In 2009, a mysterious person or persons who went under the name Satoshi Nakamoto wrote a piece of software that would become the foundation of a new kind of money: cryptocurrency. For a while, bitcoin and its brethren was just a hobby for computer programmers and math nerds, but recently, it’s drawn the interest of investors, banks and governments who wonder if it might actually start competing with traditional currencies like dollars and yen. Bitcoin’s been in the news a lot lately, but if you’re like most people, you’ve probably never used it, and don’t know exactly what it is. But according to some estimates, over 16 million Americans buy and sell bitcoin frequently, and over 100,000 merchants and vendors worldwide accept it as payment. But is that enough to qualify as a currency? And should you be getting on the crypto-bandwagon before it’s too late? In a previous episode, we talked about how money is based on trust.
You trust that this dollar has value because your government says it does. You trust your bank when they tell you how much money is in your account. But cryptocurrency is unique in that there are no centralized powers–no governments, no banks–to enforce its value or track its accounting. Instead, every single bitcoin transaction is added to an encrypted ledger called a “blockchain,” that is shared publicly on thousands of computers all over the world.
Updating this blockchain involves solving a special math problem and takes a lot of computer power. Bitcoin “miners’” who create and update the blockchain and are rewarded for their work with shiny new bitcoins, each imprinted with the whole history of bitcoin transactions since the blockchain began. It’s as if this dollar bill had a written record on it of everywhere it’s ever been–and everywhere every other dollar bill has ever been. No one can counterfeit bitcoin because everyone knows exactly how much everyone else is supposed to have. Your bitcoin “wallet,” doesn’t really hold bitcoins, it’s just an encrypted key that gives you access to however many bitcoins the blockchain says you have.
Which means that, unlike a bank that will give you a new debit card if you lose yours, there’s no way to retrieve a lost key. One man in the U.K. mistakenly threw away the hard drive that had his key on it, and his $100 million worth of bitcoins are permanently trapped in cyberspace limbo, inaccessible to anyone ever. Bummer. Bitcoin’s not highly regulated, and that’s made it the go-to currency for shall we say, less-than-savory activities.
Drugs, prostitution, and other black-market items are regularly paid for in bitcoins because of the pseudo-anonymity it provides. According to a study at the University of Sydney, nearly half of all Bitcoin transactions are used for illegal activities. And new cryptocurrencies like Monero are growing in popularity as they claim to be completely anonymous. But there are other reasons why bitcoin hasn’t gone mainstream. As you’ve probably heard in the news recently, it’s really volatile. Just in the past couple years, the price of one bitcoin has gone from around $500 to almost $20,000, then back down to around $7,000.
So even if your local coffee shop wanted to accept Bitcoin, they’d have to be constantly updating the menu board prices. And because it can take pretty long to update the blockchain, your latte will probably be cold by the time you get it. So, if bitcoin isn’t really feasible as a mainstream currency just yet… why is everyone talking about it? Well, most people are interested in bitcoin not as a currency, but a speculative investment. Just like gold, tulips or beanie babies, any resource that fluctuates wildly in price will attract people who want to get rich quick. And some people do. But speculative investing is ultra-risky. Unlike a rental property or a successful business, bitcoin has no intrinsic value.
It’s a pure gamble, hoping that you can buy the thing from one sucker and sell it to an even bigger sucker for more money. And even though the number of Bitcoins is finite–the original programmers coded in a hard limit of 21 million–new crypto-currencies using blockchain are popping up every day. Maybe Monero, ZCash or Ethereum will ultimately overtake Bitcoin as the most popular cryptocurrency.
Some experts even believe that crypto might become adopted by governments some day. So, if you’re thinking about investing in bitcoin, you should ask yourself the same things any speculative investor would: Do I really understand what I’m buying, and can I afford to lose my entire investment? If the answer to either question is no, it’s probably best to steer clear. Maybe someday we’ll be using cryptocurrency to rent hoverboards on Mars, but today, it’s popularity is based more on its potential than its practicality. Unless you’re an international criminal, in which case… cut it out. And that’s our two cents! .