Cryptocurrency 101 (Part 5)

Photo by JD Hancock

Part 1     Part 2     Part 3    Part 4

Having written about the basics of cryptocurrency and blockchain computing the past 4 weeks, I now want to conclude this series by addressing certain common objections that people inevitably make every so often. Since most people are familiar with bitcoin, I will use bitcoin as a general term. So when I mention “bitcoin” it not only refers to bitcoin per se but to other types of cryptocurrency as well, unless explicitly stated.

  • Bitcoin is not backed by anything.

People who make this objection usually say that our money is backed up by our government’s gold reserves or something like that, but that is actually an argument from ignorance. As early as 1931, Britain abandoned the gold standard of money and it was quickly followed by the US in 1933. Today, no government in the world uses the gold standard.

Instead we are now using fiat money — which is essentially money that the government mandates to be accepted as a means of payment. In other words, our money today is not backed by anything except the government’s say-so that it is valuable. Even then, even our government does not control the value of our currency but is instead dependent on the world market for our currency — like any other currency in existence — cryptocurrency included.

The underlying implication of this objection is that bitcoin has no value in itself. It’s all just electronic signals in a computer. But this overlooks the fact that the same can be said for fiat money. It has no value for itself — it’s just pieces of paper and bits of metal. If the government collapses, the currency becomes worthless.

Even gold and silver have no intrinsic value other than being rare and shiny perhaps. Now, I would even argue that the intrinsic value of bitcoin lies in the security of its network as well as its portability. No other currency can match bitcoin’s portability. I can go to any country that has internet and send the to anyone or receive them from anyone in the world. Even if entire countries like the US or China gets blocked off from the internet, bitcoin will still be running and I will still have access to my coins because they can’t be blocked or frozen by any government.

  • Bitcoin has no central authority.

Again, this comes from a mindset that a country’s currency is backed (or controlled) by its government. Someone told me, “If the Philippine peso fails, then I know who to run to or to blame.”

My response is, if the government fails, well yes, you can blame the government but there is now no government to run to. And so what if you can blame the government? That will not bring back the value of your money.

In fact, the one using this objection misses the point entirely that the power of bitcoin resides in its being decentralized — that it is quite difficult for any one entity to control and manipulate the currency because of the way the blockchain works. That it has no central authority is actually an advantage rather than a disadvantage. As I mentioned in #1, no one and I mean no one can freeze my bitcoins. As long as I have my private keys, I will always be able to access my bitcoins and no government or any other entity can stop that.

  • The bitcoin market is too volatile and risky.

This is true. When I started on this series, the price of bitcoin was at an all-time high of around $2900. Since then, it has dropped briefly to around $2,200 and is now hovering at around $2,600. Those are some pretty wild swings in a four-week span.

However, I approach risk not in terms of avoiding it but in how to manage it. As a businessman, I understand that there is risk in everything that I do. There is risk even in crossing the street or driving my car to work. One cannot avoid risk. One can only manage it.

The way I manage risk when investing in bitcoin is to use only extra money — money that I can afford to lose or to keep dormant for a few months or even a few years. That way, if the price of bitcoin drops suddenly, I won’t panic and begin to sell it off because I need the cash. I can just sit tight and wait for it to go up again.

And I’m confident that bitcoin (and other cryptocurrencies) will still go up in value. We have only begun to scratch the surface of this new type of currency. I believe there is so much more in store and so many other uses for it that will be developed in the future — maybe not necessarily with bitcoin itself but with other cryptocurrencies offering more advanced features like smart contracts and so on.

It used to be that only a small group of geeks understood bitcoin, and that circle eventually grew wider and wider, and it grows wider still up to today when even non-geeks are now interested in investing. Simple economics dictate that when the demand goes high for a commodity of limited supply, it’s price can only go up.

 

Originally published in Sunstar Davao.

Email me at andy@freethinking.me. View previous articles at www.freethinking.me.

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