CRYPTO — WILL THE INTERNET BLOW UP?
Accepting cryptocurrency as real in the same way we think of GOLD essentially comes down to accepting that the Internet is real.
If you cannot hold something in your hand or see it, does it exist? In other words, is it possible it will just vanish like it was never there? Could the Internet vanish?
Crypto-currency does not have a physical existence. So what, exactly, is crypto?
Think of a cryptocurrency “coin” as a file you have saved on your computer and used by a program called a “wallet”.
Each “wallet” has a unique identifier. The wallet owner can also save a backup of it on an external device (called cold wallets), and you can write down your wallet’s address on a piece of paper and keep it in a safe place. So if your laptop blows up tomorrow, you can still access your wallet.
(1) The “coin-file” contains a unique code that identifies the coin as belonging to the wallet, which also has a unique code. These are encrypted codes.
(2) That code is copied and shared with all the other wallets on all the other devices out there. So your coins and wallet are chained to all the other coins and wallets.
(3) If you buy something with your coin, or give it to someone else, the code is updated so everyone knows which wallet now owns the coin.
(4) Your coin, therefore, exists everywhere all the time.
(5) The process of buying/selling a coin is verified by validators. These are programs on computers that check to confirm the coin-wallet relationships and then publish the updates. All the validators have to agree with each other. If there is one validator that does not agree, then the coin does not change hands.
Think of it like this — each dollar bill has a unique serial #, and imagine that each serial number is tied to your bank account, and this is true for everyone. So a transfer of money means checking the serial numbers of all the dollar bills and making sure the accounts match up. This is done by many validators, and if they disagree (no consensus) then no money changes hands.
If a validator tries to cheat, they get caught and are punished. To be a validator you must first put up all your own assets, and you cannot validate more than the value of the assets you have. (this is the “proof of stake” method).
So let’s say I am a validator, and I have put up 32 ETH as collateral (this is the minimum amount, about 153,000 USD). I am not allowed to validate more than 32 ETH. If I try to cheat and steal some of the coins, I am caught and I lose my collateral (and the transaction fails — the owner keeps the coins).
Likewise, if someone tries to HACK the transaction code, the validation process fails.
Validators are assigned randomly to transactions. That way sellers or buyers can not work in cahoots with a validator. Even if this was possible, each validator is checking on the other validators.
Validators are also chosen by scale, so there is no significant advantage to putting up colossal collateral, or you don’t lose out with the minimum collateral of 32 ETH.
The way validators make a profit is through incentives — small fees taken from the transaction. A similar idea to bank fees.
(6) So coins and wallets are permanent. The only way they would vanish is if the Internet blows up simultaneously with every single electronic device, including all the cold wallets and pieces of paper with the wallet addresses written on them.
Thus, with crypto, there are some considerable barriers to general acceptance:
(1) People know that files on a laptop can get deleted, lost, damaged, so it makes sense that there is hesitancy to put faith in cryptocurrency since they are digital, like files.
(2) Perceptions that crypto is used for criminal activity. In reality, using a wallet to hold crypto gained illegally would be stupid as it is easily traced (as has happened). Some criminals are stupid.
(3) People know about “hackers” and worry that someone can hack into a wallet.
(4) There are people out there who are crooked and running scams using crypto, just as there are crooked people running scams with real money (know as fiat).
(5) To accept crypto you have to accept that the Internet is real, the same as you accept gold is real. It’s a shift in thinking. it is also why the younger generation, who have grown up in a digital reality, have fewer issues with cryptocurrency.
(6) There is a lot of hype and excitement around crypto that makes it look like a Ponzi scheme, with tons of YouTubers making huge price predictions and creating a sense of FOMO (fear of missing out).
(7) Since it is not that hard to create a new coin, some of the coins being created are done for a laugh and not intended to be taken seriously. Think of them like monopoly money. When people hear about these it makes the legitimate coins look fake.
(8) There is an environmental impact of BITCOIN and other proof-of-work coins. To understand this means to understand how mining works in proof-of-work validation systems. Essentially in order to validate a transaction, you need a super-powerful computer that requires huge amounts of electricity. To be less environmentally damaging, some mining companies are located in places like Iceland with easy access to renewable energy (example: https://www.hiveblockchain.com/operations/iceland/).
Note that some coins use proof-of-stake (collateral), which does not have this huge energy requirement. ETH is moving to POS soon (estimated Jan-March 2022).
(9) Regulation/Tax — governments and banks do not like the idea of cryptocurrency as it moves wealth out of banks and into wallets. Some governments have banned the currency (e.g. China). This adds to the perception the currency is illegal, criminal, and somehow ‘bad’. There is also the worry that you will lose your crypto-coin because the government will not allow you to own any. Perhaps governments will tax your wallets. This is currently impossible with the way the wallets and coins are coded, but there is a doorway through the “exchanges” and the KYC rules (know your customer).
(10) Exchange Failures — an exchange is a company that allows you to use traditional money to buy crypto. Some businesses have failed, the most famous example being Mt.Gox, one of the earliest exchanges for Bitcoin. In 2014 hackers stole about 815,000 bitcoin, and the exchange filed for bankruptcy. Exchanges today are more stable and steps are taken to prevent such events, but the existence of just one event can tarnish the reputation of crypto.
Signs of Changes and Adoption
The tangible happiness of holding gold in your hand is important to people, but once you make that mind-shift crypto becomes real. There are signals and signs that this is happening.
Like gold, the value of a coin depends on supply and demand. Gold has held value over time because people want to own it, and they want to own it because it holds value over time. Also, there is a limited supply of gold, which helps to boost the value.
Most cryptocurrencies work in a similar way. Bitcoin, for instance, has been designed with limited supply, and only 21 million coins will be created. At the time of this article, 90% (almost 19 million) of coins have been “mined”.
Ethereum does not have a limit on the total number of coins, but the code is designed to “burn” a certain percentage of coins in order to limit availability relative to demand. This is taken from the fees, not from people’s wallets.
When investment companies and corporations began investing in cryptocurrency instead of gold and other assets, it was a signal that digital currency was real. Goldman Sachs, ARK Investments, and TESLA are examples of this. When you see people with knowledge about financial systems investing in cryptocurrency, legitimacy is added to the equation.
Measuring “market cap” is another sign. This is essentially looking at all the money that currently exists in the world, and where it is being invested. Over time, there is less being invested in gold, stocks, and investment funds, and more being invested into cryptocurrency. I found it hard to find clear data on this, but the estimate I read said there currently exists about 20 trillion USD, and there’s about 3 trillion USD worth of cryptocurrency. (source).
Finally, cryptocurrencies contain some social benefits:
(1) For places where people do not have bank accounts and are living day-to-day, a government could opt to give them wallets with some coin. This is akin to having a bank account, a place where you can save your money for investment and opportunity. This has happened already (El Salvador).
(2) Decentralization — when you put your money into a crypto wallet instead of a bank, you no longer need a bank account. Since crypto is digital gold, its value will increase over time. A $100 deposit will be worth less ten years from now due to inflation, but a $100 crypto coin deposit will increase in value, the same as gold does. Plus, with your crypto wallet you have the option to earn interest of 5–12% through “staking”. Crytocurrency, therefore, levels the financial playing field somewhat and is a way out of poverty issues.
(3) The code that is used for digital coins can be used for other assets and things. This is the idea of an “NFT” — essentially it is a coin tied to something of value: a piece of art, a song, a condo, Liverpool FC, etc. When you buy the NFT you own that item or a piece of it.
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