fluctuate over time and you can win or lose just by holding onto them. Many people learned this the hard way when they bought Bitcoins as a kind of speculation early on and then watched as the value fell over time due to more coins coming into circulation and no one using them early. Of course, bold adventurers held onto their possibly worthless Bitcoin and today are smug about their gains.
Insanity, you say, well, it’s not really any different than the dollar. You can’t control that either, the Federal Reserve and the government do. They can start printing money tomorrow and this will cause inflation which will mean that that 15$ per hour you make for flipping burgers suddenly isn’t worth quite so much. So, in the end, who do you trust more, a nebulous, mysterious Australian posing as a mysterious Japanese scientist (the inventor of Bitcoin) or a nebulous, mysterious, government posing as well, a government.
So, why use it? The reason, as I said before, is that no one can track that transaction, supposedly. The transfer of the cryptocurrency is in a network not controlled by the government so no one really knows that I sold you a cat and therefore, I don’t have to pay use tax (you pay those right?), sales tax, business license tax, cat hair disposal fee tax, and cat transfer license fees and as I said before, this gets governments kind of antsy about their whole model.
Are cryptocurrencies safe? Well, it’s basically backed by nothing except the desire of anyone to have cryptocurrency. So, if suddenly Bitcoins are replaced by Etherium, Bitcoins could be worthless. The same, of course, can be said for dollars. Still, I don’t think I am going to invest at this point and I don’t need any illegal cats, so for now, I’m good.
So, why didn’t the whole world switch to cryptocurrency? Well, you and I both have a bit of a hard time trusting this unknown entity with our money even though we have been trusting an equally unknown entity with our money for a long time. Of course, your tireless government is working hard to keep you from using cryptocurrency as well and it’s not easy to get. So, we put all our faith in a piece of paper that someone (in this case, the US Government) tells us has value. It seems to work,so we put up with it. For now, I will accept gold bars, dollars, or even Renmenbi, thank you very much. But, who knows? Change is inevitable, otherwise we would still be taking a live chicken(s) or maybe a crate of cats down to the bursar’s office to pay tuition. So, keep an open mind, but guard your shekels carefully until the market settles (or go crazy and take wild speculative risks), it’s all good.
*For more like this, catch Doug's Podcast, SecureDigitalLIfe.com.
Doug White is the Chair of Cybersecurity and Networking programs at Roger Williams University. He has worked in the technology industry for many years and specializes in networking, disaster, forensics, and security. He has been paid to break into buildings, talk tech people out of their usernames and passwords, steal money, and figure out horrible scenarios like “What if a rabid shark swarm was caught up in a tornado while a core meltdown occurred? Could we still watch Netflix?” Doug has a PhD in Computer Information Systems and Quantitative Analysis from the University of Arkansas, is a Certified Computer Examiner, A Cisco Certified Network Administrator, A Certified Information Systems Security Professional, and a licensed private investigator.