Bless Paul Krugman. His is the first explanation I can understand.
I have been reading about Bitcoin for a couple of years–about speculation in this “crypto-currency,” about competitors who are equally “crypto,” about people who are willing to be paid for goods and/or services in this new medium.
The problem is, I can’t get my head around it.
I know that U.S. currency was originally backed by gold, and is currently backed by the full faith and credit of the United States government. (Our stability led lots of countries to “park” their assets in the U.S.–I wonder how long it will take Trump and his band of Keystone Kops to erode their trust…) I have no idea what backs Bitcoin, so I was interested in the linked Krugman column.
If you’ve been living in a cave and haven’t heard of Bitcoin, it’s the biggest, best-known example of a “cryptocurrency”: an asset that has no physical existence, consisting of nothing but a digital record stored on computers. What makes cryptocurrencies different from ordinary bank accounts, which are also nothing but digital records, is that they don’t reside in the servers of any particular financial institution. Instead, a Bitcoin’s existence is documented by records distributed in many places.
And your ownership isn’t verified by proving (and hence revealing) your identity. Instead, ownership of a Bitcoin is verified by possession of a secret password, which — using techniques derived from cryptography, the art of writing or solving codes — lets you access that virtual coin without revealing any information you don’t choose to.
It’s a nifty trick. But what is it good for?
My question exactly! (This is one of those times–multiplying in number–when I come face-to-face with the fact that the world has passed me by. Technology has eclipsed my ability to understand it…)
In principle, you can use Bitcoin to pay for things electronically. But you can use debit cards, PayPal, Venmo, etc. to do that, too — and Bitcoin turns out to be a clunky, slow, costly means of payment. In fact, even Bitcoin conferences sometimes refuse to accept Bitcoins from attendees. There’s really no reason to use Bitcoin in transactions — unless you don’t want anyone to see either what you’re buying or what you’re selling, which is why much actual Bitcoin use seems to involve drugs, sex and other black-market goods.
So Bitcoins aren’t really digital cash. What they are, sort of, is the digital equivalent of $100 bills.
Krugman explains that equivalency: neither Bitcoins nor $100 bills are used in most ordinary transactions. But hundred dollar bills are evidently popular with thieves, drug dealers and tax evaders. Unlike hundred-dollar bills, which are backed by the U.S. government, Bitcoins have no intrinsic value. Its “value” is whatever the parties to the transaction are willing to assign to it.
Combine that lack of a tether to reality with the very limited extent to which Bitcoin is used for anything, and you have an asset whose price is almost purely speculative, and hence incredibly volatile. Bitcoins lost about 40 percent of their value over the past six weeks; if Bitcoin were an actual currency, that would be the equivalent of a roughly 8,000 percent annual inflation rate.
Oh, and Bitcoin’s untethered nature also makes it highly susceptible to market manipulation. Back in 2013 fraudulent activities by a single trader appear to have caused a sevenfold increase in Bitcoin’s price. Who’s driving the price now? Nobody knows. Some observers think North Korea may be involved.
But what about the fact that those who did buy Bitcoin early have made huge amounts of money? Well, people who invested with Bernie Madoff also made lots of money, or at least seemed to, for a long time.
Krugman quotes a currency expert who describes Bitcoin as a “naturally occurring” Ponzi scheme.
I’m still pretty hazy about what Bitcoins and their competitors are, or why it takes so much electricity to “mine” them. I’m clearly not cut out for the “brave new world” of digital money–or new and improved skullduggery.
OK, as a technological dinosaur, I hardly understood a word of all this, except that after I finished the article, I scrolled back up to the headline and burst out laughing at the headline I’d initially missed……. and which I DID understand!
It is secrecy and hate of government that forms the raison d’etre of Bitcoin.
I’m with Connie on this one; the only part of the title and the content of the blog that makes sense is “WTF”. I equate Bitcoins with ghost employees, pyramid schemes and money laundering. Is the term “Bitcoin” a dog whistle to all schemers and grifters to join in this plot in an attempt to “…fool all of the people all of the time…”?
Let’s be clear about one thing, Krugman is a Neoliberal buffoon. His stripes were clearly identified for his spooning of Hillary Clinton in 2015/16.
The main reason for cryptocurrency is to avoid banks and state governments who issue and control monies. Plus, there are no credit card numbers to steal. No identify theft. It’s borderless on international transactions.
Do you know what’s more “WTF?” than cryptocurrency is the amount of fraud and illegal activity done by banks over the past decade. HSBC literally built a square opening in a Mexican bank drive-thru to allow for the cartel to drop off their lockboxes full of cash. They were warned but continued to launder the money for years.
How many American people know what derivatives are and what they’re used for? How many Americans know the value of the derivative markets?
The actual number is $1.0-1.2 quadrillion which casts a giant shadow over our world’s total GDP. Big Banks started using derivatives in the 90’s and I bet a very large percentage of Americans have NO clue about them.
The risk and control of currency by state banks is why cryptocurrency evolved.
Do you remember the Occupy Wall Street Movement?
It was tremendously successful until the federal government worked with banks to track the leaders and shut it down. We had democratic leadership during the social movement who assisted the 1% in shutting it down. Krugman is a shill for the 1%.
In a digital world, we need digital currency.
I tried buying a product from my website from an Australian company and my bank wouldn’t let me unless I contacted them first. I couldn’t use my money unless the bank approved it. That’s draconian.
Anybody remember the Patriot Act? LOL
And know that we embark on Trump’s trade war, you can bet China’s discussion with Russia and India about abandoning the petrodollar will increase.
Control is the opposite of democracy. When change comes demanding more democracy, some receive with open arms while others try to maintain their control (fear). Those using their power and influence to control and maintain what’s theirs is becoming more and more evident.
Krugman is a useful idiot for those in control.
wtf indeed
Technology has eclipsed my ability to understand it too. What I do understand is that a sucker is born every minute.
Paul Krugman received the Nobel prize in Economics in 2008.
Todd,
I’d be happy to take all of your filthy, Government controlled dollars off your hands.
It’s really not complicated; untraceable transactions, and tulips.
Cryptocurrencies, and there are about 50 of them, are mostly popular with four basic groups – those who hate the idea of government doing anything, those who want to deal in shady goods (Silk Road kind of things are much easier to buy if you can’t be tracked), those who just love new tech (generally, they like the theoretical security of money without singular home base), and those who want to try and make a quick buck (pump and dump – pushing up the price of something and then selling off at a profit before it crashes back again – crypto markets are the wild west of manipulation).
They are a type of money that you get either by buying it (often just a portion of a single Bitcoin since it’s gotten so expensive) or by digitally “mining” it. To mine Bitcoin is to basically have your computer solve fiendishly complicated equations – the kind of thing that your home computer will not do – or at least will not solve in your lifetime. Hence why it takes so much power – it requires a ton of processing power. Ideally you either A) grab a super computer (governments tend to do it this way – see North Korea for official efforts and the unlucky guys who got caught using some Iranian military computers recently for unofficial trouble) B) use a distributed network of hacked computers (basically a bot net) to all work together to do it for you – each computer can only do a tiny bit of the work, but if you take over a million of them, you’ve got enough juice.
Bitcoin conferences have a tendency not to take Bitcoin because it’s so wildly unstable (see wild west). Meaning someone could pay $50 worth of Bitcoin at 1pm to attend and by 1:05 that $50 is worth $5 or .05 cents or $500 or $5,000.
While Bitcoin has been crashing recently, if you bought in in January you’d still be up from your original investment quite a bit.
Krugman’s last comment is the relevant one. People who invested with Bernie Madoff made a lot of money – for awhile. Remember, if it is too good to be true, it is not true.
WTF?
The culture of greed and secrecy has become utterly silly, stupid and self-absorbed. What bullshit!
There are so many other things to deal with for the nearly 8 billion humans to survive their own folly.
Crypto-currencies such as Bitcoin are a Libertarian’s wet dream. A small system of rules enabled by technology empowering all participants to self-regulate commerce. A stateless system. On a scale of technology maturity….CC’s are now where the World Wide Web was in the early 1990’s – the Wild, Wild West. But that’s no reason to believe it must be doomed to failure and also no promise of its success and wide adoption.
Clarification, you CAN trade for goods and services with BC’s but you cannot legally redeem them for a national currency such as US$ directly on the network (known as “the ledger”. You have to purchase and redeem them with a broker, such as CoinBase. It’s true that the identity of of the owners of BC are kept secret on the BC “ledger” to maintain the security of the transactions in a highly-distributed computer network (using software technology known as “block-chain”). But the fact is the “ledger” maintains a perfect audit trail of every transaction ever conducted by a participant and/or the flow of every BC through all transactions it was used for. Now compare that to current flows of money between individuals, corporations, and involving multiple banks (or bags of cash), currencies and countries!
Since purchases and redemptions are done at the local (national) level, the identity of account holders, and the BC’s they own can be known (by subpoena). If the CB broker isn’t willing to provide that info or access to the audit trail, then the various national legal systems have to figure out what to do with them. Typically, you’d call in the Feds to seize assets and shut them down and they would comply to avoid that. But just like today, at least in the US, there has to be evidence of a misdeed. It’s called due-process. So unlike the current regime, crypto-currencies have the capacity to be perfectly transparent. Whether they become so will be a function of its ability to navigate the demands of the finance ministries.
Sheila, as for mining, it’s very complex but based on a a simple concept. There has to be a carrot to entice the various BC network operation centers (a.k.a. a “nodes” where all nodes together make up the BC network) to actively participate. Because the number of total transaction is very small in the early stages (relative to those of traditional currencies), and the number of BC accounts being opened is on the rise, the system cannot generate enough revenue to incent the nodes with just transaction fees (unless those fees were very high – which would stifle adoption). But also because the system is in its early stages, a lot of new accounts are being opened and BC’s purchased at a rising rate. When a certain fixed number of accounts are created (a “block”) that block is made available to the network of nodes to go find, or “mine”. That is, the block of accounts is not assigned by a central office to a node, the node must expend effort to find it. And it’s not easy. The nodes must expend tons of computing power to generate large keys of data using complex algorithms. This is why it takes large server farms and huge amounts of electricity. Once a node discovers or “mines” a block of new accounts, however, it is rewarded with certain fees as well as, and this is important, NEWLY MINTED Bit coins! So it serves two purposes – a source of funding the network as well as expanding the supply of BC’s and both in a very distribute manner beyond the reach of national governments (a characteristic with potentially ENORMOUS and DISRUPTIVE geo-economic and political implications!!).
The system’s architects also know that eventually the number of Bit-Coins in circulation must eventually stabilize (it is current designed to be capped at 21 million – or maybe billion – I can’t remember – total bit coins. By that time adoption rates will be high enough to sustain the node operators with a stream of revenue from transaction fees and will depend far less on mining new accounts and new BC’s.
So, is this gonna work or not? If you consider yourself a liberal, in the 18th century meaning of that word, you should hope it will be. While it may start out as a libertarian wet dream it could end up as the financial underpinning of a future stable world economic order. And then a lot of heads of libertarian-leaning conservatives head’s will explode because that’s what any mention of one-world government does.
But rather than listening to what they say, and by “they” I mean the chattering class and the CEO’s of large banks, with $gazillions to lose if this works, WATCH what they do with CC’s, where THEY are the Fortune 2000 largest companies in the world. You can bet they all have really smart people whose heads are reeling at the opportunity to further streamline their global supply-chains with a medium of exchange that exists outside of meddling national governments. And mind you, while there may be many CC’s popping up everywhere, there will only be one or two survivors if and when it all sorts out. And a lot of people are going make and lose fortunes in the process.
So for now leave it to the experimenters, speculators, and regulators to sort it all out. Happy Trails.
I had to quit reading this post halfway through. Don’t ever see myself needing to hide any monetary transactions.
It’s my belief Crypto-currencies are marketed as a method to elude scrutiny. This appeals to the “rugged individualists”, while the real intention of Cryptocurrencies is to offer a new way for some enterprising individuals/groups to manipulate the system to make more money.
In America,everything comes down to money. And,everyone wants to hide it to the extent that hiding and hoarding money is a religion in America.
JN: “Paul Krugman received the Nobel prize in Economics in 2008.”
Henry Kissinger received the 1973 Nobel Peace Prize ,so?
William,
Krugman may be a lot of things but an “idiot” he is not. Kissinger too is not an idiot, but certainly a war criminal.
I found that the best thing about crypto-currency is that it can be completely ignored sort of like the Kardashians and TrumPence.
The news and our minds are full of stuff that doesn’t matter to the point it’s displacing stuff that does. That’s how our government is being redefined as an enemy of the people.
Governance by tweet.
Not sure why bitcoin – Crypto-Currency would rate a column by Paul Krugman. Krugman states: “$100 bills aren’t much use for ordinary transactions: Most shops won’t accept them. But “Benjamins” are popular with thieves, drug dealers and tax evaders”.
These thieves, drug dealers and tax evaders must be very low on the economic totem pole. As has been revealed in the Paradise Papers and Panama Papers leaks there is no need to worry about $100 bills when – Per the NYT –
“The core of the leak (Paradise Papers), totaling more than 13.4 million documents, focuses on the Bermudan law firm Appleby, a 119-year old company that caters to blue chip corporations and very wealthy people. Appleby helps clients reduce their tax burden; obscure their ownership of assets like companies, private aircraft, real estate and yachts; and set up huge offshore trusts that in some cases hold billions of dollars”. https://www.nytimes.com/2017/11/05/world/paradise-papers.html
The so-called Legal Market has had it’s fair share of bankruptcies among them: Lehman Brothers Holdings, Washington Mutual, WorldCom, Enron and Indiana’s own Conseco. Speaking of bankruptcies Trump companies have had six of them, so much for Trump the shrewd businessman.
At some point somebody takes a hit for bankruptcies, lenders, stock holders, employees, etc.
Years ago the Legal Market had junk bonds. Recently, (per Wiki) Wells Fargo account fraud scandal is an ongoing controversy brought about by the creation of millions of fraudulent savings and checking accounts on behalf of Wells Fargo clients without their consent.
Think government control of currency is bad? Hand it over to those who evade public control over the value and backing of the currency. Inflation and deflation have a role to play. We don’t need brigands in control of our currency values and they do not work in any event as the market for their product recently demonstrated.
Bit coin is underpinned by blockchain technology. Blockchain tech is secure and verifiable. It is also going to revolutionize the way informed consumers purchase goods. If you want to know the geographic origin of the product you are buying it should be at the fingertip of the sales clerk in the future. It should streamline supply streams and inventory records. Its a boon to businesses. Bit coin is operating an alternative currency. People are buying into a speculative bubble probably based on “irrational exuberance”. Its also unregulated and subject to pump and dump schemes where a collective of buyers buy fast and start driving up prices then sell into the rally. They can do that because of the limited capacity to create coins. However, if f you think the currency of your country has been devaluing because of reckless printing or subject to being devalued because of reckless governing it is a place to stash cash like the offshore accounts famously publicized by the paradise papers. Hard to value because of the speculative investing but its got intrinsic value. Its not going away.
What Pete said at 8:48am.
How’s the polling going in Pennsylvania?
“All Dems in 2018!
Bitcoin may be an appropriate target for mockery or even derision. And it is likely to become the world’s money laundering system of choice; yet the underlying cryptography-based blockchain technology for implementing distributed ledgers (on thousands of computers) is innovative, powerful, secure, and used by IBM for developing high security business networks, by Oracle and other serious companies. It was devised in reaction to the long series of white collar financial crimes committed in 2008 in an effort to democratize international finance. There’s plenty of room for improvement, but good people are working on that.
There’s no shame in not understanding the technology. I don’t know about the optics that drive the Hubble Telescope, but I love the results it produces.
Bear in mind that the intrinsic value of a Bitcoin is the same as the dollar, the Euro, the Yen and the Yuan – i.e., zero dollars and zero cents. When Dick Nixon took us off the gold standard in 1971, effectively ending the Bretton Woods financial structure, he created the free floating currencies we have today. Since a currency’s value is based on trust, competent government, a forgotten phenomenon, is an essential part of its support system.