As the world gets weirder, how can we get smarter?

Did you learn, “neither a borrower nor a lender be?” But then you took out a mortgage and bought bonds, and became a borrower and a lender.

There’s always something new to learn about money. And now—drum roll—cryptocurrencies.

Bitcoin. Ethereum. Tether. Binance. Dogecoin. Apecoin. Literally thousands of the darn things.

A whole industry has emerged: Hardware and software firms trading on NASDAQ. Currency exchanges. Venture capitalists working overtime. Teenagers in baseball caps post Youtube videos on how to make a fortune with new coins.

Perhaps a quarter of the U.S. population owns or has used cryptocurrency—43% or so among males aged 18 to 29.

The crypto world has its own language, values, politics, humor, art forms. Even if you wouldn’t touch crypto as an investment or use it as money, it’s worth learning about—fascinating as a cultural phenomenon.

Bitcoin

The best-known cryptocurrency is Bitcoin, launched in 2009. Can you jingle it in your pocket?

Nope. Bitcoin doesn’t exist in any physical form. It’s digital—it lives only on the Internet. Its electronic ledger—or database—is called a blockchain.

What can you buy with Bitcoin? An increasing amount of stuff, actually, from a cup of coffee to a computer or a luxury watch. A lot of people buy the currency itself, hoping that the price relative to the dollar will go up.

Okay, let’s back up. What is money, anyway?

In human history, money has been cowrie shells, gold bars, silver coins, sacks of grain, stone disks, salt, pieces of paper.  It can be anything we agree to use to buy or sell things or to store value.

The fact that cryptocurrencies exist on computers isn’t the new thing about them. For a long time, most money has been numbers on computers.

In this country, coins and bills only constitute about 10% of the money supply. The rest is balances in bank accounts, CDs, money market funds, and the like. Numbers on computers.

But, people ask, aren’t dollars backed up by gold?

No, that hasn’t been true since 1971. You can’t go down to your bank and say, hey, here’s a $100 bill. Please gimme some gold. The teller would look at you funny.

A few technical points.

So if they’re both numbers on computers, how is cryptocurrency different from our familiar currencies?

Cryptocurrencies are decentralized. That means the database is stored not on one computer, but on a string of them. The Bitcoin blockchain lives on thousands—

even tens of thousands—of computers across the globe. We don’t even know how many.  

If one computer fails, thousands of others still have the information.

The transactions on the Bitcoin blockchain are permanent, public, and can’t be changed. You can add new records, but you can’t change the old ones. That makes the database less vulnerable to hacking.

Why is it called crypto? That sounds creepy. Crypto refers to cryptography. The records get encrypted—that means disguised—so that adversaries can’t get the information.

So, who’s in charge?

The money we’re used to is established by the federal government. It’s fiat currency—money created “by decree.”

In most countries, there’s a central bank—in the U.S., it’s the Federal Reserve— that manipulates the amount of money in circulation, sets interest rates, and so forth. Government agencies make the rules for safety and consumer protection.

The system also relies on a multitude of commercial banks. The banks get the money out into the world, and they let me transfer money from my account to yours.

In contrast, cryptocurrencies are privately inventions. Computer programmers put the rules about how they work into the computer code. No governments and banks are involved.

With cryptocurrency, say enthusiasts, you don’t have to trust institutions, which can be corrupt and misguided. You don’t have to get permission from a bank to move money to someone else.

Instead, you put your faith in “code”—i.e., formulas, mathematics, and algorithms. The system works automatically on computers.

What the heck is Bitcoin Mining?

Is it guys going underground with lights on their helmets?

Nope. Bitcoin mining means verifying new transactions and adding them to the database.

Who does this?  Computers. In the early days, home computers or cell phones could do it. Now, it’s likely to be a big warehouse filled with rows and rows of powerful computers.

Those computers are checking that Bitcoin transactions are valid. And they’re trying to add them to the database.

Trying?  Wait. Lots of different computers—in other locations on the planet—are looking at the same transactions, also trying to be the first to get them in. The reward for winning is some Bitcoin.

So what’s this competition entail? It’s a number puzzle. The first one to get the answer wins.

This sounds crazy, but it turns out that doing it this way solves a problem—the double payment problem. It prevents the same amount of money from being paid out twice.

The language—oh my

You saw with the term “mining” that crypto language can be a hurdle. The industry sounds as if it’s speaking English, but beware. Old words have new meanings.

“Gas fees” in the Ethereum currency aren’t what you pay at the pump—they’re good old transaction fees.

A silver lining (if you’re watching the industry) is imagination and humor, especially in the names of products or services.

Like Pancake Swap. What? Is this a new breakfast joint? No, it’s an exchange, where you can trade one cryptocurrency for another.

Crypto developers keep tongue firmly in cheek. Dogecoin, a popular cryptocurrency, started out as a joke. Doge (D-O-G-E) was a misspelling of doggy. The symbol was a picture of a dog.

Silly, right? But a lot of people jumped on the bandwagon. They bought Dogecoin. Soon, Dogecoin was used for fundraising. It helped send the Jamaican bobsled team to the 2014 Winter Olympics.

So is crypto good or bad?

Crypto fans maintain that cryptocurrency is honest, democratic, and that it will help people in developing nations. The keynote speaker at the Bitcoin 2022 Conference proclaimed, with messianic zeal, “We have to go out from this conference and take over the world.”

Critics, on the other hand, call Bitcoin a scam, a fad, and a Ponzi scheme. “It’s like buying air,” says Senator Elizabeth Warren.

Warren Buffett calls Bitcoin rat poison. In return, Bitcoin folks call him “the psychopathic grandpa from Omaha.”

In fact, there is a lot of scamming going on.

There’s the “rug pull,” when people launch new currencies, get financial support from gullible folks, and abandon the project.

There’s the “pump and dump” ploy. A celebrity talks up a new currency, drives up the price, and sells out. The price plummets.

But–these techniques existed long before crypto or the Internet.

Many clichés about Bitcoin aren’t true. I originally thought that Bitcoin was mainly for money laundering, drug dealing, and blackmail—because transactions couldn’t be traced.

It turns out that Bitcoin transactions can be traced. Rather easily, in fact.

The Mueller investigation followed the Bitcoin trail to identify the Russian hackers of the 2016 election. The same way, the FBI busted Silk Road, a notorious drug and money laundering ring. They also identified the leaders of a vicious child pornography ring.

It’s gratifying that the method criminals thought would protect them actually led to their downfall.

At any rate, the Sloan School of Management at MIT estimates that only 3% of users do illegal things with Bitcoin. I hope so, but by definition, successful crime is something we don’t see. The IRS is looking out for tax evasion.

Meanwhile, if you’re up to something really sleazy, you transfer bags of cash in a back alley.

The El Salvador Story

Can cryptocurrencies help poor countries?

The TV show 60 Minutes did a favorable story on a village in El Salvador, where some expatriates introduced the use of Bitcoin. The country was (and is) using the US dollar, but several local merchants agreed to take Bitcoin as payment.

President Nayib Bukele became a believer and pushed through legislation making Bitcoin legal tender in El Salvador. All vendors were supposed to accept it. Bukele also bought large amounts of Bitcoin with public funds. Everyone in El Salvador got $30 worth of Bitcoin in a digital wallet.

Was this a brilliant move for an impoverished country?

A lot of people in El Salvador didn’t think so. Some protested in the streets. Most merely spent that Bitcoin starter amount, then went back to US dollars.

The International Monetary Fund didn’t approve of El Salvador’s move, either. That bodes badly for future loans from the IMF, which is the lender of last resort.

To make matters worse, the market price of Bitcoin tanked in May, 2022. El Salvador’s Bitcoin holdings fell in value by about 50%, leaving an impoverished country worse off than ever.

The Environmental Question

Remember those rows of computers doing Bitcoin mining? Environmentalists are very alarmed at the amount of energy needed to run them. This is not helping the climate crisis.

The industry replies that it is increasingly using clean hydroelectric and wind power.

The United Nations is trying to get companies to sign on to a global Crypto Climate accord, with the goal being a carbon-neutral industry by 2040.

Is the crypto industry cleaning up its act? Or merely improving its image? We’ll see. But, on climate change, the clock is ticking.

How about the political wars?

 As if we didn’t have enough already.

Remember that the crypto industry is minimally regulated. There’s a race going on, with the industry heading for crypto-friendly states such as Texas before the federal government can figure out things out.

New York state, on the other hand, has just passed a two-year moratorium on carbon-based crypto mining.

In March of this year, President Biden issued an executive order for “a comprehensive…approach to crypto policy and regulation.”

We shall see who wins.

How long will cryptocurrencies last?

Transactions approved by number puzzles; currencies based on jokes…all this sounds pretty goofy. How long can it last?

Possibly a very long time. Despite its recent crash in price, Bitcoin may eventually prove itself a viable currency, existing alongside the dollar and the Euro and the yen.

Cultural entities, no matter how they start, can endure for centuries—millennia—before they finally expire.

Sometimes the passion of its supporters makes crypto sound like a new religion, a belief system. Belief systems often last a long time, before fading out and being categorized by later folks as “mythologies.”

Any currency could last, rational or not. Powerful people could profit from it. It could grow through cultural momentum. It could persist through inertia. It could die because something new takes its place.

So what might endure?

Those Buddhist principles we saw earlier have a timeless quality. Don’t earn your money in nasty ways. Don’t get into debt. Enjoy money legally earned. Spend it happily on the wellbeing of your friends and family.

I’m finding that some old saws still apply to money matters. Look before you leap. Don’t gamble what you can’t afford to lose. If it’s too good to be true—it probably isn’t true.

Your ethics and values surrounding money can hold up no matter what currency you use. It’s what you do with your wealth that counts. The currency you do it with is only a tool.

In the meantime, holding on to the old doesn’t mean closing your mind to anything new. There’s value—and entertainment—just in learning about what’s going on in the world. At very least, you’ll see a new act going on in the human comedy.

TYVM! (Thank you very much.)

© 2022 Betsy Woodman