Summary of Crypto-Currency article in the September-October 2018 Newsletter, published September 17

I rarely include quotes from the newsletter here, 

since people pay for the letter, but this blog is free 

-- mainly used for charts that are easier to read here. 

But, this is my first, and probably last, 

article on crypto-currencies, 

so here's the summary from the newsletter:

CRYPTO-CURRENCIES: 

IS  THE  2018  COLLAPSE 

A  BUYING  OPPORTUNITY ?

Crypto-currencies will be abbreviated "CC" in this article. 

 The CC referred to here will be Bitcoin, unless otherwise specified.

Bitcoin is a new subject for economists to debate! 

I had a few short articles on CCs in the EL Blog, in late 2017 and early 2018. The 2017 CC price rise was obviously a price bubble, and a "bear market" was expected. The most incredible bull market for any asset in history was a dangerous situation, and just like all prior asset price bubbles, it did burst. 

SUMMARY:

CCs combine elements from economics, cryptography, and computer science. Blockchain uses proven technologies, linked in an innovative way, to make decentralized management of a ledger (database) possible. Bitcoin is one of many different virtual monetary units -- it can be divided into 100 million Satoshis, if anyone is interested.  

The Bitcoin Blockchain is a data file that carries the records of all past Bitcoin transactions, including the creation of new Bitcoin units. The Bitcoin Blockchain is a sequence of information blocks, where each block builds on its predecessors, and contains information about new Bitcoin transactions. 

CCs like Bitcoin avoid central banks. They use a ledger (database) maintained across a computer network (called a "distributed ledger"). Members of the network verify and validate CC transactions. A transaction is the transfer of ownership of digital "coins", from one anonymous person to another anonymous person. Cryptography is used to prevent fraud. 

The blockchain is a record of the entire history of the ownership of the digital "coins". No one owns the blockchain -- it is distributed among a community of users. "Miners" compete to earn "coins", in payment for verifying transactions (to form the next block of the data chain). This is an alternative to the clearing and settlement process used by a central bank. 

The first successful CC was Bitcoin. Ethereum is another CC. In fact, there are over 1,000 different CCs. The CC owners are anonymous, by using monikers. The CC "miners" are anonymous too. That worries me -- honest people do not have to be so anonymous!

Large amounts of cash are used to trade illegal drugs, evade taxes, and get around foreign exchange controls. Cash promotes crime, and facilitates money laundering. That's why cash is condemned by many politicians and economists. About 80% of US currency is $100 bills. Large denomination cash is used in criminal activities. Some economists propose eliminating large denominations of cash to reduce crime. 

Large scale crime, that would be awkward using cash, would be much easier, and safer for the criminals, by using CCs. Bitcoin has already been used for extortion and ransom-ware payments, for one example. Making crime easier is not in the best interests of society. Government regulators could crush CC technology. 

The blockchain technology allows storage of identical data in multiple locations. Due to that data storage redundancy, blockchains are enormously expensive to operate, and slow. Each computer around the world that stores a copy of the database must agree to each change made to the database, before the network can process new data entries. 

To prevent fraud, there is a "proof-of-work game", played by anonymous Bitcoin "miners", that is intentionally very complex and costly. The proof-of-work protocol timestamps the transactions recorded in the blockchain. The correct blockchain is always the blockchain with the longest history of proof-of-work computing. This adds up to a huge waste of electricity.

With conventional money -- checks and credit cards -- bank validations of transactions are extremely fast, and cheap. There is no processing problem that needed to be fixed.

CCs will not become a common means of payment. Transaction costs are too high. CC prices are too volatile. And the blockchain system does not permit a large volume of rapid transactions.

The number of different CCs is multiplying like the rabbits multiplied in my yard this summer. Unfortunately, many rabbits turned out to be lunch for the hawks who have a nest behind my neighbor's house! Concerning CCs, I believe the people mining and selling them are the 'hawks', and the buyers are the 'rabbits'.