Saturday, March 09, 2024

Money Developments (4) Cryptocurrencies

A big development over the last few decades is the emergency of cryptocurrencies. The main feature of these is that they are created without any involvement of a government, so they cannot be traced or controlled by governments. The best-known cryptocurrency is Bitcoin. It uses a technology called Blockchain to record transactions.

Bitcoin is a digital currency that operates free of any central control or the oversight of banks or governments. Instead, it relies on peer-to-peer software and cryptography. A public ledger records all Bitcoin transactions, and copies of it are held on computers around the world. Anyone with a spare computer can set up one of these servers, known as a node. Every transaction is publicly broadcast to the network. Consensus on who owns which coins is reached cryptographically across these nodes rather than relying on a central source of trust like a bank.

In much the same way you would keep traditional coins in a physical wallet, virtual currencies are held in digital wallets and can be accessed from client software or a range of online and hardware tools. A private Bitcoin key is a 64-character string of letters and numbers. It might look something like this: E9873D79C6D87DC0FB6A5778633389F4462313303DA61F20BD67FC233AA. Most of us could not remember a number like that, so would have to record it in some way. Owners of Bitcoin addresses are not explicitly identified, but all transactions are public.

A cryptocurrency like Bitcoin has numerous benefits.

  • Financial transfers between two accounts are fast.
  • International transfers are a lot cheaper than using banks.
  • The Bitcoin ledger is public; anybody can store it on a computer.
  • Bitcoin is pseudonymous because funds are not tied to real-world entities but to Bitcoin addresses.
  • Bitcoin is decentralized, so it does not have a central controlling authority.
  • The Bitcoin network is peer-to-peer, so it does not have central servers that can be hacked.
  • Anybody can send a transaction to the network without needing any approval; the network merely confirms that the transaction is legitimate. 
  • Buying and selling is as simple as scanning a QR code and sending an email.
  • The additions to the ledger are maintained through competition. 
  • The issuance of new bitcoins is decentralized via an electronic mining process.
There are some problems with cryptocurrencies.
  • Users of a cryptocurrency must keep their address key secret. If they lose it, it cannot be recovered. If someone steals it, they have access to all their victims’ Bitcoin. Tools are available for storing an address key, but the process depends on users being diligent.

  • A growing economy needs a growing supply of currency. The electronic process for generating new Bitcoin mimics the process for mining gold. New bitcoins are generated in a process that those who do the most work get the most new bitcoins.

  • The process for generating new Bitcoin is very energy intensive.

  • The changing relationship between supply and demand for Bitcoin caused the price to increase dramatically when it was first introduced. Many people saw it as an investment that could produce rapid returns. These people did very well in the early days, but more recently, the value of Bitcoin has dropped significantly.

  • Many people have invested in companies promising to make cryptocurrency easier to use. Unfortunately, these companies have carried all the usual risks, because they are usually controlled by a few people, eliminating the distributed security provided by the cryptocurrency. Many investors have got into financial trouble and lost their wealth. The best-known example is perhaps FTX, which operated a cryptocurrency exchange and crypto hedge fund. It eventually went bankrupt.

  • Price fluctuations can be a problem for some uses. A stablecoin is a type of cryptocurrency where the value of the digital asset is supposed to be pegged to a reference asset such as the US dollar. They have been developed to provide stability, long-term purchasing power and the predictability of a fiat currency along with the benefits of cryptocurrencies. Unfortunately, many companies that have developed a product and called it a stablecoin have crashed to zero due to inadequate design, inadequate collateral or bad management. The stablecoin with the highest market capitalization value is Tether, which is pegged to the U.S. dollar as its fiat-backed currency.

If Christians are worried about being persecuted by their government and losing their ability to buy and sell (I am not currently in that situation), cryptocurrency is a practical option. However, they should be careful about a couple of the problems.
  • Christians holding a cryptocurrency for security reasons should not expect to make massive returns. If they are holding to ensure they can buy and sell when they want to, this should not matter to them. The value of their account will go up and down, but they will have the benefit of always being able to spend it when they choose. This problem is unavoidable, as notes and coins also lose value with inflation.

  • Christians should probably buy the cryptocurrency themselves rather than relying on companies that buy them on their behalf. These companies are only as good as the people who run them, so they cannot provide real security. If Christians purchase a stablecoin to gain the benefit of price stability, they should monitor its financial viability very carefully.

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