Cryptocurrencies

[Humble Scribe]

This is just me indulging my curiosity, but it's not the kind of thing I can bring up on most of my other social media profiles, which each have their defined purpose and audience. Elliquiy strikes me as somehow freer and I enjoy the quality of debate here.

So... basically whenever I see opinions on Bitcoin, Ethereum etc they're pretty polarised, between libertarian techbros ("it's the future, man!") and social liberals ("it's a Ponzi scheme that's destroying the planet!"). I think really, I'm trying to decide which side of the fence I come down on, but I also feel that maybe there's a middle ground there that doesn't seem to get much of an airing, and I'm interested in trying to tease that out somehow.

Firstly - I do agree that NFTs are a ridiculous idea. I think Stablecoins are, at best, unregulated banks holding fictional assets and at worst pure money laundering schemes. I think memecoins are worthless junk and you're welcome to trade them, but I'll steer clear, thanks. I think blockchains are a clumsy technology that scales poorly, and Decentralised Finance is largely a pipe dream. I don't think governments are inherently evil, I don't mind paying taxes, and I don't want to create a libertarian utopia, because it will become overrun with bears. I don't want to tokenise my entire existence. I know that most crypto markets are manipulated by large holders for their own financial benefit. I agree that Proof of Work blockchains are doomed to collapse under the weight of their own geometric progression of computation (and associated transaction fees), and while Bitcoin's precise environmental footprint is contested, it's clearly not a good thing in a world struggling to contain climate change, and this is likely to lead to BTC and ETH (assuming the latter never makes it to ETH 2.0) being regulated into submission. Usability is also a major issue - making sure you get every character right in a wallet address, and god forbid that you ever lose your wallet keys.

But. Something about the simplicity of the concept and its ability to work outside of barriers still appeals to me. I first bought Bitcoin back in about 2016, just to see what the fuss was about. In 2017 I had a falling out with PayPal and effectively got permanently locked out of eBay payments, which made me realise the largely unregulated power held by some of these corporations, to which there is no comeback. Then I discovered that a lot of merchants on eBay were willing to accept BTC as an alternative - back then transaction fees were a few cents rather than $50 a pop. So I genuinely used it as a currency for a couple of years. I bought rare and out of print books, a set of poker chips... all kinds of stuff. If I'd actually held on to all of the BTC I bought back then, I'd be a very much richer man today, but there we go. It just kind of worked. I don't get that impression from Bitcoin or Ethereum these days. The transaction fees have got out of hand because they've become a victim of their own success. They are no longer really viable as everyday currencies (and the Bitcoin blockchain only updates every 10 minutes - fine for buying online, but you can't exactly hang around at the till in a shop waiting for enough confirmations of your purchase from miners). They have become pure stores of value - digital 'gold' (with many of the same drawbacks as gold). Yet I still get that feeling from Proof of Stake coins like Solana and Cardano that they can potentially live up to some of the hype. They do actually work as currencies, they don't destroy the planet... I know they're mostly used for buying NFTs right now, but I could genuinely see them becoming something that has utility in both the digital and real worlds, and it pains me a little that they are lumped in with all of the NFT nonsense and scamcoins and dismissed. I think there's the kernel of an idea there, though again I can see governments not liking anonymous transactions (and the likes of Visa and Mastercard not liking the competition) and trying to force/regulate them out of existence.

I'm not sure I really have a point here, except that I'm interested in discussing the subject generally to try and clarify my own thoughts on the matter, if anyone else is interested. As the saying goes: "the great joy in argument lies not in discovering other people's opinions, but one's own."

[Azy]

A friend introduced me to it all last year.  I played around with it some.  It probably kind of is the future because bitcoin is being used in more places by more people, even countries for international trade I have heard.  I had some bitcoin and a few others for a while, and I made some money.  Then high profile people started publicly getting into it, and everything seems to be going to hell.  It wasn't that long ago bitcoin was pushing 51k, but last I looked it's down to 48k.  I would go with some of the financial experts who weighed in on it and say it's probably fine to get into, but I wouldn't put more in than you can afford to lose should things take a bad turn. 

[Humble Scribe]

A friend introduced me to it all last year.  I played around with it some.  It probably kind of is the future because bitcoin is being used in more places by more people, even countries for international trade I have heard.  I had some bitcoin and a few others for a while, and I made some money.  Then high profile people started publicly getting into it, and everything seems to be going to hell.  It wasn't that long ago bitcoin was pushing 51k, but last I looked it's down to 48k.  I would go with some of the financial experts who weighed in on it and say it's probably fine to get into, but I wouldn't put more in than you can afford to lose should things take a bad turn.

It's not so much the investment/price angle I'm interested in here, though that's interesting too. It's a casino, I know - I was fortunate to have some spare cash last year and ended up buying a basket of BTC, ETH and SOL and a couple of others. I made some money last year and then saw my profits vanish since October (I'm still ahead, but barely) - I'd dream of $48k BTC, but it went to $33k and has only recently struggled back to $41k. But it's ring fenced from my pension and apartment and other, you know, sensible investments. If it vanishes I'll be gutted but not broke. On the other hand, if it goes mad I'll have a nice extra.

What I'm more interested in is the longer term future. Can cryptocurrencies work, or are they doomed to fail under the many issues I mentioned in the OP?

[Azy]

I think it's a little too early to tell, which is why I stand on dipping my toe in, but not going all in.  Everyone thought it was the next great thing, but a few comments from some rich guy sent everything crashing, and really nothing did well.  Making it on the news seems to kill value. 

[Oniya]

I've read a few articles about crypto over the past 24 hours - mostly prompted when an IT friend of ours explained that crypto is the reason that GPUs are ridiculously expensive right now.  (Turns out that designing processors to handle graphics well also enables them to handle the whole 'hashing/mining' thing well - so all the GPUs are being put into warehouse-sized mining rigs and hopefully not catching fire.)

Just going to plop a few of those articles in here, with a little commentary.

https://www.vice.com/en/article/xgdvnd/the-nft-ecosystem-is-a-complete-disaster  - Among other things, talks about how crypto is rife with scams (also known as 'rug pulls')

https://www.vice.com/en/article/93bqap/viral-wtf-crypto-coin-launch-immediately-devolves-into-chaos-pain - an example of a crypto that ended up being essentially a Ponzi scheme, as well as an explanation of how the system was being gamed.

https://www.investopedia.com/tech/how-does-bitcoin-mining-work/#toc-what-is-bitcoin-mining - Probably the most informative, but was further back in my history.  This article includes a graph of the amount of energy that's being used purely for bitcoin mining - it's approximately equal to the energy usage of a small industrialized country.

[TheGlyphstone]

I don't know a whole lot other than the basic surface layman's impression, but what I do know leaves me deeply skeptical as to its long-term viability as a model of currency. The fundamental basis of worth for currency was originally scarcity - at first literal precious metals, then paper backed by reserves of precious metals. That, in turn, evolved into the fiat currency of today where the paper is 'backed' by the economy and global financial reputation of the issuing nation, scarcity in another form. I can at least understand the idea of these, even if the nuances of how their value is maintained escape me and my non-existent finance degree.

Cryptocurrencies, though, have no backing, no scarcity that I can understand. Any single individual cryptocurrency might claim to have a limited number of total 'coins' that can be generated, but when there are a functionally infinite number of said currencies and more being created every day, their value becomes essentially self-informed; a crypto-coin is only worth as much as its proponents can convince other people it is worth, there is nothing concrete or material backing that supposed value. The best term I can think of for it is 'hype currency', which seems incredibly unstable even if you take it at face value and ignore the vulnerability to scams. Whatever your investment in Currency X is worth, that value is solely dependent on other people's willingness to buy and sell Currency X, so if all the buzz and attention shifts to Currency Y, whoever didn't dump their X fast enough is left holding a massive wallet full of digital Zimbabwean dollars.

[Hrairoo]

I thought Folding Ideas did a great breakdown of the history of cryptocurrency and NFTs. It's 2 hours long but thorough as an exploration and explanation. He lays it all out there.

Spoiler: Click to Show/Hide

[Humble Scribe]

Thanks for engaging with this, people.

I've read a few articles about crypto over the past 24 hours - mostly prompted when an IT friend of ours explained that crypto is the reason that GPUs are ridiculously expensive right now.  (Turns out that designing processors to handle graphics well also enables them to handle the whole 'hashing/mining' thing well - so all the GPUs are being put into warehouse-sized mining rigs and hopefully not catching fire.)

This is obviously completely true, as things currently stand. But Intel is building a new class of chips specifically designed for mining, which will operate more efficiently and at much lower voltages, which could be a game changer there.

And of course, this only applies to Proof of Work cryprocurrencies, which generate additions to the blockchain by algorithmic 'mining'. Now admittedly both Bitcoin and Ethereum, which together represent two thirds of all crypto holdings by value, are both Proof of Work, as are other popular ones like Litecoin and Dogecoin, but Proof of Stake coins like Cardano and Solana, which extend the blockchain by a cryptographic consensus mechanism, are rapidly increasing in popularity and require only a tiny fraction of the power, and - in theory at least - Ethereum, the second most popular currency, is moving to Proof of Stake this year or next.

I don't disagree that this is the major issue with crypto as it currently stands - it's why I think Bitcoin itself probably has no long term future, as it can't be changed, whereas most other currencies have active developers (although other people will tell you that's why Bitcoin is more secure longer term, as it can't be messed with). It's also true that Bitcoin has become more renewable energy-based, after it got shut down in China and Kazakhstan which mainly use coal, and moved to Europe and North America. Probably only about 40% of mining currently works off renewables, but if miners were forced to use renewable power there would still be enough to continue. But because of Proof of Stake coins avoid this issue, I don't think it's an insuperable barrier to the entire concept of cryptocurrencies. And that's what I'm getting at - I think that the concept itself has become obscured by the issues with Bitcoin, but I feel that there's still something interesting and of value in there.

Just going to plop a few of those articles in here, with a little commentary.
https://www.vice.com/en/article/xgdvnd/the-nft-ecosystem-is-a-complete-disaster  - Among other things, talks about how crypto is rife with scams (also known as 'rug pulls')
https://www.vice.com/en/article/93bqap/viral-wtf-crypto-coin-launch-immediately-devolves-into-chaos-pain - an example of a crypto that ended up being essentially a Ponzi scheme, as well as an explanation of how the system was being gamed.

Yes, again this is absolutely the case with the industry as it currently stands. It's why I avoid small and new cryptos until they are established, because some of the new launches are indeed pure scams. But it's worth saying that the eye-catching cases only form a tiny fraction of the actual total number of transactions. If you avoid new launches and stick to Bitcoin, Ethereum and the other big names, you avoid that kind of nonsense.
I don't know that that can be completely overcome without international government regulation (which sort of defeats the purpose of crypto), and possibly not even then. But as with most forms of fraud, whether by phone or email or whatever, it's an issue that can be tackled with better consumer education.

I don't know a whole lot other than the basic surface layman's impression, but what I do know leaves me deeply skeptical as to its long-term viability as a model of currency. The fundamental basis of worth for currency was originally scarcity - at first literal precious metals, then paper backed by reserves of precious metals. That, in turn, evolved into the fiat currency of today where the paper is 'backed' by the economy and global financial reputation of the issuing nation, scarcity in another form. I can at least understand the idea of these, even if the nuances of how their value is maintained escape me and my non-existent finance degree.

The scarcity is artificially generated as part of the algorithm. For example, there can only ever be 21 million Bitcoins, 19 million of which have already been mined, as part of the way the currency is set up. So if demand increases, the price goes up, and if demand decreases, the price goes down.
In fact, I think the scarcity can actually be a problem for using it as a currency. Because major institutional investors, and even some national governments, have got into Bitcoin, the price has climbed year by year. If you expect your holding to double in value in the next few months, then there's a disincentive to use it as a currency now. It becomes a pure investment or store of value. It's why people use the parallel with gold. It's also why some of the newer currencies have tried to manage their scarcity in a more nuanced way. Ethereum is quite finely balanced, for example, between mining of new coins and destruction of coins used to pay transaction fees, one reason it doesn't appreciate in value as fast as Bitcoin.

Cryptocurrencies, though, have no backing, no scarcity that I can understand. Any single individual cryptocurrency might claim to have a limited number of total 'coins' that can be generated, but when there are a functionally infinite number of said currencies and more being created every day, their value becomes essentially self-informed; a crypto-coin is only worth as much as its proponents can convince other people it is worth, there is nothing concrete or material backing that supposed value. The best term I can think of for it is 'hype currency', which seems incredibly unstable even if you take it at face value and ignore the vulnerability to scams. Whatever your investment in Currency X is worth, that value is solely dependent on other people's willingness to buy and sell Currency X, so if all the buzz and attention shifts to Currency Y, whoever didn't dump their X fast enough is left holding a massive wallet full of digital Zimbabwean dollars.

How you value a crypto is a vexed question. Anything is worth only what other people are willing to pay for it. How much value is there in a work of modern art? A rare stamp? A 1970s Star Wars toy? This makes crypto markets like art markets - extremely volatile and subject to whims and changing perceptions. It's notable though that volatility decreases as the size of the currency increases. Bitcoin is far less volatile than say, Dogecoin, because there are many more holders who are more difficult to collectively convince that their coins are worth more or less than they currently are.

This does, admittedly, make crypto look like a potential house of cards. But the counter-argument is to ask what backs fiat currencies. Prior to the 1930s, what backed major currencies was gold (the Gold Standard). Currencies operated at a fixed exchange rate to the value of gold. The problem was that during the Depression, people wanted to liquidate their dollar (mark, pound, franc) assets and buy gold, and there wasn't enough gold to satisfy everyone. So to avoid a run on the currencies, interest rates were increased to boost their value and effectively 'devalue' gold. But interest rates rose too high for people to want to borrow dollars (marks etc) and so it actually reinforced the economic collapse. Getting off the gold standard allowed the US government (followed by others) to create new money for investment, lowering interest rates and boosting the economy.

But it has left the world operating on so-called 'fiat' currencies, for which there is no backing except the government's promise to cover its debts. 99% of the time this is fine, and people are confident in a currency because the government operating it has sensible economic policies, but occasionally a government borrows more than it can pay back, and people lose confidence, sell their currency for literally anything else, and that's when you get a currency collapse. Mexico, Venezuela, Argentina and currently Turkey have all seen currency collapses in the past couple of decades. The solution for many countries has been to operate at a fixed exchange rate to the US dollar. Most of the Middle East and Latin America and the Caribbean operate at some kind of fixed dollar exchange rate. Much of Africa uses a fixed Euro exchange rate. Only a handful of countries (the UK, Canada, Australia, Russia, Japan, Chile, Mexico, Norway, Poland, Sweden) actually have a free floating exchange rate. But this leaves the world financial system backed not by gold, but by the promises of the Federal Reserve or the European Central Bank. It also means that when these institutions spend an entire decade creating free money to try and keep their economies from collapsing, as happened since 2008 (see "quantitative easing") they generate massive mounds of debt and confidence in them decreases. This is why we are starting to see inflation pick up. Inflation is devaluing your paycheck every year. Headline inflation rates are about 5%, but the real figure could be double that or more.

Note - this is not a bullshit libertarian argument for returning to the Gold Standard. People who believe that don't understand how modern economies work. But it's just to say that fiat currencies aren't necessarily as stable as you think they are either, and devalue year by year.

Finally,
Hrairoo - NFTs are ridiculous, I agree. But I don't think one misconceived application invalidates the concept of cryptocurrency as a whole. I'll get back in more detail once I've had time to watch the video properly.

[Humble Scribe]

I thought Folding Ideas did a great breakdown of the history of cryptocurrency and NFTs. It's 2 hours long but thorough as an exploration and explanation. He lays it all out there.

Spoiler: Click to Show/Hide

Wow. That is a truly excellent and faintly depressing video. Thanks for posting it.

I've never bought the hype about Web3, but I guess I had at the back of my mind that there are edge use cases for crypto - avoiding censorship, facilitating business transactions in places where it's difficult, etc. Admittedly this probably mostly amounts to buying drugs and porn and evading corporate bans or international sanctions... things which I may or may not have used crypto for, but if I was in Turkey right now, I think I'd be converting my Lira savings into Bitcoin as fast as I could.

But a tokenised future is a very depressing proposition I agree. Hmm. Food for thought. Thanks.

[TheGlyphstone]

Yeah, I'm not arguing 100% for fiat currencies being stable...I mentioned the Zimbabwean dollar for a very good reason. :D Its that I understand where their stability comes from, what threatens it, and for the most part can see the value backing them. Crypto appears to conjure its value out of thin air, which is why I dont trust it to be more than smoke and mirrors.

Plus, if 1 Bitcoin converts into 35000USD, trying to invest in it is a bit beyond me anyways.

[Azy]

I think there is potential if the kinks get worked out.  I don't think it'll ever completely replace our current currency, at least not in my lifetime.  If the market ever stabilizes it would make foreign exchanges a bit simpler.   

[Humble Scribe]

Yeah, I'm not arguing 100% for fiat currencies being stable...I mentioned the Zimbabwean dollar for a very good reason. :D Its that I understand where their stability comes from, what threatens it, and for the most part can see the value backing them. Crypto appears to conjure its value out of thin air, which is why I dont trust it to be more than smoke and mirrors.

Well, it has value if people agree it has value, the same as any company stock, and while there is market rigging, it does respond to real world economic indicators like dollar interest rates, jobs news, fears over Russian invasion of Ukraine etc etc, as well as things like the hashrate (amount of mining that is going on).

Plus, if 1 Bitcoin converts into 35000USD, trying to invest in it is a bit beyond me anyways.

They're each divided into 100,000,000 satoshis, so you buy fractions. I own 0.125 of a bitcoin.

[Oniya]

The lack of regulation - which appears to be one of the 'selling points' of cryptocurrency - is what makes me skeptical.  You mentioned things like How much value is there in a work of modern art? A rare stamp? A 1970s Star Wars toy?  The thing is that there are experts and catalogues and organizations devoted to exactly that.

Beckett Grading Services is the premier valuer of trading cards.  Sotheby's can tell you how much that Warhol is likely to get you - or cost you.  Rare coins and stamps have their own experts.  Star Wars toys - a little less concrete, but there are standards regarding whether the toy has ever come out of the box, is 'Like New', or shows evidence of wear.  Even Beanie Babies and old Happy Meal toys have a price guide these days.  If someone wants to sell you a first edition, like-new Charizard, there's a way to find out if it's worth the entirety of your COVID small business relief check.

[Humble Scribe]

The lack of regulation - which appears to be one of the 'selling points' of cryptocurrency - is what makes me skeptical.  You mentioned things like How much value is there in a work of modern art? A rare stamp? A 1970s Star Wars toy?  The thing is that there are experts and catalogues and organizations devoted to exactly that.

I get that, but aren't these criteria often pretty arbitrary and often decided at the behest of a group of collectors who decide that to make their own collections have value? I'm not saying it's the best analogy, just that we often decide that things have value based on strange benchmarks.
But in the end it's all based on expectations. Why do fiat currencies have value? Because people expect them to. Why do artworks have value? Because people expect them to. Why do cryptocoins have value? Because people expect them to. It's not all Greater Fool Theory - there are big, market savvy players who are heavily invested in Bitcoin, based on expectations of future value. I don't think you get a $1 trillion asset without there being some reasonable expectation by major players that it will hold its value.