Cryptocurrencies (Part 2): Understanding the Landscape
In this episode, Everett continues his discussion about cryptocurrencies and expands the discussion to addressing the broader altcoin market. He explains why there are so many different cryptocurrencies and what makes this emerging sector so exciting for investors and bystanders alike!
This is breaking the dollar the podcast that dismantles some of the biggest misconceptions about money, presented by Gainesville Coins.
Hello and welcome back to Breaking The Dollar I'm your host Everett Millman.
Today we're going to be picking up our earlier discussion about bitcoin and why bitcoin is often considered gold 2.0.
But in this part two I'd like to take sort of a broader view of the entire crypto space because there are way more cryptocurrencies than just bitcoin. With how much publicity bitcoin gets in the mainstream media, or at least it's increasingly getting that kind of attention, I think most of the uninitiated may think that it's the only one of its kind out there.
Bitcoin is the oldest and the most expensive cryptocurrency. I would say it's the most trusted one so far, and as I said, it has the most notoriety and kind of a level of awareness in the public eye, but it is far from the only one.
In fact, there are over 2000 other alt coins.
Those are just other cryptocurrencies, there's even more than that. There's 2000 that are well known enough to be tracked and traded and whatnot. So it's a pretty broad landscape. There are lots of cryptocurrencies out there.
And that begs the question, why? Why isn't there just one?
Are they all bitcoin clones you might wonder?
You might also be questioning what makes them different, and if they aren't clones, why do we need thousands of cryptocurrencies?
You don't have that many real currencies. You don't have that many Fiat currencies in the world.
Now, granted it's because there's only 200 odd sovereign countries in the world. There's not that many different issuing authorities to have all these different currencies.
But you could almost imagine if things became very local, and this is just a hypothetical, but it almost sounded like a good idea in my head, you could imagine all 50 us states might have their own state currency, right?
That would devolved currency system were to be adopted all around the world. Then yes, you would multiply. You would have thousands of currencies.
So why? Why are there so many cryptos?
First of all, there's a concept in the crypto space called forking.
When a cryptocurrency forks, it's kind of how you'd imagine a fork in a road. It's been traveling along one path. Everyone's been using the same blockchain. And then for whatever reason, a group of developers or miners or stakeholders, you might want to say, people who hold alot of that coin, they decide that they want to go a different direction with either the programming or maybe how the coins are distributed through mining.
So a fork is literally a break in the continuity of the blockchain. One group is breaking off and saying we're starting our own separate but sort of parallel cryptocurrency that up to that point of the fork, they shared the same history.
That's happened several times with the big cryptocurrencies like bitcoin and Ethereum. They have already spawned many little forked corollaries, you might say. So for Ethereum, you have Ethereum Classic, for Bitcoin you have Bitcoin Cash, Bitcoin SV.
So there have been multiple forks that by its nature creates other cryptocurrency.
But that's not the only way.
I don't mean to suggest that all coins were once part of bitcoin and have splintered off. That's only a few. Most other cryptocurrencies are based on some of the same principles. So they are going to use a blockchain to track transactions or activity on the network. They're going to use cryptography, encrypted transmission of information, and they're probably going to have an element of exchange value. So they all share certain qualities.
But the reason there are so many cryptocurrencies is that the technology offers possibilities that go far beyond just a digital currency.
With Dash for example, there's a lot of hype about developing apps on the Dash blockchain. They'd be called DAPS.
And I think most everyone is somewhat familiar with what an APP is. You know, it's like a cool little thing on your phone or your device that essentially is like a computer program. But in microcosm.
So your APP could do any number of things, but it will offer an interface for you to to run a program or to access a network, and again, I think maybe I'm kind of wasting my breath. You know that because most people have a smartphone, everybody uses apps now, but think of think of a cryptocurrency apps as another medium for you to develop these things.
You don't have to buy a expensive device worry or have a new device to run certain apps on a cryptocurrency network. You just have to have access to it.
You can probably tell, even from my strained explanation that this is still a growing kind of nascent emerging space. It's not fully developed. There's still a lot of kinks that need to be worked out. There's still a lot of possibilities that need to be explored, but the potential is there and that's what it has.
On the other hand, one of the reasons there are so many cryptocurrencies is because people don't agree on things all the time. Even if you are doing something very similar.
So just to pull one example.
The Crypto Monero, it has this feature of being,I don't want to say untraceable, but being anonymous. Being more anonymous even than bitcoin because that's one of the calling cards of Bitcoin and most cryptocurrencies is that all though there is a perfect record of every transaction and you can trace every fraction of a bitcoin back to every wallet is ever been in, it's anonymous. You can't unmask who those wallet addresses belonged to.
Monero goes even a step further about privacy and has an added privacy element to it, that's it's calling card. That's, it's use case, but it's probably not the only one out there like that.
There are other cryptocurrencies that purport to do the same thing or trying to do something similar, but the developers who came up with it have a different vision. They have a different idea about how to accomplish a similar goal.
And that's one of the beauties of cryptocurrencies because it brings in a lot of the innovation and ingenuity that has come out of computer science and information technology and programming. They really are applying some of those great innovations to how we think about our monetary system.
Like I referenced in an earlier episode , this isn't something that we really need to think about that much to get by day to day. It's outside of our realm of consciousness on most levels in the same way that the fundamentals of rocket science are, you know, nuclear physics. You might know that's a thing and what it vaguely is, but that doesn't affect your day to day life.
That's for the experts to deal with.
Money to me is a little bit different.
Yes, we enjoy the benefits of rocket science in ways that maybe we don't appreciate, but money is right in your face. Money is a day to day consideration for most of us. So these changes are important for us to keep in mind and to stay aware of. So that at the end of this transition period that I think a lot of people are picking up on, a lot of economists and a lot of pundits and commentators are beginning to issue warnings about a period of systemic change.
At least we have to be if we don't want another global financial crisis and then, we rinse and repeat and do the whole thing over again.
I don't think anybody wants that.
So to come out on the other side whole, to survive the transition period, we really do need to think about some of these fundamentals of money and cryptocurrency is to me an excellent entry point for most people because most of us know as little about that as we do about, you know, actual money, which is to say very little.
So it's a decent starting point. You're really not behind the curve so to speak.
But where do we go from here?
Where, is all this cryptocurrency stuff leading us? Because right now it seems pretty chaotic. There's 2000 different cryptocurrencies. How can you pick the winner?
You certainly can't be expected to just hold all of them, right?
Kind of like my comparison about if every state in the USA issued its own currency, you wouldn't want to have to, as a business, keep a certain amount of reserves of every state's dollar or whatever. You wouldn't want to have to have Arizona dollars, or California dollars, or New New York dollars. That would just be too cumbersome.
There are inefficiencies in that type of situation, which is why it was kind of a clumsy, clunky hypothetical. I was just bringing up for comparison's sake, but the same question or problem plagues the alt coin market. You really just can't be expected to follow 2000 of them. Even stock indexes usually don't have that many, right? You have the S&P 500. The Nasdaq is either 100 or 300 companies listed on the index. The Dow Jones is only 30 companies.
The only us index that I think is comparable, and this is probably true of most stock indices, everyone in the world, is the Russell 2000. The small cap index. It has 2000 plus companies, but many of them are only slightly above penny stock status and the index serves as a way to aggregate all of those different stocks.
You don't have that in cryptocurrency, yet.
As far as I know, probably partly because of the regulatory challenges I brought up in our last episode. I was talking about if bitcoin was taxable or not. But the point is that because cryptocurrency is still this developing sector and that it is not fully kind of fleshed out yet, it's hard to regulate and it's hard to know where this all fits in.
It's not well developed the way stock markets are, for instance. And even within that sector, if you just want to look at an example within global stock markets, it's always said that the US stock market is the biggest and most trusted, I guess you would say because it's the most mature.
So even though stock trading has been a thing in society for so long and has, developed rules and all these things over time, one stock market is not necessarily equal to another.
The big example is is in Shanghai. The Shanghai composite on the Chinese stock exchange is quote, unquote immature. It needs more time to develop. It's still in these early stages where weird things happen and normal dynamics don't always take hold yet.
So that's the way I think it would be useful for you to think about cryptocurrency in that it is developing in a somewhat uncertain space, but nonetheless a very, very important one.
The question about whether or not governments will simply take over cryptocurrencies. Why isn't it in their interest, if cryptoscurrencies are so great, to just steal the ideas or to literally print Fiat money and then buy up all the crypto with it so that they own it?
In our last episode that was a very intriguing question we got from a listener about why don't governments do that?
Partly because it's antithetical to government monopoly on issuing money, but also because it's still undeveloped. It needs more time. It needs to kind of grow into what it's going to become.
And perhaps the most important piece of that is the question of mass adoption.
One of the fundamentals of money is that it's based on trust. You have to trust that someone will accept it and then that you can spend it later for the same amount and that only happens if enough people have adopted your money.
A quick example from history is in colonial times in the early republic of the United States, we didn't have a federally issued dollar. Banks would issue their own money and back it with some amount of gold reserves and you just had to trust that your money was worth something. But if you went across state lines and they didn't know or recognize your bank or that bank note, they wouldn't give you full value for it.
It hadn't been adopted by enough people yet if it wasn't being used and that is something that is plaguing cryptocurrencies right now.
Adoption is still rather slow.
The company I work for, Gainesville coins, they just recently have broken into accepting different cryptocurrencies for payment.
We have an edge in that sense, partly because we deal in the crypto space, but also because we're an eCommerce company largely, so we do have a good working familiarity with the Internet in general and online transactions. So from our standpoint, cryptocurrency makes it easy.
There's not a whole lot of barriers compared to other digital transactions.
If you're doing a traditional credit card transaction over the Internet, Bitcoin does offer you some advantages even now, even already, but that's our specific case as you can pretty plainly see. It's not like you can go to any store around the corner and spend your Bitcoin, your Ethereum, or your Ripple.
You just can't, not enough places I've adopted it.
Even just cashing out, even just exchanging your crypto for the local currency and then spending it, is also not as seamless and as easy as one would hope.
It's just not there yet. The infrastructure isn't in place.
It used to be so bad that there was a small company in New York City that their whole business model was literally just that they would take your bitcoin and give you cash for it because that was a service that was needed. Enough people had bitcoin but they could not spend it. They have to have someone cash it out for them.
So from a convenience standpoint and from a utility standpoint how useful cryptocurrencies are as money, they are still not there yet.
That is the biggest barrier to them becoming a full fledged alternative currency system to what we have now and the current kind of landscape.
It's still moving slowly.
It's not particularly encouraging that recently there was a study done that something like 80 to 90% of bitcoin trading activity is not actual transactions.
It's not people spending their bitcoin.
It is speculative trading. It's people betting on whether the price of Bitcoin will go up or down.
And frankly that's the main participants in any futures market. It's really speculative, but there are at least actual productive transactions going on.
If you're speculating on corn futures or or hog futures, there's still somebody out there who is picking that corn and delivering it.
Not so much the case with Bitcoin trading.
There aren't actual items being exchanged for Bitcoin for the most part. So that needs to develop and change for cryptocurrencies to become really a serious contender.
Interestingly, maybe the biggest impediment to bitcoin's mass adoption right now is even though it is digital currency, it's not totally digital yet.
And what I mean by that is you can't mine Bitcoin, or as far as I know any cryptocurrency that's mineable, without 1 having the computer hardware and 2, expending electricity.
There are some interesting statistics about how expensive the electricity costs are for big mining operations for cryptocurrencies, and at this point you can't separate bitcoin from its physical aspect, yet. We haven't gotten to that.
There is a maximum on how many bitcoin there will be in the future. It will max out at 21 million, so there will be no more mining after that. But that's just Bitcoin.
I'm sure there'll be other minebale cryptos that will continue on. You just have to wrap your mind around it.
We've been sold that this is a totally digital currency, it's all electronic.
That is true, I'm not denying that. But it's easy to lose sight that there is a physical aspect of it that we still haven't moved beyond or can't do without.
You can't compare it one on one with gold.
The amount of hardware and kind machinery required to mine each Bitcoin which at the time recording is around $8,000 is actually heavier and requires more material than $8,000 worth of gold, which is sort of bizarre.
It's hard to imagine, but it's true.
The inescapable physical side of Bitcoin is definitely something that holds it back from being mass adopted because if you want to mine it yourself instead of just going out and buying it or accepting bitcoin from an exchange, you have to make that overhead investment to have the hardware and you have to spend money on electricity to do it.
So it does have a real world sort of back end to it and that's why it's called mining.
There is sort of a reference there, a similarity with actual mining for resources which costs money to run the machines. You can't avoid that.
And even if you completely throw out the relative kind of money comparison, okay let's stop talking about dollars, you're going to have to use electricity to run all this stuff. It's easy to lose sight of that or take that for granted. But it's worth considering.
I think now I'll take a question from the audience, from one of our listeners who obviously saw that we teased the topic for this part 2 because the question from anonymous here is,
Are Cryptos backed by anything?
I like that line of thinking. The short answer is not really, but keep in mind that in so far as a dollar or a euro or yen or any currency has value, it's not actually backed by anything tangible.
They only difference is the level of trust and that the Bank of Japan or the Federal Reserve or, I should say the US treasury has a track record with investors in the market and the general business community. They trust their money by its nature because cryptos don't have a centralized issuing authority like that.
They don't have that same level of trust yet, so they're backed by the same thing as every other money, which is to say almost nothing but promises and trusts.
But it's interesting to question that because that gets to the root of how does money work.
It'd be much easier to explain honestly how money worked if it was backed by something real.
If we had a gold standard still, I'm not just outright advocating and saying that would be better. I simply think it makes more intuitive sense to the average person.
So that's a great one. Great question.
That pretty much wraps it up for this episode. As always, thank you so much for listening. We really appreciate your support and we hope that you're getting something out of this series of discussions.
Our next episode is going to tackle the historical basics of what makes gold valuable and this is right up my alley, but I also find that it's not well understood by the general public. So, uh, we'll get into gold and where gold comes from next time.
Join us again on Breaking The Dollar and as always, thank you very much.
Today's episode was presented by our sponsors, Gainesville Coins. You can find out more at GainesvilleCoins.com
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The views and opinions expressed on this show are for informational purposes only and should not be used or construed as professional investment. Yes.
Everett has been the head content writer and market analyst at Gainesville Coins since 2013. He has a background in History and is deeply interested in how gold and silver have historically fit into the financial system.