Have you ever heard of Bitcoin? Or blockchain technology? Cryptocurrencies?
Probably. You’ve probably heard someone talking about fake money or get-rich-quick scams or some kind of new scheme for Wall Street people to make more profits. You probably brushed it off as unimportant… I know I did… initially.
I heard about Bitcoin probably four years ago or so from a couple Christian podcasts that I follow. But over time the idea intrigued me. What was all the fuss about?
What is Money?
What is the US dollar? I know it’s bills and coins, but what is it really? As it turns out, the US dollar is a “fiat” currency, and almost all the countries of the world have one. Fiat money is simply physical bills or coins made by a government (or its central bank) that has value simply because that government guarantees that it has value.
(Try explaining that to a 7-year-old. 😀 )
Fiat currencies are based on trust in the government that prints it. Once my head wrapped around that, the next obvious question for me was: “If the US dollar has value only because people trust the US government, what other kinds of things can currency be backed by?”
It turns out, money can be backed by a lot of things!
Gold, for instance, used to be the thing that “backed” the US dollar. Dollars used to basically say, “I represent a tiny fraction of a gold brick held by the Federal Reserve, so feel free to use me as if I were gold.”
Bank notes backed by gold became a thing simply because gold was so difficult to handle. Instead of lugging around your gold coins and bars to pay for every-day purchases or even large purchases, the banks could instead give you “promissory notes” that could be redeemed and exchanged as if they were gold.
In fact, this tendency to simplify the media of exchanging goods and services is the whole reason money exists in the first place. The bartering system of ancient times, as societies grew in size and complexity, was simply untenable in the long term. People needed something that “worked” for everything. Salt, animal skins, weapons, copper coins… whatever the society at the time agreed upon as their common exchange medium. For more information, check out The History of Money at investopedia.com.
Because of huge debts wracked up in the World Wars and the subsequent spending of Americans and our government in the decades after, it was easier to sever the dollar’s connection with gold (by FDR in 1933 and Nixon in 1971) so as to meet our financial obligations. If we needed more, we could just print more, and since people trusted that the US government was good for its promises, the world eventually started using the US dollar as kind of a “gold standard” itself. The world economy essentially made the US dollar the new ‘gold,’ or its main “reserve currency,” in which all trust was placed.
So, if I were an person that wasn’t comfortable with the fact that US dollars are backed by something as ethereal as “trust in a government,” or if I saw that that trust was waning, I’d look for something else besides fiat currency to hold, right?
In this day and age, what could hold value, be exchanged anywhere in the world, and move almost at the speed of light?
Why not digital currencies? Or digital assets?
It’s not crazy to think that collections of 1s and 0s can hold value. Think about it… how many kids get on their phones and purchase upgrades, skins, expanded adventures or maps, etc. for online video games? People trade digital items all the time (“I’ll give you my Flaming Sword of Destiny of your Wand of Uragonia!” “Sure, but only if you throw in those pink ostrich boots.”). To them these items hold real value. These assets are backed by trust in the game’s developers.
Cryptocurrencies are a bit different.
Many cryptocurrencies are digital assets that are backed not by trust in a government or metal but rather in… itself.
(I say “most” because some crytocurrencies are backed by other things… for instance PAX Gold is backed by a physical commodities (gold, in this case). Companies like Tether offer digital currencies whose value is pegged to the market value of fiat currencies.)
Cryptocurrencies use a technology called blockchain.
- First, imagine you have a network of computers.
- Now imagine that these computers work together to verify “blocks” of information connected by “chains.”
- A “block” is a packet of information which contains all of the the details of all the transactions that occur on the network in a given amount of space (say, 1 megabyte of data).
- When enough transactions occur that the block is “full,” that block is “sealed up,” copied, and distributed to every computer on the network.
- Those computers then make sure all the copies are exactly the same.
- If all the computers agree that their copies of the block match, it’s verified as “correct” and a new block is begun, connected by a “chain” to the previous completed block. This “chain” is also copied to the whole network and is also verified.
- This chain of blocks serves as a ledger for the cryptocurrency that this network verifies.
This validation technique makes blockchains very difficult to change (hack), since if the copies of the blocks don’t match, the network rushes to resolve the discrepancy. If a hacker takes down one computer on the network, the blockchain program immediately sees the one computer’s copy is different. Then it simply ignores it, and often that computer is kicked off the network. In other words, this hacker would have to simultaneously hack the entire network at the same time in order to change a single block. The longer/older the blockchain is, and the more computers participate, the harder the blockchain is to hack.
In the case of Bitcoin, its blockchain network is made up of millions of computers spread out over the entire world. Even if North America was suddenly wiped off the face of the Earth, taking all of the N.A. Bitcoin network computers with it, the Bitcoin blockchain would go on being verified by computers on all the other continents (even Antarctica, apparently!).
Still Nervous? I Get It.
So… cryptocurrencies are their own digital assets, backed by “trust” in their own verified ledgers, independent of the monetary policy of any government.
Still nervous? I get it.
Cryptocurrencies have been around since 2009 (when Bitcoin launched), but blockchain technology has been around since 1991, invented to make a system where timestamps could not be tampered with on a network. It’s very existence is owed to the pursuit of security, and the technology has improved since.
You may not have even heard of this stuff until recently. Honestly, that’s exactly the reason that cryptocurrencies beside Bitcoin are not worth much right now (XRP, one of the most promising cryptocurrencies out there in my opinion, is only valued at ~$0.24 right now). Every day people like us don’t know or don’t care to know and so are not buying into the market.
- Wyoming approved the US’ first cryptocurrency bank this week.
- Regulations in places like Nigeria, the EU and the US are being worked on even as we speak.
- Mastercard is allowing the use of cryptocurrency with a new card.
- You can monitor the world’s adoption of cryptocurrencies at this blog.
- Financial institutions all over the world are working toward adoption of XRP as a bridge currency for international settlements.
So Why Do This?
Consider that because of the global pandemic, economies around the world have tanked. While we’re starting to see the economy in the US pick back up, our debts haven’t changed while tax revenue has fallen. To keep things going, our Federal Reserve has printed more money in the past couple months than it has in its entire history before this year!
(As an aside, “printing” in this day and age means “creating”… the Fed is loaning banks and financial institutions trillions of dollars to be able to pay their own debts).
As the money supply increases, both incomes and the price of goods and services go up, but the purchasing power of individual dollars go down. This is a huge detriment to people who have savings or who invest/trade globally.
I don’t blame them. It’s the system we have and you can’t just pretend that debts aren’t owed. The Fed has to do what the Fed has to do.
But what’s the end game here?
This just isn’t sustainable. The more we “print,” the more individual bills and coins are debased. Same thing happened in Germany before WWII. Same thing happened to the Roman Empire during their decline.
The reason I got into cryptocurrency about a month or two ago is that after years of sitting on the sidelines, unconvinced, I suddenly found myself valuing digital cryptocurrency more than our old stalwart US dollar over the long term. My trust in the US governments’ ability to enact responsible monetary policy had been eclipsed by my understanding (and trust) in the fundamentals of decentralized currency backed by blockchain technology.
So I bought some. Eventually, as the US dollar loses its value, I’ll probably shift more of my savings into various cryptocurrencies.
I’m not the only one who is feeling trepidation concerning the US dollar. Warren Buffet, one of the richest men in the world, recently pulled most (or all) of his assets out of US dollar holdings and moved them into Japanese yen… and gold (which has also seen price surges as of late). This from the guy who said:
“Never bet against America. That is as true today as it was in 1789, during the Civil War, and in the depths of the Depression.”Old quote, found here: https://horizonfs.com/encouraging-words-investing-legend/
Being Responsible for My Family
Clearly, I am not a financial advisor. I write about Jesus and teaching music to kids. When I say that you should not do or buy anything based on what I say, take it to heart. If something I say piques your interest, do your own research and come to your own conclusions. I just thought it was prudent to share what I had done.
Most of all, pray about it. I certainly did. I want to provide for my family no matter what happens. This is a small way I can take care of my family’s future. Above all, I put my faith in God, not finances.
Get wisdom—how much better it is than gold!
And get understanding—it is preferable to silver.Proverbs 16:16 (HCSB)