Well, here we are at the tail end of 2017. It’s been a, uh, real string of days that happened, hasn’t it? But now it’s the holiday season! That magical time of year when we can muster up some forced jolliness, drown our sorrows in boozed-up dairy sauce, and lie to ourselves about how next year can’t POSSIBLY be worse than the flaming sack of reindeer turds we’ve just endured!
So naturally I expected to find something merry and bright when I peeked into our advice stocking this week. Surely our dear readers would want advice about, I dunno, vegan cookie recipes or buying gifts for Republicans or assembling the ultimate holiday music play list. BUT INSTEAD ALL I GOT WAS CRYPTOCURRENCY COAL.
(Reminder: It’s never too late to send your questions to the Pajiba Over-Elves at [email protected]. We gather in front of a crackling fire and read them whilst sitting under some mistletoe. Some of us may even wear those onesie pajamas with the handy butt-flaps while we answer your questions — but you’ll have to guess who!)
Here’s this week’s question:
What is bitcoin? Also, how many bitcoin should I buy?
Can Bitcoins Buy Common Sense.
Seriously folks, THIS is how you want to close out the year? You want to make me to come up with a bullshit economics lecture, when all I want to do is get back to the sugar plums dancing in my head? UGH FINE WHATEVER.
So let’s tackle this is two parts. What is bitcoin? It’s fake money from the internet.
Ok, so it’s a bit more complicated than that. Bitcoin is a cryptocurrency. Specifically it’s the first decentralized digital currency. There is no central bank, administrators or other third parties involved in the transactions, and thus there are no transaction fees (theoretically — we’ll get to that). Instead the transactions happen on a secure peer-to-peer network backed by cryptography. It was created by Satoshi Nakamoto, a pseudonymous person (or group of people) who published a white paper outlining the concept back in 2008, with the initial version of the technology being released in 2009. So Bitcoin is both a transactional unit and the system that supports that transaction.
At the heart of all cryptocurrencies (bitcoin is just the first of many) is blockchain technology, which… look, my husband is super into this shit and he’s talked to me ad nauseam about it and I still mostly don’t get it (but I try, because love and stuff). What I think is going on is that, like, there’s a ledger (not a physical one) that is made up of “blocks” of data. That data could be anything (the underlying concept can be applied broadly), but in terms of cryptocurrency the data is transactional. You can offer to pay me using whatever cryptocurrency you want, and that is a transaction. Once that transaction is added to a block, it is officially a part of that currency’s ledger and is recognized by the network. Basically, it’s secured. That money is now really, truly mine — not because I’m holding it physically, but because the whole network agrees that the funds are in my wallet. That block is basically taking a snapshot, or a point of time, and registering it for all users to reference. It makes the transaction real, and trustworthy. The ledger BECOMES the verification. Sort of. I guess. Look, I’m doing the best I can with this.
The blocks are formed by miners, who go through the pool of transactions and format them to add them to the given ledger — and it’s here that the dreaded transaction fees DO come into play. Initially miners are rewarded for contributing to the ledger in the currency itself. But just because this is fake internet money, it doesn’t mean that there is an unlimited supply. You can’t fake print more of it. There are caps built into most currencies — once that amount is in the market, no more can me made. Instead the miners are paid in fees — and they’re likely going to be motivated to mine the transactions that pay the highest fees first (though they don’t have to). If you want your transaction to be recognized faster, you’re incentivized to pay more to get it into a block more quickly. And frankly, it’s impractical to imagine that a system of any sort could be purely free from costs. Cryptocurrency relies on a network of computers, using energy and hardware, and the people who maintain those systems need a reason to do it. The key, supposedly, is that in a truly international, decentralized economy, the cost of sending money from one country to another will be less than, say, wiring cash to your family via Western Union. You’re not dealing with banks taking a cut, or exchange rates between one nation’s currency to another. Because the costs of maintaining the economic systems are lower, the fees should in turn be lower.
It also means that you, and you alone, are responsible for your money. There is no bank to appeal to if you experience fraud, or lose your log in. Your own security is your problem.
Though bitcoin has been around for 8 years or so, its future, and that of cryptocurrency as a whole, isn’t guaranteed. Much has been made recently of the environmental impact of cryptocurrency, and the energy consumption of mining, which could actually exceed the energy consumption of entire countries. Which is fair but possibly overblown, at least when compared to the energy costs of traditional cash and coin production, gold mining, banking, or even U.S. data centers as a whole. Scalability is an issue: how you do improve a system with SO many participants across SO many countries without any centralized institution coordinating it? With a network that vast, there is no way to, say, improve the internet connection to EVERY node in the system. Accessibility is another one: how can you encourage people to participate in a whole new, largely unregulated economy that they can barely understand? Will it stand the test of time, or will it fail in the long run because not enough people got behind it? And when will governments figure out how to impose regulations — because you know they’re going to have to someday.
There is also the matter of reputation, which is a surprisingly large hurdle. It’s not just that cryptocurrency can seem prohibitively complex to anyone who doesn’t have a degree in computer science. It’s that bitcoin was initially seen as a black market currency precisely because it was unregulated, and because users can operate largely anonymously (there is no institution to verify your identity — you either have access to a wallet or you don’t). It was the currency of choice for the Silk Road online illegal drug market, for example. People have attempted to use bitcoin to pay for actual, literal murders. And there’s also the fact that its biggest cheerleaders might just be fucking Mens Rights Activists, who see cryptocurrency as a way of divorce-proofing their assets, protecting their savings from their future ex-wives. So if any random mansplainers pop up in the comments to talk about how I got it all wrong and I clearly don’t know what I’m talking about… keep that in mind.
Though they’d also probably be right — I’m totally pulling this out of my ass.
Look, there’s a lot more to unpack about cryptocurrency, but I’m literally an unqualified stranger on the internet and I think I’ve gone into enough detail. So onto the second part of the question: How many bitcoins should this person buy?
Uh… well, do you have *looks up current price of a single bitcoin* like $20k lying around? This past year — hell, the last handful of months — have seen a steep increase in bitcoin value. But this is a volatile market, and there’s a strong chance that there will be crashes in the future. You can wait to purchase some when the prices dip, but if you want bitcoins you’re probably not going to see them at pocket-change prices again.
The good news is that there are fuck-tons of other cryptocurrencies on the market, which are newer and cheaper. You can start watching the trends and buying up some of those and see what happens. You also have to think about your aims, just like any investment: Are you looking to day-trade for quick gains, or are you willing to play the long game and ride the tides of the market for 20 years or so? That’s the question people who bought bitcoins early are asking themselves now.
And when you put it that way… it starts to sound like any other kind of money, doesn’t it? The reality is that ALL currency is fake, to a degree. It has the value that we give it. If enough people believe in it, and invest in it, then is becomes real (“The Tinkerbell Effect,” as our in-house money expert Emily Chambers dubbed it). But it’s too early to tell if people will believe in cryptocurrency, or if bitcoin has real value.
All you can do is study it, really try to wrap your head around it, and make an informed decision for yourself. If YOU believe in it, then fucking buy some! It’s your money to spend on other money if you choose!
And if bitcoin is out of your price range, can I recommend Dogecoin, the preferred digital currency of Shiba Inus worldwide?