Risky Business: Coining a new currency

Risky Business: Coining a new currency

Photo Illustration by Jenny Li and Kate Schrage

When Brandon Porter ’18 saw his 2013 Bitcoin investment triple in value in less than six months, he felt a sense of victory. He quickly sold his investment, congratulating himself on profiting off the “passing fad” as much as he could.

Little did he know that the value of Bitcoin would continue to exponentially grow. Had he kept his initial investment, he would have more than $50,000 today.

Bitcoin’s first recorded value was at about eight hundredths of a cent in 2009. As of publication date, one Bitcoin is equal to 16,930 U.S. dollars.

“People look at Bitcoin like a kind of virtual gold, something they invest in, hoping that it will go up,” Porter said. “People go in completely unaware of the risks of Bitcoin, driven by others like them who view it as a get-rich-quick scheme.”

Bitcoin was developed in 2008 by an unknown coder under the screen name of Satoshi Nakamoto as an untraceable currency operating beyond government oversight. Because Bitcoin and other cryptocurrencies, or virtual currencies, are decentralized and exist virtually, they bypass middleman institutions, such as credit-card companies, banks and other government institutions, that people currently rely on to transfer money.

A key tenet of Bitcoin and most cryptocurrencies is the blockchain, which records each transaction on a public ledger to verify each transfer’s authenticity, prevent fraud and maintain accountability.

Because the records are not held by a centralized authority, there is a perceived anonymity in transferring cryptocurrencies, which attracts black market patrons and promotes illegitimate actions, interim math department head and AP Economics teacher Kent Nealis said.

Even though transfers are already recorded under anonymous passkeys, investors can use “mixers” to further encrypt their deposit information.

This process makes purchases more secure, but it also allows investors to purchase from online drug markets, Jeff* ’18 said. He said that those who choose to purchase drugs prefer the increased safety and lowered chance of substance contamination that comes from purchasing using cryptocurrency.

“It takes a lot of research to actually do it, so it’s a barrier of entry for most people,” Jeff said. “But in the end, it’s a lot safer and easier, and [drugs can be delivered to your] home and basically anywhere. However, although [cryptocurrencies are] used in black markets, I don’t think that’s an excuse that they won’t be used in mainstream society.”

Nealis said cryptocurrencies fail to serve as a true form of currency for several reasons: lack of acceptability, relative value and function as a medium of exchange.

“The idea is that it is supposed to be money,” Nealis said. “I don’t think it is right now. For something to be money, it has to be a medium of exchange. You don’t want it to be eroded by inflation and deflation, and in that regard, Bitcoin fails miserably. It behaves more like a speculative investment than it does a true currency.”

Porter said that if Bitcoin stops behaving like a speculative investment, it will have the ability to transform the future.

“It needs to stop being viewed as an appreciating asset and needs to actually be viewed as a currency,” Porter said. “People are using Bitcoin for a purpose it was never intended for. People think they are investing in Bitcoin like it’s an asset, not converting their U.S. dollars to a new type of currency. Bitcoin has the potential to create a financial revolution, but it won’t happen until it is accepted by the public as something more than a risky gamble.”

Porter admits this change is not likely to happen soon. He said the majority of users are unwilling to use cryptocurrencies as a form of money and instead choose to hold on to the hope of continued profit.

Nealis said that as this cycle progresses and demand heightens, the value will simply grow more volatile.

“It’s supply and demand,” Nealis said. “The supply can only grow at a certain rate, but people have been bidding up the price, demanding it and wanting to hold it because they see a profit in it. This has caused the incredible increase in value.”

Cryptocurrencies have the possibility to change the concept of money and institutions, professor at University of California, Los Angeles Terence Tao (William ’21) said.

Because cryptocurrencies are decentralized and fraud is theoretically blocked due to the authentication of the blockchain, many believe that government institutions will not have the ability to print money irresponsibly or promote inflation, he said.

John Villanova, an adviser for the cryptocurrency research center Coin Center, said he sees an even broader future.

“The concept of decentralized trust is fascinating, and the implications go well beyond currency,” Villanova said. “The currency is managed in a distributed manner by a network. Even though no single node in the network is trusted, the network as a whole can act in a trusted manner. Smart contacts enabled by blockchain technologies have enormous potential in a range of applications, including in the financial markets.”

Oliver Richards ’17, a consultant for blockchain storage company Drobo, said this technology can also change the way people save information online. He said the company works to store peoples’ data less expensively and more efficiently than hard drives or cloud storage.

“I think blockchain really is the future,” Richards said. “I don’t think we have scratched the surface of what blockchain can do yet. In the future, more and more people are going to figure out more applications for a decentralized ledger.”

However, Tao said the increased use of digital currencies comes with a price. While the decentralized nature of cryptocurrencies may theoretically be safer or prevent the abuse of currency by the government, he said cryptocurrencies will not be able to stabilize the economy during a recession or any minor hack.

“If a bank collapses and you lose all of your money, the government can restore a big fraction of your funds,” Tao said. “There’s nothing like that for Bitcoin. There’s no central authority, so there’s no one you can call. [When you’re using cryptocurrencies], you can’t get oppressed by the government, but you also can’t get rescued by the government. You’re on your own.”

Nealis said he is skeptical that cryptocurrencies will ever be able to serve as a widespread form of currency.

“If it ever got to the point that it was functioning as a real currency, I can’t see major governments not taking it over and regulating it,” Nealis said. “They just aren’t going to give up the means of payment. It’s just too valuable and too powerful.”

While the future remains unclear for cryptocurrencies, Nealis said that many can agree that they are extremely volatile and an immense risk to invest in for profit.

“If you are not making a type of calculation and not willing to take a type of risk with the expectation to get some sort of return, then all you are really doing is gambling,” Nealis said. “If you don’t have any reasonable justification for saying that a value is going to go up or down, then you shouldn’t be making it in the first place. Then, you really are just going to Las Vegas and using the coin slot handle.”

*Names have been changed.

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