What They Don’t Want You To Know About Cryptocurrencies
By P.J. Beaumont, co-creator of Tactical Pajamas®
(Note: P.J. is a trained and certified FOREX trader.)
Nearly everyone’s heard of Bitcoin, but very few people— even some of the people who own a lot of it— know what it actually represents. They just know they do X and get Y.
Bitcoin began when a proposal outlining the system was published by an anonymous person or persons calling themselves Satoshi Nakamoto. Some people think that maybe the CIA was behind bitcoin (https://www.vice.com/en/article/dyp7vw/the-cia-is-deep-into-cryptocurrency-director-reveals). Some people think that might make a difference, and some don’t.
THE BIGGEST LIE AND THE BIGGEST TRUTH
The biggest warning given about cryptocurrencies is that— with a very few exceptions— they are not backed by any type of physical worth. IOW, there is no gold, no bonds, no tangible asset that is linked to Bitcoin or Ethereum, etc. which would assure the holder of the currency that the worth of his or her cryptocurrency holdings will not drop to zero in value.
So what supports Bitcoin?
Remember this: If they can get you asking the wrong questions, then the answers don’t make any difference. Burn that phrase into your mind. It could help keep you from getting brainwashed in the future.
So what’s the right question?
The right question is, “What supports any currency?”
Cryptocurrency traders will often refer to government-issued money as “fiat currency.” Fiat basically means, “Because I say so.” The U.S. dollar is supported by “the full faith and credit of the United States Government.” Notice what that doesn’t say. No gold, no silver, no land. Just “faith and credit.” Silver Certificates, which were redeemable for silver, haven’t been issued since 1964, and can’t be redeemed for silver today.
The U.S. government went off what was called the “gold standard” in 1971. Conspiracy buffs will tell you that it was a ploy to raise the percentage of money paid to the government in taxes by the citizens. That happened, but such increases had been going on for many decades anyway.
(Slightly off-topic, here’s an interesting statistic— Quarters used to be made out of silver, but now they’re made out of mostly base metals that aren’t worth much. People are talking about raising the minimum wage to $15. Back in 1964, the last year that 90% silver quarters were minted, the minimum wage was $1.25/hr. You could get paid in five silver quarters for an hour’s work. How much are those quarters worth now? As of this writing, the silver in one of those quarters is worth a little over $4. If you got paid five silver quarters for an hour’s work today, you would be earning about $20 in today’s money, simply based on the coins’ silver content.)
What determines the worth of the U.S. dollar is, in some ways, complicated. The Federal Reserve Bank has many methods it uses to try to regulate the economy, and thus the worth of the U.S. dollar. However, nothing they do can have absolute control over it (some people would add, “except to screw it up”).
Also, in order to understand U.S. currency, you need to understand where money comes from, and very few people understand this at all. And when I say “money” I’m talking about the value of money, not just the stuff that’s printed or minted or tallied on a ledgers in banks.
So what’s the answer? Where does the value of money come from?
Basically, money in that sense is generated when banks make loans. (More background info from The World’s Smartest Human: https://www.straightdope.com/21341890/how-much-money-is-there-with-the-u-s-borrowing-so-much-why-aren-t-we-broke)
B.S., you say! Money is printed by the U.S. Government. Surely that is where money comes from!
Remember this: MONEY IS NOT THE SAME AS WORTH OR VALUE! Printing more money just leads to inflation (which is happening). The WORTH of the dollar you own is determined by the market. The market judges how much a unit of currency is worth by the analysis of many factors, including the stability of the government, the economy, and society in general. Which is why a crappy government can cause a country’s currency to inflate to the point where it costs millions of the pre-2008 Venezuelan bolivars to purchase a loaf of bread. Today the original Venezuelan Bolivar has been replaced at least three times, the first time at 1000/1 and the second time at 100,000/1. So it would take 10,000,000 pre-2008 bolivars to buy one as of mid-2021. Since then, Venezuela devalued its currency again. I think it added five zeroes, but at this point it’s pretty meaningless, as the original amounts of the citizens’ savings accounts are tiny fractions of a decimal place.
One thing, though— there is one way for governments to try to generate worth, and that’s if they act like a bank. Which is seldom a good idea, but which they all do, in one form or another.
What about going back on that gold-standard thing? Remember this— ANYTHING is only worth as much as someone else is willing to pay for it. During the Bosnian civil war, gold was worth very little. What had great worth? Cheap cigarette lighters, ammunition, and antibiotics. In the current time, when law and order still maintains a general hold on what we call the civilized world, going back on the gold standard might act as a type of limiter on how fast the worth of money can change, but that’s not always a good thing. Besides, there’s not enough gold in the world to support the worth of all the currency floating around.
So what’s the bottom line?
Basically, it’s ALL “funny money.” The financial system works because we need it to work, and we believe it will work. Something needs to function as a means of exchange, and so far this has proven to be the most practical and resilient system we’ve found. Also, it’s extremely well entrenched, and everyone knows what to expect of it.
So its benefits are universal recognition, familiarity, resiliency, and entrenchment. As well, fiat currency is the only currency accepted as payment for taxes, and official courts will declare fines, penalties, and awards in lawsuits only in the fiat currency of the country in which they are adjudicated.
Into the existing financial system enters cryptocurrencies. Why are they worth anything at all? To figure that out, let’s see what they offer.
Originally, cryptocurrencies offered anonymity, relative safety, and low-cost value (“money”) transfer between individuals anywhere on earth. Bitcoin was not designed as a means of investment, but as a means of exchange only. You want to purchase something from me (let’s say it’s the rights to a patent, use of a photograph, or even stock in a company), I want to sell it. I’m in Canada, you’re in South Africa. Making payments by bank can take time and/or cost a lot of money in transfer fees. However, if we do the exchange using an amount of Bitcoin equal to the equivalent amount of national currency (as determined by the exchange rates at the time of transfer), the transfer of value can be nearly immediate and have a very low cost of transaction.
As Bitcoin was originally envisioned, you and I would then transfer our Bitcoin back into our respective national currencies. And that’s the way it happened at first.
But that changed. Bitcoin value started going up, and because of that people used it as a means of investment instead of a means of exchange. The original value of Bitcoin was about a penny. As I write this, one Bitcoin is worth well over $47,000. At one time, it was nearly $70,000
Why did it go up so high? One big reason was this: Fucked-up governments.
When currency crises started happening in various parts of the world, people looked for a place to stash their accumulated monetary wealth that was different and outside of government channels. If they had access to a computer, they had access to Bitcoin. The worth of their accumulated monetary wealth was plummeting down to nothing, but here was this universal money exchange, and the worth of each unit of it was going up! If you saw your net worth imploding, and you had access to this monetary life raft, what would you do?
Millions of such people bought as much Bitcoin as they could get their hands on, which led to the other reason why Bitcoin kept rising in value. Other people saw the worth rising, and purchased Bitcoin as an investment. Together they blew up the price of Bitcoin by a factor of (at one time) over six million.
Bitcoin and other cryptocurrencies have taken hit after hit from governments around the world, and they keep on bouncing back. In fact, some governments have created their own cryptocurrencies.
It looks a lot like non-governmental control (or non-control, some might say), plus a degree of anonymity, plus the lack of foreign exchange fees, plus the lack of bank fees, has monetary worth.
Let’s look at that anonymity thing first, because it’s the most confusing and mis-understood. Are Bitcoin and other cryptocurrencies truly anonymous?
There are dozens if not hundreds of cryptocurrencies plying the market, so to simplify things let’s look just at Bitcoin for this. Most other cryptocurrencies rely on some similar form of blockchain. To discuss anonymity in Bitcoin, we’re going to have to discuss blockchain. Forgive me if this gets a little technical.
Without going into detail, blockchain is basically a means of recording the record of an exchange in many places and in a way that can’t be easily counterfeited. Each transaction is tested against the record of past transactions, which are held in nodes throughout a network, and only if the network agrees that the transaction is valid does the transaction proceed.
Summary— in theory, you could no more counterfeit a past blockchain transaction than you could go into a large crystal and extract a single, specific molecule— without disturbing any other atoms in the crystal. Impossible, basically.
Is Bitcoin truly anonymous? Kind of, sort of.
In order to make it secure, Bitcoin has two keys, a private key (which only you or your wallet should know) and a public key. The transactions are encoded by the public key, which is available to anyone, but they can only be de-coded by the private key, which only you know— IF you take the proper steps to safeguard it.
But because the record of transactions is totally public, if your public key can be matched to your real-world identity, then any Bitcoin given to or sent by you can be connected to you. Brokers like Coinbase are required by law to “know their customers,” and thus will require you to confirm your identity before they give you access to their exchange. No anonymity there.
WHAT THEY DON’T WANT YOU TO KNOW
Which leads me to one very interesting aspect of cryptocurrencies that nearly no one who deals with them is aware of— where does that private key come from? Realize this— THE NETWORK DOES NOT KNOW YOUR PRIVATE KEY! Nobody else but you/your crypto wallet knows it!
How do you get a private key, then? Simple. Your computer (or the hardware wallet, if that’s what you’re using) generates it when you create your digital wallet. In fact, it is possible for you to take your human brain and generate the series of numbers and letters that will form a Bitcoin private key.
What makes sure that some other computer doesn’t create the exact same private key for that person’s crypto wallet?
Nothing, except for the laws of chance (which are heavily on the side of there not being another identical private key).
WHAT ABOUT ALL THOSE MASSIVE BITCOIN THEFTS?
There are multiple ways to enter into the cryptocurrency world, one inconvenient but safe way, or several convenient but vulnerable ways.
The inconvenient but safe way is to make sure that your private key is stored only in a secure cryptocurrency wallet that is separate from your computer or phone. Ledger, for example, is a highly regarded cryptocurrency wallet.
A more common convenient but still very vulnerable way is to store your private key in a cryptocurrency exchange, and hope that the software designed to keep your private key safe works effectively, AND that the owner of the exchange is honest.
Some on-line cryptocurrency exchanges use a third way– they don’t give any of their users a separate private key at all— you just have to trust that they will keep your crypto safe. They use their own public and private keys to carry out the transactions that their customers request.* Many customers of this type of exchange transfer their crypto to a secure hardware wallet ASAP after a transaction.
Storing your private key on an exchange— or using an exchange where you do not have a private key— can greatly speed up transactions, as well as lower their cost. But if a hacker gets access to the private keys in an exchange, billions of dollars with of crypto can be siphoned off very quickly.
Storing your private key on a separate, secure crypto wallet means that extra steps will be required to complete any transactions, but the chances of anyone getting your private key are much smaller than with any other method.
Another option is storing your private key on your computer, but that is not recommended. If you can’t figure out why, then you have no business getting into crypto.
As for anonymity, if any aspect of your identity can be tracked to a public key— for example, if you purchase Bitcoin with a credit card— the transaction can eventually be traced back to you. Criminals use multiple layers and various identities to try to hide their cryptocurrency identities from authorities. Allegedly the U.S. Government was able to track down one ransomware hacker group that got its ransom in crypto, and get most of the money back, but they didn’t give any hard evidence of it.
One way identities can be traced is by looking for identical amounts of money being transferred between accounts. If the transactions are broken up between several private keys, that makes them extremely hard to trace. Criminals can get the main payment in one account, and then immediately split the funds into several other accounts, greatly reducing the ability of authorities to find out where the money actually ended up. The first account is then discarded.
How can you purchase cryptocurrency anonymously? Probably the safest way (and it’s only moderately safe) would be to find someone locally who is selling some, and do an in-person transfer. Some organizations exist that allegedly vet members who wish to do such transactions.
And as mentioned earlier, cryptocurrency brokers who operate in the U.S. are required to “know their customers,” and you will need to prove your identity before you can work with them. Many other countries have similar laws.
SHOULD YOU GET INTO CRYPTOCURRENCY?
Some respected pundits have said that cryptocurrencies are nonsense, a fad, and will be relegated to the trash heap of economic history. But if that’s true, why are some large, established and respected banks moving into cryptocurrency?
Crypto is very volatile, and the rise of government regulations is causing issues. Several months ago, China passed its most restrictive laws yet against cryptocurrency, and while the market reacted, it was only a few percent, and for months cryptocurrencies were trending higher across the board. Bitcoin in particular has undergone several cycles that have seen its price drop as much as 27% or more. As I write this, Bitcoin dropped from a high of nearly $68,000 to about $48,000, and for the past few weeks is clawing its way back up. So far nearly all cryptocurrencies have bounced back from several major downturns. Apparently the world wants and needs cryptocurrencies.
However, crypto– specifically bitcoin– has a major, major problem, and it’s this: Just a few entities control huge percentages of bitcoin, and relatively small transactions of 150 bitcoins can swing the price several thousand dollars. That’s a lot of volatility.
There’s another aspect to cryptocurrencies, and that’s cross-currency “propping.” Some analysts claim that exchanges are supporting themselves by borrowing a cryptocurrency and then buying it back to prop up the price, then claiming the new amount as collateral (that’s the simplified description). Those analysts say that new people bringing in fiat currencies are the only thing keeping the system alive. (There’s a great explanation of this at this link, if you really want to get into the weeds about it: https://www.coalexander.com/post/the-tether-binance-axis-and-the-great-crypto-crash-of-2022)
Personally, I’d buy when the dips hit about 17% (expecting perhaps a 20% reversal) and sell short when the highs exceed the previous high by 12% (expecting as much as 16%). Those are rough estimates, though, and are subject to revision as the numbers are approached. Use extreme caution.
CRYPTOCURRENCIES AND SHTF SURVIVAL
Will crypto work if society breaks down? In my opinion, no. Money in general will be worthless, and even precious metals will not have much worth. As well, there will probably be no network access available to record and confirm the transactions.
I could be wrong, in that people in an uncertain world will want to keep their wealth in a form that is transferable and secure from government interference. But if you buy a million dollars worth of Bitcoin, and the value increases to ten million dollars, what good will that do you if a loaf of bread costs $12,000,000? If the world comes back from catastrophe and gets itself together, will cryptocurrencies return to their former values?
That is impossible to say, as nothing like that has ever happened before.
As well, in order for cryptocurrencies to function they require a world-wide, cutting edge network. If the network is down, you can’t do any transactions, or at least you can’t do any that would be secure.
*Note that in some exchanges, transactions can be executed between members of the exchange without going into the network. Member A wants to buy $100,000 of Bitcoin, and Member B wants to sell that amount, and the manager of the exchange can cause that transaction to take place without ever going out to the outside (cloud-based) network. Often the exchange operator can pool the buy-and-sell amounts into one general account, and move the required amounts between the accounts of the individual members as easily as changing the numbers on the electronic ledger. If anyone wants their Bitcoin to be transferred to their own wallet outside the exchange, the exchange operator just sends it out from that main account (this is a simplified explanation). If the exchange is big enough, the transactions have a better chance of being balanced between buyers and sellers, and the exchange only needs to put transactions into the network when things get unbalanced or large customers extract funds. That’s why transactions can be cheaper through such exchanges, because much of the time they are just transferring data between accounts. This type of internal trading is extremely common with FOREX brokers.