There are other variations of the same question: is crypto really a Posture, can i use it to buy stuff from my neighborhood grocery store, If it is a currency, why are people buying and selling it?
Honestly, it is extremely difficult to explain the technical aspects of crypto to a layman. One is because the technical aspects are technical. And two, because middle-aged and senior citizens already have a certain view of money, which is very physical.
Take something as simple as cash. You keep paper notes in your pocket and spend when you need it. Digital forms of money also have a certain physicality attached to them. Take the case of debit cards only. When someone spends money using it, he is not actually paying cash. However, the debit card itself is a physical thing. Also the money spent with the debit card is earned and deposited in the bank account.
or take the case of all payment apps, They are eventually linked to a bank account. And a bank is a physical thing, at least in people’s minds, even though a lot of banking nowadays happens digitally.
So, here’s an attempt to understand and explain the mystery cryptocurrency For the common man, especially, people who are senior citizens, such as my aunt and my mother. But before we get into the specifics, it’s important to understand how it all started in the first place.
From 2000 to 2006, a huge real estate The bubble has formed in the US and much of the western world. The bubble grew so large that when it burst in late 2007 and throughout 2008, it threatened to pull down some of the world’s largest financial institutions along with it, and few did. Lehman BrothersThe investment bank, the fourth largest on Wall Street, went bankrupt in mid-September 2008.
The weak position of financial institutions after the crash created a situation where Western economies were looking at an economic slowdown. To prevent this, central banks led by the US Federal Reserve started printing a lot of money. Between the beginning of September and the end of December 2008, the Federal Reserve printed more than $1.3 trillion. Other central banks such as the European Central Bank and the Bank of England soon joined the money printing party. A few years later the Bank of Japan came.
The idea was to flood the system with money, lowering interest rates and hoping that people and corporates would borrow and spend more, spurring economic growth in the process.
Historically, paper currency has almost always been backed by some kind of commodity. By 1913, before World War I began, most paper money was backed by silver and gold, which originally meant that citizens could exchange paper money for a certain weight of silver and/or gold . Therefore, the ability of governments and central banks to make money out of thin air by printing it was largely limited, as people could convert their paper money into gold and/or silver. And there was so much gold and silver going on all around.
Many countries in Europe suspended this convertibility when they had to fight World War I, in order to finance the high expenditure by printing money only. Before World War II ended, 730 delegates from 44 countries met at Bretton Woods in the US state of New Hampshire to discuss and implement a new global monetary system.
The system that emerged had the US dollar at its center and backed by gold. Other countries had the option of converting their dollar hoarders into gold by presenting those dollars to the US Federal Reserve. However, in 1971, the then US President Richard Nixon put an end to it.
What evolved from this was the pure paper currency or fiat currency system. Essentially, today’s money is not backed by anything other than a guarantee by the government.
If a government prints too much money, economic theory states that it is likely to lead to high inflation. The point is that while the money supply has grown exponentially, the supply of goods and services it can buy has not. In this scenario, the only way the economic system can adjust is to increase the prices of goods and services, and that is inflation.
There was a greater fear of inflation in the value of the currency than the amount of money that Western central banks printed after September 2008.
Enter Satoshi Nakamoto
Satoshi Nakamoto invented the first cryptocurrency, bitcoin. It is not known who he, she or they are. As Jacob Goldstein writes Money – The True Story of a Made-Up Thing: “Satoshi Nakamoto could be a cyberpunk living in an underground bunker in New Zealand or an executive officer in a bank in London. He could be a priest or he could be a criminal or he could be a criminal or they want to take over the world. There may be a cable plan for it.”
Nakamoto did not like the privilege that is reserved for government-backed central banks, which can make money from the air. As Nakamoto said in a blog post: “The fundamental problem with traditional currency is all … central banks must be trusted not to deface the currency.”
To counter this, Nakamoto invented bitcoin, a new form of money based on cryptographic techniques as “a piece of software … written in the programming language C++.”
As Ishwar Prasad writes future of money: “Cryptography, or covert writing, usually involves the encryption of the message by the sender and the decryption of the message by the recipient.” The idea was to create a form of decentralized money that could be based around a government-controlled paper money system. The first block of bitcoin was created on January 3, 2009 – just a few months after the world began mass printing money.
Furthermore, unlike paper currency, the total amount of bitcoin that can ever be created is limited to 21 million units. The creation of new units of bitcoin halve every four years. In addition, modern paper currency primarily operates on trust. As citizens of a country, we trust that when we use paper money to pay for something, it will be accepted. This confidence stems from the government guaranteeing it.
So, where was the confidence going to come from in the case of bitcoin? As Prasad writes: “Trust is created by making certain aspects of transactions transparent and visible to all.” Goldstein puts it very simply, where he says: “The dream of bitcoin is that you don’t have to trust the government, or a bank, or Satoshi Nakamoto; you just have to trust the code.”
Over the years, bitcoin attracted the attention of technocrats and, given that no government or regulator was involved, anyone with enough technical ability could launch a system similar to bitcoin and that’s exactly what happened. According to the database Statista, the number of cryptocurrencies in the world stood at 7,557 in November 2021.
medium of exchange
The basic idea behind bitcoin and other cryptocurrencies was to create a money system that centers around a government-based fiat money system. Hence, the word currency got associated with them. But over the years, it has become a misnomer.
Bitcoin, in particular, has been very popular for making payments in illegal commerce – everything from terrorism financing, human trafficking and money laundering.
But bitcoin or any other cryptocurrency for that matter has not managed to emerge as a medium of exchange in everyday life. For a whole group of people, including senior citizens, it is very difficult to imagine cryptocurrencies as money that they can use to make payments in everyday life. Second, all said and done, it is easier to trust the government in most countries than other entities.
Third, there is a very fundamental problem with the way cryptocurrencies are structured, which limits their ability to process payments at high speeds. As William Quinn and John Turner write Boom and Bust—A Global History of the Financial Bubble,[Bitcoin’s] The popularity highlighted the inability of its system to process large numbers of transactions, resulting in long delays in transferring bitcoins and substantial transaction costs. The impossibility of reversing mistakes made it impractical.” The bitcoin network can handle about seven transactions per second. Visa can handle 65,000 transactions per second. The good news is that the new cryptocurrency is trying to solve this problem. So, in that sense, you cannot use crypto to do everyday money transactions.
For years, people have put their savings in bitcoin and other crypto, and have turned it into a method of investment and a form of speculation – by betting on its price movement. For bitcoin aficionados, bitcoin is like digital gold and a store of value.
Gold has been a popular store of value as its supply grows at a steady rate every year. There is no way a government can suddenly increase the supply of gold like it can with paper money. In this respect, bitcoin is like digital gold. Its supply only grows at a constant rate and is capped at the upper end.
This became the theoretical argument for owning bitcoin. Governments around the world were depreciating paper money by printing more and more. Therefore, buying bitcoins makes sense. This increased its price. Of course, after some time, as in the case of any other form of investment, the theoretical logic didn’t really matter and people invested because they saw prices rise for a period of time.
The success of bitcoin affected other cryptos as well. And this is where the whole logic of bitcoin being digital gold breaks down. While there is a limit to the total number of bitcoins, there is no limit to the number of other cryptos that can be launched.
As noted investor Ray Dalio said in a note on bitcoin: “Competition will play a role in determining bitcoin and other cryptocurrency prices. In fact, I think better people will come along and displace it because that’s how everything else.” develops.” So, in the coming years, while gold will still be around, we can’t really be all that sure about bitcoin.
As shown by Statista data, in July 2021, the number of cryptocurrencies stood at 6,044. In August, that number had fallen to 5,840. Investors who disappeared into crypto would have lost money.
Right now, when it comes to crypto, many people are suffering from FOMO, or the fear of missing out, fueled by all the ads promising easy money.
So, should middle-aged and senior citizens fall for it and enter the easy money bandwagon? Consider the period between November 6 and November 13. As of November 6, the price of one bitcoin was $60,163.8. On November 10, it touched a price of $68,789.6—up 14% in just four days. By November 13, the price had fallen by 8% to $63,303.7. Many such examples can be given. When it comes to many other cryptos, their volatility is even higher. So, clearly, investing in crypto is not for the weak-hearted.
Furthermore, the typical argument offered by bitcoin aficionados is that even if bitcoin prices fall sharply, they tend to go up again. While this is true, past performance is no guarantee of future performance.
In all of this, don’t forget the oldest cliché in investing: Don’t put all your eggs in one basket. If you are investing in crypto, make sure it is a very small part of your overall portfolio.
Also, keep in mind that crypto has nothing to do with government, as the word currency seems to imply. And finally, there is a lack of clarity on the regulatory structure as well as the taxes that will have to be paid on gains from buying and selling crypto.
Vivek Kaul is the author of Bad Money.
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