Revisiting Cryptocurrencies

[buddyhu]

We've had a few threads about crypto in recent years. Here's something that Paul Krugman wrote recently...I'll be interested in reading the replies to this.



By Paul Krugman
Opinion Columnist
"Last week TerraUSD, a stablecoin — a system that was supposed to perform a lot like a conventional bank account but was backed only by a cryptocurrency called Luna — collapsed. Luna lost 97 percent of its value over the course of just 24 hours, apparently destroying some investors’ life savings.

The event shook the crypto world in general, but the truth is that this world was looking pretty shaky even before the Terra disaster. Bitcoin, the original cryptocurrency, peaked last November and has since declined by more than 50 percent.

Here’s one way to think about that decline. Almost everyone is concerned about the rising cost of living; the Consumer Price Index — the cost of a representative basket of goods and services — has gone up about 4 percent over the past six months. But the cost of the same basket in Bitcoin has risen around 120 percent, which means inflation at an annualized rate of about 380 percent.

And other cryptocurrencies have performed far worse. Two cities — Miami and New York — have introduced their own cryptocurrencies, with enthusiastic support from their mayors. MiamiCoin is down more than 90 percent from its peak, and NewYorkCityCoin is down more than 80 percent.

By now, we’ve all heard of them, but what exactly are cryptocurrencies? Many people — including, I fear, many people who have invested in them — probably still don’t fully understand them. Saying that they’re digital assets doesn’t really get at it. My bank account, which I mainly reach online, is also a digital asset, for all practical purposes.

What’s distinctive about cryptocurrencies is how ownership is established. I own the money in my bank account because the law says I do, and the bank enforces that legal claim by requiring, one way or another, that I prove that I am, in fact, me. Ownership of a crypto asset is established through what’s known as the blockchain, an encrypted (hence the name) digital record of all previous transfers of ownership that supposedly obviates the need for an external party, such as a bank, to validate a claim.

What’s the point of this kind of decentralized finance, and what purpose does it serve? Well, I’ll get to all that.

Though cryptocurrencies are currently way down, boosters — and as anyone who’s played in this space can tell you, there are few boosters quite as boosterish — will reassure you that this has happened before. Bitcoin, in particular, has always bounced back from previous dips, and investors who HODLed (held on for dear life to their coins, despite falling prices) have ended up with huge capital gains. But there are reasons to believe that this time may be different.

In the past, cryptocurrencies kept going up by attracting an ever-growing range of investors. Crypto was once held by a small clique that often had the feel of a cult, motivated in part by a combination of libertarian ideology and fascination with the clever use of technology. Over time, rising crypto prices drew in large numbers of additional investors and some big Wall Street money.

And in the past year or so, crypto marketing has gone really mainstream, with endorsements from celebrities — including Matt Damon, Kim Kardashian and Mike Tyson — not to mention political figures like Mayor Eric Adams of New York and the (unsuccessful) Republican Senate candidate Josh Mandel, who declared his intention to make Ohio “pro-God, pro-family, pro-Bitcoin.” Given all this, it’s hard to see who else there might be to recruit into crypto investing.

One disturbing aspect of this marketing push, by the way, is that those who bought cryptocurrencies relatively recently — and have therefore lost a lot of money in the crypto crash — probably consist disproportionately of the kind of people most likely to be influenced by celebrity endorsements. That is, they are probably poorer and less sophisticated than the average investor and badly positioned to handle the losses they’ve taken over the past few months.

In any case, as we look forward, the value of cryptocurrencies will have to rest on their underlying economic uses, which are …

Well, that’s just the thing. I’ve heard many discussions in which crypto supporters have been asked exactly what economic role crypto can play that isn’t more easily and cheaply achieved through other means — debit cards, Venmo, etc. Other than illegal transactions, in which crypto may sometimes offer anonymity, I have yet to hear a coherent answer.

As it is, cryptocurrencies play almost no role in economic transactions other than speculation in crypto markets themselves. And if your answer is “give it time,” you should bear in mind that Bitcoin has been around since 2009, which makes it ancient by tech standards; Apple introduced the iPad in 2010. If crypto was going to replace conventional money as a medium of exchange — a means of payment — surely we should have seen some signs of that happening by now. Just try paying for your groceries or other everyday goods using Bitcoin. It’s nearly impossible.

And then there’s El Salvador, which tried to force the process by making Bitcoin legal tender and heavily promoting and subsidizing its use, in an attempt to make it a true medium of exchange. All indications are that the experiment has been an abject failure.

But can crypto really have become such a big deal without any clear economic rationale other than pure speculation? Can it really be just a bubble inflated by FOMO, fear of missing out? Those who question crypto’s purpose are constantly confronted with the argument that the sheer scale of the industry — at their peak, crypto assets were worth almost $3 trillion — and the amount of money true believers have made along the way proves the skeptics wrong. Can we, the public, really be that foolish and gullible?

Well, maybe the crypto skeptics are wrong. But on the question of folly and gullibility, the answer is yes, we can."

[Gitfiddlemann]

Cryptocurrency on its own is hard enough to conceptualize,


But throw in there a multitude of choices,


And the net result, at least in the near term, will be continued risk and uncertainty.
I don't see that changing soon until a grand plan emerges that makes financial sense and that most people can follow.

[RP]

From my totally naive perspective as a 72 year old, cryptocurrency is like high-tech monopoly money. As long as you're in the game, the money has value. However, once you leave the game, it has no value...

[tbeltrans]

Though I understand the underlying technology (i.e. the mechanics), I can't claim to understand how cryptocurrency works in terms of what dictates its value at any given moment, nor its long term stability if that is even real.

My attitude is simply not to invest in something I don't understand. This applies to most anything, not only cryptocurrency.

Tony

[elephony]

I don't think it's quite true that speculation is the sole purpose of cryptocurrency; it's also used in places where conventional banks are unwilling to get involved, specifically ransomware, drug dealing, and other such areas. This is a long but good overview that I coincidentally just read. The gist, basically, is that cryptocurrency is valuable if you're dealing in money that banks won't touch or running a Ponzi scheme, but otherwise it's in basically every case a trap and you'd be better served staying well away.

[ewalling]

It's interesting just how quiet the News in Miami has been about recent events regarding crypto.

[David Eastwood]

Originally Posted by tbeltrans

Though I understand the underlying technology (i.e. the mechanics), I can't claim to understand how cryptocurrency works in terms of what dictates its value at any given moment, nor its long term stability if that is even real.

My attitude is simply not to invest in something I don't understand. This applies to most anything, not only cryptocurrency.

Tony

This, and other comments, pretty much sums up my view of crypto also. I'm staying well away.

There are many similarities to the infamous South Sea Bubble of 1720, notably (emphasis mine):

"Stocks sold well and in turn generated higher and higher interest, pushing up the price and demand for stocks. By August 1720 the stock price hit an eye-watering £1000. It was a self-perpetuating cycle, but as such, lacked any meaningful fundamentals. The trade had never materialised, and in turn the company was just trading itself against the debt that it had bought."

Full story here:
https://www.historic-uk.com/HistoryU...th-Sea-Bubble/

[JonWint]

Originally Posted by buddyhu

...........Luna lost 97 percent of its value over the course of just 24 hours, apparently destroying some investors’ life savings............

Crypto is one of those investments that you shouldn't invest more than you can afford to lose (not your life savings). I'm 70 years old and have 1% (previously 2+% before drop) in crypto. It's enough to keep me interested.

I purchased most of it in 2018. Gain to date is 250% and was as high as 550%.

One family member was in Ethereum from the beginning in 2014. From $2000 to multi-millionaire. Three quarters of it was periodically sold on the way up and invested in stock funds.

Can massive gains be realized again in ICO's or current coins? Maybe?

Now is a time to buy Ether and Bitcoin at a deep discount.

[Bob Womack]

I think I may have found where the real earning potential in bitcoin exists: A friend of my son heard about an investment opportunity and took advantage of it. He built an Internet server to spec and had it certified, set it up with an uninterruptible power supply, and applied to one of the bitcoin organizations. He was accepted. The company moved into his server and now and it sits quietly processing bitcoin transactions and generating income for him around the clock. Within the system at large, bitcoin consists of nothing more than encrypted transmissions. All that encryption and decryption is incredibly expensive in machine cycles so it is all farmed out to servers owned by individuals all over the country and world, ensuring that the processing load can be carried and that it is diversified for security and reliability.

This guy was smart enough to see the demand coming. He asked a few questions and became a part of the system.

Bob

[raysachs]

I see, or saw, the potential value of crypto as an alternative currency, but as Krugman and others have pointed out, the only situation where it's preferable as currency to, you know, CURRENCY, is for fundamentally shady or outright illegal transactions that normal banks won't touch. But as in investment? There's no there there, unless you look at it as a Ponzi scheme that you got in on early enough to make a bundle on the backs of the suckers who waited too long but got in anyway. I have a son in law who, despite my advice, took some "play money" (his description) and invested in crypto a little over a year ago. He was real big on it for a while, but I haven't heard anything else about it in some time, so I think he was one of the buy high / sell looooow victims of it. Too late to the party, err Ponzi. I sincerely hope he's learned his lesson. Fortunately, my daughter handles the bulk of the finances in the family and I think she was OK with him taking an amount they could afford to lose to find out what he didn't know with.

Me, I stay faaaaar away from it... I learned my lesson full and well with some bad investments in my youth, but they were just bad investments - stocks that didn't work out. Learned to trust a financial advisor who understood the fundamentals of markets and companies and played a long game. I don't even consider crypto a bad investment - it's a different thing entirely...

-Ray

[Murphy Slaw]

Fiat money is shaky enough.

Crypto is like a pipe dream.

[imwjl]

Originally Posted by Bob Womack

I think I may have found where the real earning potential in bitcoin exists: A friend of my son heard about an investment opportunity and took advantage of it. He built an Internet server to spec and had it certified, set it up with an uninterruptible power supply, and applied to one of the bitcoin organizations. He was accepted. The company moved into his server and now and it sits quietly processing bitcoin transactions and generating income for him around the clock. Within the system at large, bitcoin consists of nothing more than encrypted transmissions. All that encryption and decryption is incredibly expensive in machine cycles so it is all farmed out to servers owned by individuals all over the country and world, ensuring that the processing load can be carried and that it is diversified for security and reliability.

This guy was smart enough to see the demand coming. He asked a few questions and became a part of the system.

Bob

That's really being a service provider and a bit removed from it having function, use or value. Still, that is a lot of commerce and a long-running function we've had in modern society. All sorts of businesses are there just as service elements.

Servicing is a good way to make a living. I think of how I worked for an Internet telephony startup. That particular firm crashed but applying the tech skills used and needed there broadly has been a good living.

Originally Posted by Murphy Slaw

Fiat money is shaky enough.

Crypto is like a pipe dream.

I don't know how it is like a pipe dream when it exists and has utility or function.

For the controversy I think it is best to just consider the speculation or gambling elements here and maturity. That speculate and gamble part draws people to lots of things that are both okay and unhealthy. We don't have a mature market yet. For example, count how many types of currency or notes we had early in our history or how many automobile makers we had near the beginning vs now. Lots of people got burned in those days.

[buddyhu]

Originally Posted by imwjl

For the controversy I think it is best to just consider the speculation or gambling elements here and maturity. That speculate and gamble part draws people to lots of things that are both okay and unhealthy. We don't have a mature market yet. For example, count how many types of currency or notes we had early in our history or how many automobile makers we had near the beginning vs now. Lots of people got burned in those days.

I don’t see how we can liken cryptocurrencies to automobile makers. I’d love to be educated about this view if you think it clarifies something.

I do see how crypto is analogous to the situation in our country’s early history, where many currencies were produced by states and eventually by the federal government, BUT, no crypto is backed by a government, which seems like an important distinction.

Regardless, people using currencies that stopped being produced often had time to trade in their currencies for the “new standard”, just as folks had a chance to trade silver certificates for “regular” dollars when silver certificates stopped being issued. And if you held on to an old currency or a silver certificate, you had a chance that it might be collectible some day. And o bet no one held onto large sums of money in a currency that stopped being produced.

It seems like people who buy large amounts of crypto are somehow imagining that they will get rich. I doubt that was true in the early days of our country as folks held local currencies. They used them exclusively in pragmatic ways.

[Mr. Jelly]

I look at economies and currency's as being founded on faith. Without that they fail. There doesn't appear to be anything that can shore up faith in cryptocurrencies. Without that they are bound to fail in the long run. IMO

[Murphy Slaw]

Originally Posted by imwjl

I don't know how it is like a pipe dream when it exists and has utility or function.

If it lost 50% of its value since Nov., does it really exist?

Maybe it halfway exists...

Does it function when the power is out?

I drove through a Popeyes last night and the lady said "Cash Only", the internet is down."

I had cash. No problem.