One of my hobbies is collecting hyperventilated currency, I have old German Marks, Yugoslavian Dinars, and Zimbabwe dollars. I bought some "fake" bitcoins. Those things that get pictured when people talk about the Bitcoin since Bitcoins have no real physical form. I tossed in mention of the Euro as well since it had no real physical form until 2002, but there's a difference between the Euro and bitcoin.
Doggone has been asking me to write something about Bitcoins and why they are dangerous. I have been procrastinating about this in my usual style until the Wire article "Bitcoin’s Greatest Feature Is Also Its Existential Threat" popped up on my radar. There are three types of currency: one is currency backed up by a commodity which is usually gold or silver, Fiat currency which is where a government prints money and gives it value, and now cryptocurrency which isn't issued by a government. Cryptocurrencies are probably closer to commodity based currencies in that they get their value from the market.
Yet Cryptocurrencies' market value isn't based upon a commodity. It's based upon something called a block chain, which makes it somewhat similar to Fiat currency in that there isn't some form of actual value to either one. Fiat currency at least has a government backing it up. The blockchain is far more fragile and dangerous.
"See footnote for Hitchhiker's Guide Quote"
But let's get down to a really basic history of what "hard cash" money is. Basically, an economy is based upon trade. I have grain and you have bricks, or some such. Maybe bricks aren't available where I live and I can't trade directly with you. So, a commodity was chosen to make trade easier. The commodity was made into coins. Currency came about when banks wrote promissory notes to pay the value of the note.
Cryptocurrency gets its value from something called a blackchain and isn't really backed up by anything other than that. Blockchains are fairly complex topics. I'm not going to get into what exactly the blockchain is, but it is actually quite fragile. It's based upon a key, and woe upon you if you lose that key. I was trying to find the story about the person who died taking his bitcoin key with him. A story titled "$66,500,000,000 in Bitcoin Is Lost and Will Never Be Recovered, Says Crypto Intelligence Firm Chainalysis" was one of many that showed up.
That gets me back to the Wired story which led to this being written:
It’s best to avoid explaining the mathematics of Bitcoin's blockchain, but to understand the colossal implications here, you need to understand one concept. Blockchains are a type of “distributed ledger”: a record of all transactions since the beginning, and everyone using the blockchain needs to have access to—and reference—a copy of it. What if someone puts illegal material in the blockchain? Either everyone has a copy of it, or the blockchain’s security fails.
In other words, anything which can corrupt the blockchain will result in bitcoin literally being nothing. Those fake bitcoins I have will be worth more than a "real" one. Toss in that cryptocurrencies require a lot of computer power, or eat up a lot of electricity, to store those blockchains. This comes from a very cryptocurrency friendly article:
Cryptocurrency mining, by its very nature, requires a lot of electricity and sophisticated computers. In a paper published this week in the journal Joule, data scientist Alex de Vries — correctly — argues bitcoin mining is likely to exceed an annual consumption of 101 terawatt-hours (TWh) of electricity as the price fluctuates.The Wired Article is much better about the fragility of cryptocurrencies. The best way to remind someone of the danger of bitcoin is to point to things like Tulip mania. In other words, commodities, whether physical or not, can be subject to DRASTIC fluctuations in price. People who advocate for commodity based currency based upon their stability are ignorant of economic history. There were severe depressions when commodity based currencies existed.
Bitcoin isn't even commodity based. it is based upon the integrity of the blockchain. And if you don't trust a government, You really shouldn't trust a blockchain. Bitcoin’s self-positioning in opposition to fiat monetary systems is misguided, because the established system relies less on fiat than Bitcoin itself.
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