The Differences Between Crypto and Government-Backed Money
This one is for the noobs again. I like to think of myself as an intermediate noob: I’m not a coder, a miner or even a day trader (I’m a proud Hodler, thank you very much). However I follow the news, check my altcoin investments 35,562 times a day and I have the mad skillz to get my real estate transactions done.
Unless you’ve been living under a rock, you know that Bitcoin has recently BLOWN. UP. My mother and ex-husband called me within 24 hours of each other asking how to buy. Seth Meyers did a hilarious skit about it. A rando friend of mine posted his new Trezor and Bitcoin for Dummies book. Yes, there’s a growing curiosity (okay, more like a frenzy) about how people can get in on the action, and although Bitcoin itself has become a favorite buzzword, the clear majority still don’t have a clue as to what cryptocurrency actually is.
Let’s start with the basics. We all know what government-backed money is, right? Geez, I hope so. Investopedia’s definition is pretty succinct: Fiat is a currency that a government has declared to be legal tender, but it isn’t backed by a physical commodity. The value of fiat money is derived from the relationship between supply and demand rather than the value of the material that money is made of.
So, government backed = centralized. The feds have control over the banking industry as interest rates determine the cost of money borrowed. When the centralized banking system fails (remember the S&L scandal? 2008?) the public takes a major hit. We’ve also seen Greece declare bankruptcy while Venezuela is on the brink. Don’t get me started about the new tax bill – the money that’s been promised to the banks to “stimulate the economy” is mind-blowing. In case you’re wondering where I stand on this issue, you can watch Rachel Maddow’s take on it.
Most banks can’t get behind the idea of cryptocurrency and have been very vocal about it for obvious reasons. Without getting too technical, cryptocurrency is decentralized, and each transaction is recorded onto a transparent, immutable public ledger called the blockchain. We’ll call it community-backed currency, even though the IRS considers crypto an asset/commodity. It behaves like a stock and one can spend, trade or transfer it back to fiat. The thing that irritates me the most is that these Wall Street dinosaurs write article after article comparing cryptocurrency to the behaviors of stocks and fiat trends and try to predict the next bubble while dumping on the validity of cryptocurrencies. They can’t seem to wrap their heads around the fact that yes, while crypto behaves similarly to a stock, IT’S NOT A STOCK, it’s a CURRENCY YOU CAN BUY SHIT WITH.
The Bubble Scare
I just read an article by Jerry Welch, about how crypto fails the duck test, which I think is a ridiculous analogy (he does reference a passage in his book, Back to the Futures, as to how Darth Vader struck down the pin-striped pork bellies known as stock future contracts…starting to see a trend here?), then goes on to compare epic bubbles such as the Dutch Tulip Bubble of the 1630s (!!!), Japan’s real estate market bubble of the 1990s and of course the dot-com bubble, and hints that the crypto bubble could be just as epic of any of those. But he, like so many other old-school finance “experts”, is putting old-school rules like the duck test onto cryptocurrency. No shit does it fail, and keeping in the vein of horrible, over-used analogies, it’s NOT a duck - it’s a honey badger, and honey badgers don’t give a fuck.
And while comparing a nearly 400-year-old bubble to Bitcoin is completely and totally rational (it’s like comparing the Titanic to IOTA), I honestly don’t think there is a Bitcoin bubble and many experts with much more experience than I have will agree. A great point of reference is Lou Kerner’s article. He takes a look at Amazon stock when the dot-com bubble hit and compares it to the overall performance. Still apples and oranges, but we’re at least on the right track. However, I do believe there’s going to be an ICO bubble, but again that’s another article.
If a bank with a centralized server gets hacked, everyone is screwed. Depending on the bank, the FDIC only insures up to $250,000. Anything after that is your loss. The key point here is that centralized banks have centralized systems, and the hacking ease is much greater. Yes, there have been a few exchange hacks over the years but in most cases, the exchanges have been able to give back two-thirds to three-quarters of the fiat back to its customers. There is also the 51% Attack theory, in which if 51% of the Blockchain mining could be taken over with malicious intent to control the network. This would be extremely difficult to accomplish due to the massive amount of computing power needed.
Who Has Control
As mentioned briefly above, centralized banking is controlled by the feds and we as consumers have always been helpless with regards to inflation spikes, interest rates, and so forth. Cryptocurrency, however, is community-based for all intents and purposes and the price is derived upon simple supply and demand. Sure, the price is affected if a country like China speaks out against ICOs and Bitcoin and corrections are made, but once the news dies down then the price shoots right back up. We’ve seen just recently the price of Bitcoin was affected by the holidays – perhaps people were cashing out a little to get the Christmas shopping done, but it’s crawling back up and hanging steady around $15,000 at the time of this writing.
Another little amusing thing is that the old-schoolers in traditional finance love to discredit crypto because it’s based on “nothing.” Let me make it clear that fiat is literally based on nothing. No gold to back it anymore, no real infrastructure, nothing other than what the feds declare. To reel in inflation, the feds put more money into circulation, sometimes flooding the market and driving down the value of the dollar. Bitcoin will never have more added to circulation because it was designed that way. There are 15M in circulation now with 6M in reserves to be added at specific times throughout the life of the Blockchain. The Blockchain is at its infancy and just like the Internet, will be used in various industries over the next few years and will most definitely become mainstream. There are different Blockchains that power cryptocurrencies (Bitcoin which is closed-sourced and Ethereum which is open-sourced), and they’re not going anywhere anytime soon, if at all.
If you’re going to invest, invest at your comfort level. If you’ve got the stomach to ride the ups and downs of cryptocurrency, then do so. However, I will leave you with this: The 2017 stock market has produced about a 9.7% ROI, while Bitcoin’s 2017 returns have been 1375%, and 2018 will only be better for Bitcoin as well as Ethereum and other promising cryptocurrencies.