Cryptocurrencies |Essay

Why digital money is here to stay

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Miguel A. Torres

"Do you know the concept of "big lie"?..."
MT

Miguel A. Torres

"Actually, you're not the first person..."
MT

Miguel A. Torres

"And your help is greatly appreciated...."
ME

Michael Ele

"Hi there, just some comments as the t..."

Bitcoin is a big word these days. Some, like computer programmer and businessman, John McAfee, are predicting the digital coins will eventually hit a price of $1 million each. Others have reported (Atlantic) that cryptocurrencies in general could be Ponzi schemes. Despite divisive opinions, it’s clear that Bitcoin is moving beyond the digital space and becoming part of our day-to-day conversation.

Bitcoin’s current popularity comes from it hitting over US$19,000 (Fortune) in the middle of December, a 19-fold increase since the start of 2017.

Governments have also grown concerned about it. Just a few years ago, some countries like Iceland (Forbes) were expressing their intention to forbid the use of cryptocurrencies altogether. South Korea and China seem to be implementing a crackdown right now (Bitsonline). Some, like Russia, have decided it would be impractical to enforce such bans and decided to regulate them instead (Coindesk). Though it’s important to mention that they may not be targeting the use of cryptocurrencies per se, but an emerging capital raising method known as initial coin offerings (ICOs), similar to the stock market, but currently unregulated.

Now, there seems to be an increasing number of countries getting ready to enter the cryptocurrency market. Venezuela announced the petro and Russia announced the CryptoRuble (Financial Times). The Washington Post reported that the rising value of Bitcoin has observers predicting the U.S. may release a ‘FedCoin’ at some point.

As with most financial matters, nobody knows for certain what Bitcoin’s future will be. So it’s time to give the whole topic a closer look.

Digital money was already here

It’s important to note that cryptocurrencies didn’t introduce the concept of digital money. Most money in circulation today is digital and it’s been that way for at least a couple of decades. It may come in forms like plain cash in bank accounts or financial instruments like bonds, but it all exists as numbers in the computers of private banks. Such computers are audited by government agencies to make sure nobody cheats.

Paper money and metal coins are also issued by governments, but they make up just a tiny fraction of all money in circulation today (How Stuff Works). The usage of credit cards is so widespread in certain parts of the world now that actual cash is becoming a thing of the past.

If the traditional banking system, which comprises regular bank accounts, wire transfers, credit and debit card processing, is the first generation of digital money, then cryptocurrencies like Bitcoin represent the second generation.

Cryptocurrencies may not have introduced the concept digital money, but they have curtailed government control.

From blockchain to cryptocurrencies

The amount of attention blockchain – a decentralized ledger –  is attracting these days gives the impression that mathematics is finally catching up as a popular topic. For example, blockchain solves the Byzantine Generals’ Problem, which is part of a branch of mathematics called Game Theory. But in reality, this is a practical matter.

Centralized banking systems require all transactions to be validated by single authority, ensuring that digital money, which is easy to replicate by nature, can only be spent once. In contrast, distributed banking systems face a problem known as double spending: the possibility that, by taking advantage of the time gap required to synchronize the network, someone may spend money more than once.

Blockchain – the technology behind Bitcoin – was the first practical solution to this problem. It is a specific kind of distributed database devised to operate inside a network with no central authority. As its name implies, it’s composed of interlinked blocks of information, each containing data – in the case of Bitcoin, a transaction – that can’t be altered once set. The chain itself is built collectively but independently by the nodes (computers) in the network. (Investopedia)

Blockchain is the equivalent of monetary democracy in the digital world, since it is based on the principle that the opinion of the majority is the truth. The inevitable discrepancies between nodes in a decentralized system are solved by the majority principle, with nodes always preferring to build upon the most popular chain, quickly leaving minority chains behind.

A cryptocurrency is a specific form of digital money that uses cryptography for protection. Bitcoin uses a mechanism called proof of work to make it difficult for the nodes to launch brute-force attacks on the network. Cryptography in general is a highly asymmetric process, making an encrypted block easy to decode with the proper key and extremely difficult without. Since all blocks are required by the network to comply with a specific signature, it is necessary to add random information to the block and test it by the method of trial and error, until it meets the requirement. Keys are shared with the blocks, making it trivial for the rest of the nodes to check the validity of the block, but non-trivial for a rogue node to fake it.

It’s important to mention here that not all digital currencies use cryptography for protection. Competing technologies such as The Tangle don’t use it and thus aren’t technically cryptocurrencies.

Bitcoin and other in practice

According to some estimations (Blockchain.info), there are nearly 17 million bitcoins in circulation. At US$16,000 each, the cryptocurrency market has grown to at least about US$300 billion so far and already manages more wealth than some nations.

But Bitcoin still isn’t as practical as the paper bills and metal coins we all carry around in our pockets.

As impressive as this growth sounds, Bitcoin and other cryptocurrencies are still a failure when it comes to day-to-day usage. Sure, there are people who pay for drinks with actual bitcoins, but most transactions are done through intermediaries or brokers, meaning one of the parties (or both) receive the payment in a regular currency.

Also, despite its reputation as a haven for criminals, Bitcoin is far from anonymous. In the end, blockchain is a public resource and therefore transparent. Accounts don’t have an individual’s name on it, but this is mostly a disadvantage: your crypto-coins may be safe when it comes to street mugging, but they can and have been stolen from the other side of the planet a few times already. If that happens, it’s nearly impossible to report the theft to the police.

Right now, the Bitcoin network has almost stalled (Medium), making the time it takes to validate a transaction ridiculously high. It can go on for days sometimes. Fees are also outrageous. Among other things, this prompted the launch of a fork called BitcoinCash.

At the core of the issue is that Bitcoin isn’t as decentralized or peer-to-peer as some people claim (Bitcoin Magazine). It still depends on a single authority, which is now the consensus between the majority of the nodes in the network. In the end, you can’t really validate a transaction on your own.

Why cryptocurrency prices fluctuate so wildly

The digital part of cryptocurrencies might be high tech, but the process of rapid appreciation (deflation) most of them is experiencing can be explain by old-school money theory.

Traditional economies revolve around a single, government controlled currency. Almost all currencies exhibit sustained inflation. Together, these two properties uphold the policy of price stability. Supposing that you want a bike and it costs $100, the best you can expect tomorrow is that it will still cost $100. If you wait a year, it’s to be expected that it’ll cost more, say, $105. That’s why, if you really want the bike, there is no rational reason to delay its purchase.

Now, when a second currency enters a traditional economy (let’s call the original A and this new one B), the process of exchange between A and B provides contrast to notice the minor and natural fluctuations in the purchasing power that were previously hidden. This invites people to gamble.

A notable exception is the Swiss franc, the only currency in the world with nearly zero inflation. The main reason why people opens bank accounts in Switzerland isn’t anonymity; it’s because, like gold, the Swiss franc has proven to retain its value over time.

Speculation is quite inevitable when multiple currencies co-exist, but as long as they are exchanged for real goods and services (such as bikes), their value is kept in check. Gold has many advocates because it’s an element and thus its value is easy to quantify: 100g of gold is worth twice as much as 50g. On the other hand, the value of complex goods such as bikes is more difficult to quantify and compare.

By contrast, the problem with Bitcoin et al. is that very little of it is used to purchase real goods and services. Nowadays, most cryptocurrencies go back and forth in the market in the form of currency exchanges. As long as Bitcoin keeps receiving more capital that is stored and not exchanged for anything else, its price will keep going up.

The thing is, most people expect to spend their own money at some point; and when that happens, Bitcoin’s price will have to adjust accordingly, as in our bike example. Whether this happens smoothly or suddenly all depends on the net percentage of its users who hoard it for speculation purposes. If 90% are in it just for the quick gains (which seems to be the case, since most of it goes back and forth in the market in the form of currency exchange), be sure that the bubble will burst and its price will collapse to just about zero.

Critics tend to argue that Bitcoin et al. isn’t backed up by anything, but actually, none of the traditional, government issued currencies in the world is backed up by anything either. The proper term for this is fiat currency. Since money lost parity with tangible wealth, such as gold or silver, all currencies risk a process called hyperinflation. During the 1920s, the Weimar Republic (Germany) printed so many Marks that they began to be used as wallpaper.

However, if only 50 percent of its users are really committed to it, meaning they won’t buy or sell just based on exchange rates, the bubble will contract to its natural balance and stay there. The aggressive “investors” will lose interest, considering Bitcoin just another other asset in their portfolio.

Cryptocurrency future

No one knows what will happen to “private” cryptocurrencies like Bitcoin in the long term, but with governments preparing to launch their own digital currencies, they’re definitely here to stay.


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Independent inventor with several patents on my name in fields such as vehicle and information technology. Proficient at mechanical design and manufacturing (lathe, milling machine, surface grinder, etc.). Independent writer with extensive knowledge in many humanistic fields such as History, Law, Economy, Politics. Expert on Physics. I'm about to release a book describing the Theory of Information. I speak some human (Spanish, English, German) and computer (x86 assembly, BASIC, C/C++, Java/JavaScript, PHP, SQL, etc.) languages. Above all, I'm an homo quærens (a philosopher).

History for stories "Why digital money is here to stay"

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22 January 2018

15:24:03, 22 Jan 2018 . .‎ Jeffrey C (Updated → copy edit)
12:08:56, 22 Jan 2018 . .‎ Troy Hester (Updated → Minor Grammer edits.)

08 January 2018

13:52:12, 08 Jan 2018 . .‎ David Spohr (Updated → the franc inflation is not perfect zero)
10:01:55, 08 Jan 2018 . .‎ Angela Long (Updated → comprises doesn't need 'of')
02:46:21, 08 Jan 2018 . .‎ Jodie DeJonge (Updated → accepts some proposed revisions, makes other style corrections)

07 January 2018

10:44:53, 07 Jan 2018 . .‎ Miguel A. Torres (Updated → overhaul)

05 January 2018

17:03:34, 05 Jan 2018 . .‎ Joshua Marx (Updated → )
12:08:43, 05 Jan 2018 . .‎ Robin van Boven (Updated → Unnecessary 1G and 2G terms removed)

04 January 2018

23:34:31, 04 Jan 2018 . .‎ Matthew Trager (Updated → )
20:19:13, 04 Jan 2018 . .‎ Linh Nguyen (Updated → typo)
15:25:01, 04 Jan 2018 . .‎ Burhan Wazir (Updated → updated)
14:52:04, 04 Jan 2018 . .‎ Linh Nguyen (Updated → summary revised, waiting second edit)
14:33:52, 04 Jan 2018 . .‎ Linh Nguyen (Updated → format)
14:30:37, 04 Jan 2018 . .‎ Linh Nguyen (Updated → edits)
07:45:53, 04 Jan 2018 . .‎ Miguel A. Torres (Updated → i think i'm done)
07:16:17, 04 Jan 2018 . .‎ Miguel A. Torres (Updated → polishing)

03 January 2018

20:33:01, 03 Jan 2018 . .‎ Miguel A. Torres (Updated → HTML cleanup, minor polishing, illustration)
10:03:34, 03 Jan 2018 . .‎ Miguel A. Torres (Updated → minor polishing)
09:54:53, 03 Jan 2018 . .‎ Miguel A. Torres (Updated → reworked, work in progress)

02 January 2018

12:28:45, 02 Jan 2018 . .‎ Linh Nguyen (Updated → edits)
12:26:24, 02 Jan 2018 . .‎ Linh Nguyen (Updated → edits for Miguel to consider)
11:36:32, 02 Jan 2018 . .‎ Linh Nguyen (Updated → still editing)
10:53:33, 02 Jan 2018 . .‎ Linh Nguyen (Updated → editing)
09:59:30, 02 Jan 2018 . .‎ Linh Nguyen (Updated → editing)

29 December 2017

23:49:47, 29 Dec 2017 . .‎ Jonathan Cardy (Updated → copy edit)
19:31:31, 29 Dec 2017 . .‎ Miguel A. Torres (Updated → more HTML cleanup, i think i'm done)
19:27:39, 29 Dec 2017 . .‎ Miguel A. Torres (Updated → HTML cleanup, please fix SPAN tag spamming)
19:23:27, 29 Dec 2017 . .‎ Miguel A. Torres (Updated → removed first person wording)
04:47:59, 29 Dec 2017 . .‎ Miguel A. Torres (Updated → i think i'm done here)
04:34:09, 29 Dec 2017 . .‎ Miguel A. Torres (Updated → HTML cleanup, polishing)

28 December 2017

20:53:27, 28 Dec 2017 . .‎ Miguel A. Torres (Updated → minor tweak)
20:47:25, 28 Dec 2017 . .‎ Miguel A. Torres (Updated → structure)
19:20:42, 28 Dec 2017 . .‎ Miguel A. Torres (Updated → i need a second opinion)
08:16:35, 28 Dec 2017 . .‎ Miguel A. Torres (Updated → i need a second opinion)
03:24:38, 28 Dec 2017 . .‎ Miguel A. Torres (Updated → work in progress)

Talk for Story "Why digital money is here to stay"

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  1. Rewrite

    Hi there, just some comments as the title caught my attention.

    Isn’t the title a bit misleading? The ‘essay’ seems to point out what digital money is in the form of cryptocurrencies, but doesn’t give enough valid points why there are here to stay. At the end in a small paragraph points out that the price will probably not going to go to zero if enough investors stay around.

    It would need stronger arguments to indicate that digital money is here to stay.

    One idea, could be, to indicate the natural progression of money and why money till now where issued by a centralised authority and it kind of makes sense in the future to have the most trusted way of issuing money that have value.

    For example in the past we had to associate paper cash with an tangible asset like gold, but money has evolved to become digital where big corporations and institutes have controlled where the money flows and this was a problem in various ways. It seems a natural progression to have money that are decentralised and public or even decentralised but privatised (offering a certain incentive) and thus will give people the choice on how they will exchange goods, especially in third-world countries that have no or limited financial infrastructure but have mobile devices.

    The technology still has room for improvement but if something is exchangeable people might start using it as a form of money and give their own value to it. (https://www.economist.com/news/finance-and-economics/21569744-use-pre-paid-mobile-phone-minutes-currency-airtime-money)

    To conclude the article didn’t convince me why they are here to stay. There is a fundamental reason why decentralised or even centralised digital cash would be better in the long run but the important aspect (since this is inside cryptocurrencies) would be to give socioeconomic and a bit more well rounded reasons reasons why digital money is here to stay.

    Just my thoughts, ignore me if I am wrong.

    1. Rewrite

      Actually, you’re not the first person who tells me the same thing (that the body doesn’t match the title) and I’m struggling to determine why people say so. I mention it clearly that digital money has been around for decades and governments are even preparing to launch their own second generation digital currencies (crypto-currencies). If physical cash is becoming a thing of the past, isn’t this an indicator that digital money is here to stay?

      Re-reading your commentary and others again, I’ve just realized that I’ve not made a clear enough distinction between digital money in general, and a specific variant of it, which is crypto-currencies like Bitcoin et al. I make it sound like they are the same thing. But when I say that digital money is here to stay, what I really mean is that all money is going to end up in digital form. This claim shouldn’t be read me suggesting that Bitcoin et al. will be it (my personal opinion is that it’ll disappear).

      The whole article meant to dispel the myth that Bitcoin et al. is digital money while regular currencies are not. The original title was: “get used to it: digital money is here to stay” meaning that it doesn’t matter what happens to Bitcoin et al., digital money is the future.

  2. Rewrite

    Minor typo – you need to close bracket after currency A and B description. I’m a lecturer so after years of marking, am super sensitive to punctuation!

    1. Rewrite

      And your help is greatly appreciated. I think I closed the bracket and someone removed it, though. I’ve noticed it happen more than once.

    1. Rewrite

      I’m well aware that McAfee is pumping Bitcoin, he is probably an early adopter and trying to pump his own coins. In the context he is quoted on, he serves the purpose of illustrating one extreme very well. The other extreme, as I mention, is those who accuse crypto-currencies of being Ponzi schemes. If we accept that, we’d have to launch the same accusation on central banks for issuing currencies with no intrinsic value and pumping its value with a legal monopoly.

  3. Other

    It might be helpful to raise the issue of the future of encryption, given the rapid development of quantum computing, and how it might affect cryptocurrencies.

    1. Rewrite

      99% of the time you hear quantum it’s used as a buzzword. But it’d be worth investigating.

  4. Rewrite

    Hi Miguel,
    Thanks for the essay which I enjoyed. Whilst the topic is clearly digital currencies, it may also be worth mentioning that blockchain or DLT can be used in many other applications (such as smart contracts), so whilst Bitcoin itself may well be flawed it really is only a proof of concept. I would also suggest that the wild fluctuations of value and current speculation are valuable in teaching the builders of the next generation of cryptocurrencies how to build a little more stability into the design (Fiat has been around for centuries but can still suffer from this, but national banks have learnt how to mitigate matters in most cases).

    1. Rewrite

      You’re right. In the story I mention that Blockchain is a distributed database, perhaps it’d be useful to mention that it can be used for other purposes. Actually, the crackdown on crypto-currencies is not targeting Bitcoin in particular but a business model called initial coin offerings (ICOs), which is basically a capital raising model parallel to the stock market. People create a new coin, keep coins to themselves from the start, and sell them when the price rises. From what I know Satoshi Nakamoto did the same and has about 7 billion.

      1. Rewrite

        The crack down appears to be focused on both ICOs as a security and outright ponzi scams (see: Bitconnect — https://cointelegraph.com/news/texas-regulator-orders-bitconnect-to-cease-and-desist-marketing-securities). Bitcoin, as of now, appears to be headed towards government regulating the flow of money as it relates to their fiat currency.

        Also, to correct you about Satoshi, they did not “create” new coins, but mined them, in accordance to the system. Satoshi just so happened to mine a lot before many even knew about Bitcoin and are believed to hold around 1million Bitcoin — though there is no official numbers as we do not know who/what Satoshi is. This is the closest anyone has attempted to locking down Satoshi’s holdings (https://bitslog.wordpress.com/2013/04/17/the-well-deserved-fortune-of-satoshi-nakamoto/)

        1. Rewrite

          Bad wording, I meant a new crypto-currency and keep some of the coins for themselves. I’m not saying they magically “create” them, but they use privileged information of some sort to leverage themselves. Good call, I’ll update the article later. Thanks.

  5. Rewrite

    “Paper money and metal coins are also issued by governments”
    More accurately they are issued by central banks. While they are for the most part government owned, their exact relationship to the government varies. One of the major reasons for having a central bank manage this aspect is to keep politics out of it. Since the term ‘government’ is strongly associated with politics I think this could be misleading.

    1. Rewrite

      I can change it for central banks, no problem. But the currency still circulates under a legal monopoly and is technically part of the government.

  6. Thank you for your feedback. I reworked the whole story. I hope this is a compromise between my original style and yours.

  7. Miguel, I’m just going in to edit your piece. I’ve changed it from “Explainer” to “Essay” for now since the piece reads like an editorial. I’ve made comments on the piece for your consideration, too. You clearly know a lot about the topic, but some of the sections are highly complex for a reader who may be coming at it with fresh eyes, hence me simplifying it. Certain terms should always be explained, like blockchain for example. Looking forward to collaborating with you. Thanks, Linh

  8. I’m not sure how the main body of this piece fits with the conclusion. It correctly points out that the bubble will burst but overlooks some of the most pressing concerns around using cryptos as currency such as the ever increasing transaction fees. It currently costs me $6 to transfer money to Europe and $25 to buy goods using Bitcoin. It also mentions that trading encourages people to gamble but in the context of ‘fiat’ vs. cryptos I’d love to see instances and protections against, say, wash trading between the two financial systems. You raise a very good point about most money being digital now – but I would also be interested in seeing a comparison of the distribution and storage systems set up to support fiat currency vs. the blockchain-dependent cryptos. I think comparing the two systems is a great idea and having an essay around the important differences between the two and perhaps the immediate future is also brilliant. Would love to read more about it.

  9. You are correct in thinking that low or nonexistent transaction costs are an attraction for a digital currency, but remember that is only going to be true during the mining phase. Once all 21 million bitcoins have been mined then the currency can only continue to operate if the transaction costs are sufficiently high to reward the former miners who are now just transaction processors. There is a very real possibility that Bitcoin will fail at that point if not before. Also it is incorrect to say that national currencies have nothing backing them. National currencies are backed by national governments. Governments with the ability to levy taxes…….. OK sometimes governments get into financial difficulties and even like the Confederacy cease to exist, but that’s why the Swiss Franc is such a strong currency and some other currencies so weak. Bitcoin has nothing backing it and no guarantee that it will be worth anything in the future.

  10. I agree and that’s why I don’t really care much about Bitcoin myself. As an experiment it absolutely succeeded, but its design is fundamentally flawed and will not be useful in the long term. I don’t think I understand you about governments backing money up. Money used to be a reference to real wealth (traditionally gold and silver, but it can be anything) that you were able to withdraw at any time. A sort of cheque. Now money makes reference only to itself. As I mention in the article, governments only ensure a legal monopoly (and thus, demand for the currency) to prevent wild fluctuations in its price. However, this mechanism quickly loses effectiveness with the circulation of parallel currencies.

    1. Rewrite

      As I said governments have the ability to raise taxes, I’d add they can sell public assets. They are unlikely to hold convertable assets that 100% back a currency, but it simply isn’t true to say that governments don’t back up their currencies. crypto currencies by contrast include currencies with nothing to back them up at all.

      1. Rewrite

        Do you know the concept of “big lie”? It’s mentioned briefly in Hitler’s Mein Kampf. Basically, most people are good, and for that reason, they can understand small “white lies” but not outrageous acts of evil, as they are not capable of that themselves. I think the whole issue with fiat money is the same.

        Let me try again. Our little example economy has a bank account containing 100 gold coins and 100 physical goods to be exchanged with it (1:1 parity). Since people is lazy and don’t like to carry physical gold, they pay for the goods with a cheque, and they issue it to the bearer to avoid complications. it happens that the seller is also lazy and don’t want to go to the bank to cash the cheque, so it passes it to someone else. Over time, only the cheques circulate and nobody goes to the bank to cash them. Thing is, the cheques originally represented 200 units of tangible wealth, and not 100: 100 gold coins and 100 goods. When governments removed the gold parity, the whole economy shrank 100 units of tangible wealth. People didn’t notice it because they had forgotten that they were owners of both tangible goods: the regular ones AND the gold. Not individually of course, but as a group (the bank is never the owner of the deposited wealth, only a custodian).

        The paper bills we all know are no longer cheques because they don’t point to funds stored in a bank account. The bank account just disappeared. They are just pieces of paper that give you no ownership rights over anything. Should the government decide to sell the public goods you mentioned, it’s not obligated in any way to give you some of it. You’re not the owner of the public goods. You don’t own anything.

        Like I said, the government ensures demand for your worthless pieces of paper by monopolizing the economy (in a specialized society money is needed just to exchange goods). The only thing that sustains its demand is that people didn’t have any option but to accept them. But If emerging currencies like Bitcoin put an end to the monopoly, there is nothing preventing a regular currency from free falling. I don’t think the government is worried about you losing everything; they are worried that you (and millions others united by this and not divided by religion, race, etc.) will begin to question what did they do with your gold. Who’s got to keep 50% of all wealth; and how.

  11. Hi Miguel, thank you very much for your essay. I wondered if you could go back into it and try and remove all instances of first person commentary? I’ll then give it an edit and return it to you for approval? Thanks.

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