The Septuagenarian Speaks, published August 8, 2021, Siskiyou Daily News
All eyes these days are on Afghanistan, for good reason. There is only one word to describe what’s happening there, and you can’t say it in a family newspaper. It’s actually two words tacked together, the first being “cluster.” I will spare you my biased opinion on the topic, and leave you to choose one from your source of choice, NPR, CNN, Fox News, or whatever.
Today, I’m going to talk about cryptocurrency, which, so far, isn’t a cluster****, although the government is chomping at the bit to regulate it, and therefore, screw it up. The government has been slow to pounce on cryptocurrency so far because it can’t figure out what is, and therefore can’t decide which of its agencies should regulate it. Is cryptocurrency a commodity, a security, a technological breakthrough like the World Wide Web was back in 1989, or something entirely new? Cryptocurrencies have been headline news off and on for several years, usually when one, such as Bitcoin, has a wild mood swing in its valuation. Recently, cryptocurrency regulation was part of the Senate debates on the so-called infrastructure bill. One of the sticking points of the debate was a proposal to give the federal government authority to impose new tax-reporting requirements on cryptocurrency brokers. Given that cryptocurrencies are by definition “virtual,” you have to wonder how they can be part of infrastructure, which we usually think of as roads, bridges, buildings, and things like that. There is a logical answer … well, sort of logical. The connection is that “regulating” the tax reporting rules will increase federal revenue by some $28 billion over ten years, and thus help pay for the other infrastructure. That’s Congress for you.
The recent buzz about regulating the cryptocurrency industry, and specifically Bitcoin, has made me realize two things. First, I really don’t have a clue what Bitcoin is. And second, whatever it is, I want one. I want to buy one and put it in my wallet. So, I started to educate myself. In doing so, I was disappointed to quickly learn that I can’t afford a bitcoin right now because its current price, as of August 26, is $46,756.30. (By the time you read this, the price could easily have increased or dropped $10,000 or so.) In the last 52 weeks, the price of one bitcoin has fluctuated between $9,916.49 and $64,863.10. Back in October 2010, you could have purchased a bitcoin for ten cents. If you had bought $100 worth, your 1,000 bitcoins would now be worth almost $47 million.
I also learned that if I could afford a bitcoin today, I could actually put it in my wallet. So, how, you may ask, can you put anything “virtual” in your wallet? Easy. You get a virtual wallet.
Confident of my new-found knowledge and understanding of cryptocurrencies, I feel compelled to pass this wisdom on to you. Here is my crash course on Bitcoin, lesson one:
Who invented Bitcoin? On January 9, 2009, Version 0.1 of the Bitcoin software was released by Satoshi Nakamoto. Satoshi Nakamoto is thus regarded by people who know about these things as the creator of Bitcoin. But strangely, no one knows who Satoshi Nakamoto is (or was). Not only that, noone knows if Satoshi Nakamoto is a man, a woman, a group, or a thing, or if he/she/it existed at all. But he/she/it does live on, because the smallest Bitcoin unit, equivalent to 100 millionth of a bitcoin, is called a “satoshi.” As of August 26, the value of a satoshi was $0.0004679. Therefore, today one U.S. Dollar equals about 2,123 satoshis (SATS). I guess even I can afford a few SATS. By the way, did you notice that in this paragraph I mentioned Bitcoin (with a capital “B”) and bitcoin (with a lower-case “b”)? It’s not a typographical error. Bitcoin, with capitalization, describes the concept of Bitcoin, or the entire network itself, while bitcoin, without capitalization, describes a unit of the currency, as in “I paid two bitcoins (or two BTC) for my latest shipment of illegal cannabis.” Yes, Bitcoin use has been popular in illicit transactions, because cryptocurrencies are not regulated by any centralized authority, are free from government control and intervention (so far), and don’t have a centralized issuer such as the central bank of any country. But Bitcoin has also been increasingly more common in legitimate transactions (maybe for the same reasons?). More and more retailers are accepting bitcoins. For example, if you look hard enough, you can now buy things like cars, furniture, vacations, electronic equipment, socks, and even funerals. The common abbreviation for a bitcoin is BTC.
Cryptocurrency – According to old standby Wikipedia, “a cryptocurrency is a binary data designed to work as a medium of exchange wherein individual coin ownership records are stored in a ledger existing in a form of a computerized database using strong cryptography to secure transaction records, to control the creation of additional coins, and to verify the transfer of coin ownership. Cryptocurrency does not exist in physical form (like paper money) and is typically not issued by a central authority.” Therefore, cryptocurrency is an internet-based system that uses cryptographic functions to exchange financial transactions. Cryptocurrencies are virtual or digital currencies and have no physical existence. They exist only as a set of programming codes.
Blockchain technology – Blockchain is a giant database, but the data is not stored in any central location. It is stored in computers all over the world linked together. The use of blockchain technology isn’t limited to cryptocurrencies. It can now be used to move lots of things, like real estate, automobiles … and bitcoins. And it can do this without a middleman, such as a bank, as occurs in a conventional transaction when you order something from Amazon with a credit card using U.S. Dollars.
Wow! Are you confused yet? I sure am.
Why would anyone want to invest in a bitcoin if it doesn’t physically exist? Some people invest in it as a hedge against inflation. Why is that? Bitcoin is distinguished from more conventional fiat currencies like the U.S. Dollar, because, at least in theory, Bitcoin has a finite supply of 21 million units (bitcoins). There can never be more than 21 million bitcoins (at least that’s what they claim). When a government, such as the U.S., wants to pump more currency into the economy, it just prints it. Therefore, inflation is built into the system. U.S. inflation rates have varied over the years, but there has always been some inflation. Since the introduction of the CPI, the highest inflation rate was 19.66 percent in 1917. Today’s rate is above 5 percent. The proponents of Bitcoin claim that because only 21 million bitcoins can be created (mined), bitcoins are a good investment as a hedge against the always inflating U.S. Dollar. Sounds pretty tempting, right? But wait, there’s more. The price of a bitcoin on April 14 of this year was $64,863. If you would have bought one bitcoin on that date, only four months ago, you would have lost more than $18,000 at today’s price. Investing in Bitcoin is not for the faint of heart. So, do you think the government should regulate Bitcoin? Do we need the government to save us from ourselves and our own greed? Hopefully Americans are smart enough to make their own decisions about how much risk to take. If you bought a bitcoin on April 14, it wasn’t because anyone held a gun to your head. But … I’m sure the government will regulate it anyway, because that’s what government does … just as soon as it can figure out what it is.
I’m still learning about Bitcoin and intend to keep working on my knowledge and understanding of it. Let me know if you want me to share.