Bitcoin is the biggest and best-known “cryptocurrency,” the label of which is enough to scare most people off, but a few are investing in these new, unregulated forms of money and reporting huge profits and they appear to be gaining in popularity. Why should this be?
It is widely reported cryptocurrency investors are making thousands of percentage points on their investments and are encouraged to leave their money in deposits to enjoy more growth and add as much as they can! Is this good a good idea or even sane? How does it work?
Paper currency came from notes defining title to things of value like quantities of grain. The note, or “chit,” value would be for a certain number of bushels or pounds of the substance. This was formalized by the creation of banks, but they could not store tons of grain so they formalized the notes into what became the currency of our day.
The use of “precious” metals, gold and silver began as “storehouses of value,” but are they?
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Gold and silver are both rare and permanent, but have very limited use value. We cannot eat them. We cannot use to make anything, but jewelry or decorations as neither has the physical strength of more common and cheaper metals. Copper, zinc and iron have much more strength and practical value, but they are common thus low in cost compared to gold and silver.
Gold has been used a currency standard because the limited supply was thought to be stabilizing as it prevented debasing currency by overprinting, the best known currency collapse happened in 1923 Germany and several African states in late 20th century. However that became a problem as economies expanded with new inventions and improvements to the point that the limited gold supply became a constricting factor in economic growth.
For centuries the limiting factor of gold caused a direct barter trade of goods like grain and fuels as they were measureable entities and in many cases such trades could be done untaxed! This alone created the opportunity of alternate commerce with the most recent iteration, or refinement, has been the “BitCoin” cyber-currency.
How do “cyber-currencies” work? To start a cyber currency you only need to define one, say “1 million CyberBucks” and to establish it you set up a trust in a bank with $100,000. Each CyberBuck then has a value of ten cents, suppose you hype “CyberBucks” as the greatest investment of all time and get people to make deposits in your CyberBuck account.
After a lot of promotion you have collected one million Dollars! Now each CyberBuck is worth $1, a 1,000% increase! You promote CyberBucks as the greatest investment of all time, but wait, CyberBucks are not being used for anything! So you have to get to work on setting up ways CyberBucks can be used a medium of exchange. That is the hard part. Without that people will begin to pull their Dollars and the scheme crashes, which is the usual outcome.
BitCoin has enjoyed success as it has become a way to launder money and the users of BitCoin have often been drug dealers and other criminals, most notably computer ransomware fraudsters. Now BitCoin is talking about setting up ATMs, but no banknote or coin design has yet appeared, save artist’s renderings for publications and promotions. It now remains to be seen if and how BigCoin survives commerce, criminal investigation, and acts of Congress as they may well prove to be more than a minor nuisance in the economy.
Where silver and gold actually have very little real worth we expect a serious re-evaluation of economic theory and practice simply because the opportunity is there and leave it to some author’s right combination of words, a book or two, a film or two and we may see a cryptocurrency become our medium of exchange!