Explaining cryptocurrency to others

2019-04-04T15:06:45.000Z Honest Cash

Why am I so enthusiastic about cryptocurrency, even if I should just call it money now? And how can I explain why I like it to my wife, my sister, or someone I have just met who questions its merits? And what is it, exactly? What on earth is a Bitcoin? What is Bitcoin Cash? An Ether?

Before a good explanation can be thought through, it may be instructive to begin with how conversations usually begin. Sometimes it's bad press, other times it's why would you want these coins when you've just bought some, and their dollar value can go down?

Occasionally a conversation begins with hackers.

My response is the insecurity of legal tender. This also draws the power of banks into the picture. I ask: how much superannuation have you lost to fees and charges over the past ten years? It's supposedly a wonderful way to be forced to save for retirement, even though inflation cools it down and super funds wipe maybe $500/year from your account in various ill-defined fees and charges. How much have you had to pay banks to keep your funds in the last year? Typical account keeping fees for *nothing * in Australia are $5/month. Isn't this just legal theft?

We don't exactly consent to having a bank account, we accept it from an early age, and besides, what employers will employ you without a bank account? If you fall on hard times, how is welfare going to keep you alive and fed without a bank account? Banks do literally nothing to keep your accounts; it's all computerised. I find it contemptible. Banks are also (although less so, perhaps) susceptible to hackers.

I'm more worried about institutional theft, sanctioned (and until recently unpunished, and little reported) corruption, and good old honest thieves than hackers. With all your lost money over the years, forced participation in banking, spying on your activity and spending habits, withholding of transactions and the awesome corruption of some institutions, tell me again about hackers, these young men in black hoodies doing weird stuff on a laptop. How often have they stolen your money?

Sometimes a conversation begins with the "my goodness your irresponsibility led to us having less money now because of the falling dollars for Bitcoins now!"

Behavioral economics tells us that herd mentality and being swayed by FUD or just misinformation is natural to us. It looks like we have lost money and still are right now. It might have been in the past, although the next day or even in the next hour you might have more dollars for your cryptocoins. Within a year, you could have double the number of dollars if you sell your coins. This volatility isn't exactly a big selling point, although instant reaction to negative information, and euphoria when the news is great, isn't good for us. We are supposed to be rational actors in our best economic interests, and we rarely are. Confess now! We have our blind spots and make less than good decisions, and so how is this much different from putting your deflating purchasing power into a bank account with a piddling interest rate?

Assuming an inflation rate of just over 2% between 2010 and 2018, the Reserve Bank of Australia's inflation calculator tells me that a basket of goods and services valued at $100 in 2010 would be about $117 in 2018. But that sounds okay doesn't it? It's now valued higher. Put it this way, there is a sustained growth in general prices over time, with a unit of currency purchasing less over time. So in 2018, you fork out $117 instead of $100. Now it doesn't sound so good.

The point is, how is volatility in cryptocurrencies much different from inflation concerns and for that matter, the volatility of legal tender as well? One of the properties of money is that it shouldn't fluctuate in value, but it does. In most major economies, currencies fluctuate vs each other with, for example, more Australian dollars buying less than US dollars. Most currencies fluctuate on a global floating exchange rate system, along with other complex factors influencing its value. And the value of a currency significantly impacts the domestic economy, and with globalisation almost all economies, which can have effects economists like to call "externalities".

But that's not the point, the point is: is this much different and perhaps even more complex than supply and demand for cryptocurrency?

In my opinion, the floating exchange rates for fiat (national) currencies contains a lot of jibber jabber designed to mask its real function and how it really works from all the stupid plebs. We know so little about economics and money that following the Global Financial Crisis of 2008, the University of Manchester in the UK ended up with a pesky group of bright economics students questioning the teaching of economics and why they couldn't explain how the economic crisis happened. At all, to anyone. Great, let's have future experts on economics who can't tell us what's going on or what it all means. The report from the University of Manchester's Post Crash Economics Society is interesting reading: have a look some time.

So far, the beginning conversations are "concerns" revolving around hackers and the exchange rate, or spending money for unreal money, or "toy money" that nerds play with.

Inevitably we all ask the question when we mature enough and observe the world around us about what makes a $50 note worth $50. This is a well dragged-on trope in the argument, but deserves re-visiting once in a while.

Why would you spend money on these Bitcoins? What are these bits worth?

Okay, what makes you think your piece of paper is worth $50?

The answers are related. We believe it to be so. In the latter case, only a great deal stronger. And we all agree that it is true, for the notes, and that's all. (Does that make you feel a little spooked?) Less so for the value of Bitcoins, although it's remarkable that this economy of cryptographic signatures and proving computational work has survived and not completely flunked since it emerged over ten years ago now.

So how would you explain cryptocurrency to someone else?

Cryptocurrency has the properties of money, or almost nearly so. Casting aside the bigger picture for a moment, and the fact there are different types of money, the essential properties of money as we deal with it include:

  • Interchangeability or fungibility (one unit is interchangeable with another, and has the same value). So my 0.5 BTC must be the same as your 0.25 BTC and your other 0.25 BTC, like my two $10 notes are interchangeable with a single $20 note, which has the same value.
  • Durability (ability to be used again repeatedly). Cryptocurrency demonstrates this property.
  • Portability. You can have your cryptocurrency in a mobile phone wallet, or even in your head, as a "brain wallet" although this is not recommended!
  • Recognisability (its value should be easily recognised). It usually is. It's getting more publicity, and almost everyone has a vague idea of what Bitcoins are.
  • Stability of value. Hmm.
  • Acceptable (everyone must be able to use it to transact, if they want to). We're getting there, I think.
  • Limited in supply (think about what might happen if bank notes just got printed a lot more and in higher values). So far, so good.
  • Uniform (all versions of the same denomination must have the same purchasing power).

But most people cannot sustain that type of conversation. Sometimes I just say, so, my Bitcoins are invalid as money because they aren't dollars?

Are you saying my British Pounds Sterling can't be money because it's not, strictly speaking, Australian or US Dollars? That's a little superficial, but it's a good starting point that's simple and direct. It does sometimes jolt people into the process of thinking.

If you believe your dollars are money, why can't I believe my Bitcoins are money? If others believe it, almost magically so, it is. It eventually becomes a medium of exchange (fancy pants words), a store of value, a unit of account, and so on.

Cryptocurrency is a different form and type of money that can perform the same functions as other types of money, like dollars. It takes a little getting used to, because it's new. We don't teach children much, if anything, in school or at home about money (aside from how to save it and earn it). Cryptocurrency is money even if you can't touch it. Can you touch the bits and bytes inside a bank's computer system? Does your note cease to become money when you hand it in at a bank branch and it shows up in your banking app?

Think about it this way, pop: once you had pennies and pound notes. Then you had plastic cards, digital money if you like. Well now you have digital stuff that functions as money in a "wallet" on your phone, rather simplistically, an evolution of the plastic card that at one time you said "isn't money" because it's "not real." What's the difference in that respect? Why not swap out dollars for Bitcoins with a card? Or at an ATM? You can, in fact. And as for the usability aspect, you increasingly can. Do others agree it has value? Absolutely, you can buy a lambo with Bitcoins. Just kidding, pop. You can't buy a lambo, you aren't rich.

One final thought on explaining cryptocurrency to others, putting aside proof-of-work and cryptography, which most people will give you the blank stare about if you dare venture into that territory.

Cryptocurrency is another type of digital money, it just doesn't live in a bank's computer system like your digital dollars. It discards banks as a trusted third party to settle transactions; the cryptocurrency community does it together, and clearly, at the very least in a technical sense, it works. It is an Internetwork of money, like the Internet of information with no real central control. And that's the core of it. For example, you need nobody's permission to spend your money on whatever you want, whenever you want, and have the transaction settled.

To use it as money, ask someone how to obtain it and use it. Most of the time all you need is a phone and a little help, then cryptocurrency can really be explained and illustrated. Forget all the nit picking and technical details: cryptocurrency is a next step in digital money and some prefer it over other types of money. But money it is, and I can exchange it for goods and services.

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