4 Comments

1. 

   Petrea Mitchell on March 23, 2018 at 4:08 pm

   I’m not a stupid person and I keep trying to understand cryptocurrency and how it’s created and I keep on not getting it.

   Are you open to people in your comments attempting to explain cryptocurrency?

   • 

     Natalie Luhrs on March 23, 2018 at 4:29 pm

     I am! I really hate that I can’t seem to get it.

2. 

   Petrea Mitchell on March 24, 2018 at 11:13 am

   Okay, I’ll take a whack at it. First, as you no doubt already suspect, the market for pretty much all cryptocurrencies other than Bitcoin comes from people looking at Bitcoin and going, “Hey, people got rich with that thing! We should build something like it!” and then other people going, “Hey, people got rich buying that thing! We should buy something like it!”

   Regarding Bitcoin itself, I’m sure you’ve already read ’til your eyes were bleeding about how it already has all the necessary properties of money, such as portability, having a limited supply, people willing to use it, etc. But another crucial part of a currency gaining, um, currency is that there has to be a niche no other one is able to fill. This is taken as read with physical currencies, because they’re usually issued by entities that can use laws and force to suppress the use of other currencies and encourage the use of its own.

   The niche Bitcoin filled was that it provided a reliable currency operating entirely outside the reach of financial regulation. Banks and merchants are subject to laws about who they can do business with, and other laws requiring them to report certain things that are done with money (such as on tax forms, or like the law in the US that requires banks to report transactions involving $10K+ in cash). Bitcoin has no such restrictions or obligations. If you bought Bitcoin, until recently, all your bank knew was that you had given money to someone online. Bitcoins being exchanged for goods and services were so much random Internet noise as far as financial regulations were concerned.

   So Bitcoin had huge appeal to people who wanted to buy things through an alternate financial system: either because what they wanted was difficult to purchase with regulated currencies (usually because it was illegal), or because they were attracted to the idea of not having The Man watching their every move. (Bitcoin transactions are actually completely public– that’s what’s in the blockchain– but they’re between pseudonymous entities that are theoretically hard to match up with real people. I say “theoretically” because most people are terrible at security.)

   “Well, then,” you are likely to be saying by now, “can you explain to me how this is different from money laundering? Because this sounds a lot like money laundering.” Well… that’s because it is. The actual value that backed Bitcoin up when it was launched and started propelling it to its current dizzying heights is that it was a useful tool for money laundering.

   It has grown beyond that by now, of course. Now that respectable merchants are starting to accept it, and financial regulators are starting to pay attention to it, if it can survive its growing pains, it may be able to take a place long-term as a currency that everyone accepts as real. But at the same time, as it becomes part of the regulated financial system, the invisible magic that originally drove it will evaporate (i.e. it’ll get a lot harder to launder money with it), and it’ll become just another boring currency offering boring returns to investors.

   I believe you are correct to predict that a painful bubble-popping lies between now and that boring future.

   • 

     Natalie Luhrs on March 28, 2018 at 8:38 pm

     Ohhhhh, I get it now! I think it was the money laundering part I was getting hung up on because I guess I don’t think like a criminal.

     Thank you so much for taking the time to explain.