SENSIBLE DOLLARS

CONFUSED ABOUT CRYPTOCURRENCY? ME, TOO!

By Allan Kunigis

Allan Kunigis is a Canadian-born freelance financial writer based in Shelburne, Vermont. He has written about personal finance for more than two decades. He is the author of A Kid’s Activity Book on Money and Finance: Teach Children About Saving, Borrowing, and Planning for the Future, published in September 2020.

One clue to a person’s age is how he or she feels about cryptocurrency. If, like me, you’re older than 60, you probably don’t understand crypto and can’t fathom why someone would invest in it or use it. Frankly, cryptocurrency scares me a bit, and I wouldn’t mind if it just, well, disappeared.

But because cryptocurrency seems to be growing in acceptance, I have resolved to try to keep an open mind and learn what I can about “the future of money.”

ANTI-FAD, AH!

I’ll be frank about why I don’t like cryptocurrency. First, I have a knee-jerk response against fads, hype, and especially financial speculation (A.K.A. gambling). Cryptocurrency reeks of all of that. The price of a Bitcoin skyrocketed in late 2017, then plummeted. In late 2020, it soared again and continued to climb to lofty heights from October 2020 through March 2021, before tumbling once more.

If Elon Musk can make a joke on Saturday Night Live that causes the price of Dogecoin to fall 30%, as he did on May 8, 2021, that’s all you need to know.

I imagine many crypto enthusiasts find that “Awesome!” or “Dope!” I find it troubling. Unless the laws of financial physics have been rewritten, what goes up does eventually come down – and the faster anything rises, the harder it can crash. Most people discover they were in a bubble only after it pops. Remember the dot-com bubble? How about the real estate bubble and the great financial crisis of 2008?

THEY STARTED A JOKE

How do you price something with no intrinsic value? What is the price based on, other than what the next person is willing to pay for it? If Elon Musk can make a joke on Saturday Night Live that causes the price of Dogecoin to fall 30%, as he did on May 8, 2021, that’s all you need to know.

Ironically, Dogecoin was actually created as a joke. The New York Times reported: “Dogecoin is a digital currency started in 2013 by a pair of programmers who decided to spoof the cryptocurrency craze by creating their own virtual money, based on a meme about Doge, a talking Shiba Inu puppy.”

That joke was worth less than a penny in late January 2021. It peaked at more than 71 cents on May 8, 2021, with $27 billion in trades in a 24-hour period. (Source: https://coinmarketcap.com/currencies/ dogecoin/)

But enough with the jokes. Let’s learn a “bit” about cryptocurrency.

WHAT IS CRYPTOCURRENCY?

I’ll quote a good, succinct description and explanation of Bitcoin from a BBC article dated February 5, 2021: “Guide: What is Bitcoin and how does it work?”

“Each Bitcoin is basically a computer file that is stored in a ‘digital wallet’ app on a smartphone or computer. People can send Bitcoins (or part of one) to your digital wallet, and you can send Bitcoins to other people. Every single transaction is recorded in a public list called the blockchain.”

NINE THINGS TO KNOW ABOUT CRYPTO

1. Although Bitcoin dominates cryptocurrency in hype and total value, making up roughly 60% of cryptocurrency’s entire $1.5-trillion value, it’s just one of more than 6,700 cryptocurrencies.

2. As you probably know, the value of Bitcoin is extremely volatile. In early October 2020, a unit of

Bitcoin was valued at less than $11,000. It peaked at more than $63,000 in mid-April 2021 and ended

May at roughly $37,000. But that’s all millions of times higher than its humble beginning in May 2010, when it was worth less than a penny. No one knows how much its value might rise or fall in the next day, month, year, or decade.

3. Is cryptocurrency a currency or a commodity?

Like gold, it can be both. For now, its main role in the financial markets is as a magnet for speculators, who seek to make a fortune by buying it before it rises in value. Of course, they could also lose a fortune if it drops sharply.

In case it isn’t obvious, this is the Oxford English Dictionary’s definition of the word “gamble”: To take risky action in the hope of a desired result.

As you probably know, the value of Bitcoin is extremely volatile. In early October 2020, a unit of Bitcoin was valued at less than $11,000. It peaked at more than $63,000 in mid-April 2021 and ended May at roughly $37,000.

4. Cryptocurrency is secure but not necessarily safe. The cryptography on which its transactions are based establishes highly secure transactions.

If you lose your private key/password, however, cryptocurrency is so secure that you’ll be locked out. That means you will lose the entire value of your Bitcoin.

As a comparison, your Canadian bank deposits are insured up to $100,000 per account by the Canada Deposit Insurance Corporation. In the United States, the Federal Deposit Insurance Corporation insures your bank deposits up to $250,000 per person per insured bank.

5. Bitcoins are “mined” by solving complex computational math problems to add a block of transactions to the blockchain. That process uses an enormous amount of computing power and energy, which makes it extremely harmful to the environment.

The annual power consumption of the Bitcoin network is estimated at 129 terawatt-hours. That’s more electricity than Norway uses in a year. A terawatt-hour is one trillion watts of electricity sustained for an hour. A single Bitcoin transaction has the same carbon footprint as 680,000 creditcard transactions, according to the Cambridge Bitcoin Electricity Consumption Index. 6. China is the largest miner of Bitcoin, maintaining an estimated 75% of the Bitcoin mining network.

Coal is by far the largest source of electrical energy in China, making up 57.7% of that country’s energy use.

7. Cryptocurrency is extremely difficult to trace and almost impossible to regulate, making it highly popular for illegal uses like drug or firearm sales, extortion, and terrorism. The ransom recently paid by Colonial Pipelines after its fuel-pipeline network was hacked was reportedly sent to the ransomware cybercriminals with cryptocurrency.

8. Cryptocurrency is ideal for e-commerce and could facilitate international transactions, including legal ones. It requires no middleman or intermediary, like a bank, which simplifies operations, and you can bypass foreign exchange.

Its avoidance of banks makes it more accessible for many people in Third World countries, where opening a bank account can be a challenge.

9. The mysterious inventor of Bitcoin, reported to be Satoshi Nakamoto, is rumoured to be fictitious.

Interestingly, the name appears to include parts of these four Asian electronics firms: Samsung, Toshiba, Nakamichi, and Motorola.

So, there you have it: the good, the bad, the ugly, and the scary of cryptocurrency. After my deep dive, I’m shaking my head even more. But I’m just a middle-aged guy, kind of set in my ways. I like to hold actual dollars occasionally. I have faith in large financial institutions. I have nothing to hide from the government. I prefer knowing that if I should forget a password, I won’t lose a fortune. And I’m not fond of gambling or supporting terrorists!