The BitCoin Apocalypse

Patrick Stingley

8/14/2017

"We live in a fantasy world, a world of illusion. The great task in life is to find reality." Iris Murdoch.

"Money is an illusion and cryptocurrency even more so." Patrick Stingley

BitCoin, crypto-currency and BlockChain are three terms bandied about these days, sometimes used interchangeably. However they are not synonymous. Each has a specific meaning and it is important to understand what each is about.

BitCoin is the name of the largest virtual currency company currently in existence. It is a form of currency that only exists on the Internet. It represents a disruptive technology because it allows people to transfer value globally over the Internet, without requiring the services of banks or their associated fees and controls. This makes it ideal for people who want to transfer money across borders without paying a bank a percentage. In so doing it also makes it possible for criminals to send their transactions without the scrutiny of banks.

BlockChain is an algorithm that can secure data across multiple systems in a distributed fashion, making it an ideal technology for use on the Internet. Invented by Satoshi Nakamoto in 2008, it is best known for being the secure ledger system used by BitCoin. 

It is important to define these terms because BitCoin and BlockChain are two different things. Although BitCoin uses BlockChain to secure its transactions, there is nothing saying that BitCoin must only use BlockChain. If a flaw were found in BlockChain, BitCoin could shift to another encryption system and continue to do business. Similarly, BlockChain is in use by many more groups and has many more uses besides BitCoin.

CryptoCurrency – Because BitCoin and its ilk use encryption to provide transaction security and because Internet based currency like this is not visible to the human eye, as a dollar bill would be, these are called CryptoCurrencies.

The controversies surrounding CryptoCurrencies stem from two things, the first being that these systems don’t require banks. Banks make untold trillions each year by charging for the monetary transfers they perform. CryptoCurrencies can effectively operate for free, thus making them a disruptive technology so far as the banking community is concerned.

The second concern, which stems from the lack of bank involvement is that the regulations imposed on banks do not apply and are not enforceable with CryptoCurrencies. For instance, U.S. banks are required to identify the sender and recipient of any transaction of $10,000 or more (ostensibly so the federal government can identify criminal activity). Because a cryptocurrency is decentralized, it is not necessarily a U.S. Bank. In fact, it may not qualify as a bank at all.

The next major concern the federal government has about CryptoCurrencies, especially those that use BlockChain is that the BlockChain algorithm doesn’t appear to have a back door.  This poses a concern for the National Security Agency, but brings to light what should be a larger concern for the rest of us by implying that the NSA has a backdoor into the other encryption systems commonly in use today.

Now that the above points have been explained (somewhat) it’s time to delve into why this article is titled The BitCoin Apocalypse.  Money itself is a fabrication of the human mind. It is only valuable so long as people agree that it is. Sheets of paper with pictures of famous people printed on them aren’t worth much from an intrinsic point of view. What makes them valuable is the value people ascribe to them. Up until 1971, the American Dollar could be converted directly to gold. Until that point, the value of the dollar was tied to a limited resource, Gold. The problem with releasing the Dollar from its bondage to Gold is that once a currency is allowed to float, it’s value can fluctuate wildly depending on people’s collective views towards that country, its people and its leadership. If people inside as well as outside of the country don’t have much faith in these, then the currency (and thus the citizen) suffer. This was seen after the Second World War when the war debt tied to the floating currency resulted in a lack of faith in European currencies, leading to hyperinflation. The United States did not experience the losses that Europe did because it didn’t amass war debt while simultaneously dealing with severe destruction. In 1971, when at Nixon announced that the American Dollar would no longer be able to be transformed for Gold, the effect seemed to be to float the dollar and allow it to come into alignment with Europe. However this didn’t happen, because the American Dollar is also tied directly to the price of oil. Oil is priced in terms of dollars per barrel and by 1971 it became clear that the U.S. was much more tied to oil than it was to gold. Further, the United States has significant oil reserves serving at buttress its economy for many years to come. Because it is tied to the price of oil, the more oil other countries use, the stronger the American Dollar becomes. 

As an aside, the first sign of an economic war between the Chinese and the U.S. would be if China were to try to price barrels of oil in Yuan. If they were to do so, it would effectively float the US Dollar and since China now has the largest economy and is a massive consumer of oil, this would effectively tank the U.S. Dollar taking the U.S. economy with it.

Thus far, this hasn't happened and so the U.S. Dollar remains strong. BitCoin, on the other hand, is not tied to anything intrinsically valuable. If one day everybody decided they no longer believed in BitCoin, its value would evaporate. 

Some are wondering how big banks will react to BitCoin. Will they use their considerable influence to make CryptoCurrencies illegal? Such moves would be counter productive because they would t imbue a level of credibility to the CryptoCurrency economy by broadcasting their fear of it while highlighting the interdependencies between governments and the financial community that neither of these groups would like publicized. All a frontal assault would achieve would be to force a CryptoCurrency economy underground where it has been very happy serving the shady side of commerce for some time. A significant risk of this approach of forcing it underground is that, due to its disruptive cost structure, the outcome could well be a groundswell of adoption making the conventional banking economy irrelevant.

The more effective approach for big money to eliminate CryptoCurrency would be to incite an incident leading to a is a lack of faith in it. For example, an event such as a major international industry (such as a telecom provider) using BitCoins as a means of paying its bills internationally, overextending itself in debt to achieve rapid expansion, then defaulting on all of its loans would be enough to cause the entire ecosystem to implode due to a lack of faith in it. A few millionaires would lose their investments, but these same millionaries would likely make more money back because of their interests in conventional banking. On the other hand, the lack of faith this would cause in the CryptoCurrency industry would be devastating.