I bought some crypto currency. Not a lot. Just a little. Some Bitcoin, some Ethereum and some Litecoin. I’m thinking about acquiring some NAVcoin too. I have digital wallets on a website called Coinbase and I’m wondering what to do with it. Do I trade or hold tight? My wallets have a digital address and, armed with that information, people can make payments to me. Should they wish to supply their wallet address to me I can pay them, if I so desire. The two-part address has a public key that I can share with all and sundry, and a private key that I dare not divulge anywhere. It’s money but without central government interference and outside of the banking system, the middleman raking in commissions and percentages, whilst controlling every transaction.
Ah! But what makes it real? What intrinsic value does an intangible ‘asset’ possess? Is it nothing more than a number held in memory on a computer? Have I wasted my pounds sterling? Time will tell. But then again, what is real about a fiat currency? In the UK a relatively small percentage of the currency in circulation is in the tangible form of coins and notes. If everyone wanted to exchange the digital numbers printed on their bank account statements into bank notes, they would be deeply disappointed. A bank note is in itself valueless. It’s a piece of paper, nothing more. In fact there is no actual value in the system at all. It’s all a confidence trick. Any value is perceived, not real. If I believe that I can accept your money in exchange for goods and services provided and then use that same money to purchase goods and services myself, then I will happily do so. If I don’t have that confidence, then your money is a worthless pile of paper and steel discs. Which reduces any currency to a set of trading tokens and IOU notes. The only value is trust. In what way is my crypto currency different?
I am still struggling with the concept of creating digital coins. I have read Satoshi Nakamoto’s paper ‘A peer-to-Peer Electronic Cash System’ and it is interesting, although summarising it all into a few simple sentences is beyond me at the moment. Nevertheless and at the risk of sciolism, there is a process called mining that involves powerful computers resolving massively complex cryptographic calculations. Apparently, as time passes the calcs get harder and so each coin requires more resources to mine. In the Bitcoin world there can only be a maximum of 21 million coins of which about 11 million have already been mined. There is a shared public ledger called the blockchain. All transactions are open and transparent. The costs associated with transferring funds are minimal. There are no barriers. The value is kept at known addresses. Who owns those addresses is irrelevant. Security is maintained by the fact that attackers need more CPU resource than the system itself. In order to spend the same money twice, a second blockchain will need to catch up with, and overtake, the first chain. As time passes this becomes more difficult by an exponential factor. Mining reaps its own rewards so why work against the system when you can generate value by working with it? If the maximum coinage is actually unalterably fixed, as is claimed, then there can be no quantitative easing (QE). What’s that, you ask? We have all heard the term and are aware that it is colloquially known as printing money. When a government is in financial straits it seems to think that it can just produce money from thin air. It is not actually printed. It is just a number in computer memory. There is no matching additional value in the system. The extant value is simply divided into smaller bits. It’s like this. I have cooked a meal for six people. The main course is a meat pie that I have cut into six pieces. Unfortunately each diner has unexpectedly turned up with a friend. There are no more ingredients in the cupboard. There is insufficient time to go to the shop and then cook another pie. So what do I do? I quantitatively ease the pie that I have. I cut each piece in half. I now have twelve slices of pie but no more actual pie. The slice originally allocated to each diner has been devalued. To get the size of meal I originally intended, each diner would need to have two slices. That’s inflation. That is what QE is - subdividing the national GDP into ever-smaller slices. The pounds you possess are devalued and inflation is created, as you need more pounds to pay for the same stuff.
Whilst Bitcoin is a currency in itself, the majority of our daily transactions still occur in pounds sterling. Therefore there has to be an exchange rate and this has proved to be volatile. Currently each coin is valued around $2,500. It was much lower. Predictions are that it will go much higher as more traders start to show an interest. Maybe I will just hang on to it and see what happens. With a new architecture, due to go live on the 21st July, that will give Bitcoin a similar processing capacity to that of Visa, and with large organisations such as Microsoft and Amazon looking to get on board, it might just take off. Or it might crash and burn. That is the risk.
Curiously, each UK bank note still bears the wording ‘I promise to pay the bearer ‘n’ pounds sterling’. It used to mean gold. I wonder what that actually means today?
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