

Those who have been in the industry for awhile certainly know what "crypto" is, but now laypeople are talking about it, so it's important to cover some of the basics:



What is crypto-currency?



In a nutshell, crypto-currency (of which there are literally tens of thousands of different systems) refers to a proposed method of trade that involves "digital currency".



What does that actually mean? Digital currency? It is currency, which is unlike traditional fiat currency and exists primarily as a "digital address" and sequence of codes.



Whoever has the code, owns the currency. If someone guesses/steals your code and executes a transaction with it, you just lost your crypto-currency. It's called "crypto" for short, because, supposedly the details of these codes are encrypted in various ways for your protection.



What is fiat currency?



Traditional fiat currency is often represented in coin and bill form, and is something you can hold in your hand and is easily transferable. In the case of the US dollar for example, it's mandated by law to be accepted virtually everywhere in your community.



Yes, traditional fiat currency can also be represented in "digital form" similar to crypto currency, as indicated in computers controlling peoples' banking accounts, but is subject to much more oversight and regulation. And there's a system to quickly and easily convert your banked currency to material form if needed.



Is there a material component to crypto currency?



Crypto currency, sometimes referred to as "alt-coin" typically does not exist in any material form. Like "fiat currency", it's a "placeholder" that represents a certain value that is used in the exchange of goods and services between parties.



But unlike traditional fiat currency, it doesn't translate well to bill, coins or other material items that can be physically exchanged. This is because what determines who owns the currency is based on who has the codes. You could print a bill that had the code on it, and that could technically be transferred to someone else, but every time crypto is transferred, these codes change. Plus a print of a code doesn't mean someone else doesn't also know the code and can take the currency without having access to the bill.



What is a "blockchain?"



This is a fancy new buzzword, and it's being used interchangeably with the term "crypto-currency" nowadays by various institutions who want to capitalize on the popularity of crypto.



Blockchain refers to the method by which many crypto currencies keep records of transactions.



A blockchain is basically a database of transactions, typically involving a few basic elements of information: the id of a buyer, the id of a seller, and a transaction amount, along with other information. This is stored in a database. It's not that much different than what might be called a "general ledger" at a bank.



If a "blockchain" is simply a ledger of transactions, why not call it that?



Because, "blockchain" sounds cooler and high tech!



It's easier to get hedge fund managers to invest peoples' retirements into something called "blockchain" than an old, un-exciting thing called a "general ledger." (Sorry, I'm a snarky person.. couldn't resist..)



What is "Fintech" and "DeFi?"



These are more made-up buzzwords that people attribute to crypto-currency related activities, as if they're something new and innovative. DeFi = Distributed Finance and FinTech = Financial technology. Just more words that describe age-old processes, but repackaged as if they're something new.



What is special about crypto currency blockchains?



One element that distinguishes most crypto currencies from traditional fiat currency is the fact that there is no central regulation, or central repository of the blockchain (ledger).



For example, with Bitcoin, when a transaction is made, details on this transaction are sent to an array of different systems that maintain blockchains. The data is compared and collected and verified after a certain process. No single entity controls the blockchain. It's de-centralized.



It's also partially-anonymous. The people who execute transactions are only known by arbitrary IDs. The blockchain records that two parties exchanged currency and notes that the currency is now in the account of a different ID.



The past, present and future of crypto currency - it's not what it used to be.



The original concept behind crypto currencies like Bitcoin was fairly humble. And a lot different than it is now.



As I type this, the value of BTC is currently $12,870 USD to 1 BTC. By the time I finish this article, there's a very good chance the value may have changed anywhere from 5-20%. It's that volatile right now. Which is dramatically different from what it was intended to be.



The original concept was as a "micro-payment system" that could be used as a proxy for bartering goods and services, and in the early days, this is what happened. The value of Bitcon was fairly marginal and in and of itself, worth nothing, but if you had some BTC and could trade it to someone else for something, that was cool. The first material BTC transaction was on May 22, 2010 by Laszlo Hanyecz, a programmer who paid a fellow Bitcoin forum user 10,000 BTC for two pizzas. People harp now that the bitcoin to buy those two pizzas is now worth millions of dollars. But back then, believe it or not, the guy buying the pizza got the better deal . And you can bet the pizza seller moved his bitcoin shortly thereafter. Nobody in their right mind could have predicted that seven years later 1 BTC would be worth more than ten grand (and even now, this is arguable).



In theory, crypto currencies make sense. They're supposed to be a simple, direct, peer-to-peer transaction system that is nobody else's business.



Unfortunately, that's the OLD crypto model. Now there's a new crypto model and it's completely the opposite of this. Crypto currency in its purest form was never intended to be used as a security and hoarded, or monitored based on its value in any other fiat currency. Now companies are treating crypto like stocks and offering "initial coin offerings." This is not what the originators of this technology wanted.





What is crypto uniquely good for?



Because of its decentralized nature and (so-called) anonymity, it lends itself to transactions between parties who aren't necessarily interested in being tracked (criminal activities, drug traffickers, money laundering, black hat transactions, and governments and people looking to move money around without others knowing).



Some argue it's a way to transfer money outside of prying government eyes and taxation, but even in America, crypto currency is subject to taxation. Many industry leaders have gone on record expressing concern and/or calling crypto currencies Ponzi schemes.



What should crypto currency holders be concerned about?



The list of concerns is significant enough to warrant a separate article, but here are a few things that aren't as well known (NOTE: some of these vary slightly based on the crypto currency obviously but there are many generalities in common):

The blockchain in all likelihood is not really "anonymous." - In fact, blockchains like Bitcoin keep records of every transaction ever. So from the moment of inception, every piece of Bitcoin that's changed hands is recorded. It may be meta information and not peoples' names or SSNs, but there are plenty of ways to ID people through meta information and once that's done, the money trail is public record.



What a crypto is "worth" is nebulous - Many exchanges are allowed to set their own transaction rates and details, and it's becoming harder and harder to painlessly convert crypto into traditional fiat currency, which is one reason why the prices are so high. There are lots of hidden hassles and fees involved.



The value of crypto currency right now is promoted based on its conversion to more accepted fiat currency such as dollars, which is incredibly ironic given the fact that advocates of crypto insist their currency is superior. In reality, the value of crypto should be based on how easy it is to use in its natural form.



such as dollars, which is given the fact that advocates of crypto insist their currency is superior. In reality, the value of crypto should be based on how easy it is to use in its natural form. Crypto is perfect for stealing - The more value a crypto has, the more appealing it will be to anybody and everybody who might try to crack codes and take the currency. It's basically a lawless expanse, which means there's no reason why governments and corporations might also invest in ways to suck value from the blockchain in ways most of us would find unethical. (ICO's are a good example - treating alt-coins like stocks is questionably ethical)



Many crypto coins are "mined" initially. This is a process where people run "mining" computers to guess the codes to discover new crypto units. These formulas are designed so coins are easy to mine initially, but become progressively more difficult and resource-consuming to mine later. Early developers get a huge amount of crypto early on. This, like a traditional multi-level-marketing scheme, sets the stage to primarily reward early adopters if they can continue the scheme long enough to pump value into the commodity. If you're late to this party, you're basically giving your money to the early adopters and putting tremendous pressure on yourself to see a profit. This is assuming the crypto you're investing in ever increases in value, which is statistically unlikely.



they can continue the scheme long enough to pump value into the commodity. If you're late to this party, you're basically giving your money to the early adopters and putting tremendous pressure on yourself to see a profit. This is assuming the crypto you're investing in ever increases in value, which is statistically unlikely. Technology has not kept up with the needs of Crypto - It's no longer economically viable to mine for Bitcoin and hasn't been for years, so the only way to profit in BTC is by taking advantage of others. There are also big problems with the growth of crypto and the blockchain and there's controversy over how to manage the transactions. Some might argue this problem is localized to a few crypto-currencies like Bitcoin, but the fact is, all cryptos are susceptible to these problems and until they are traded at the rate of ones like Bitcoin, there's no evidence they're any more technologically stable.



Not all crypto-currencies are the same, and this is as bad as it is good. For example, Bitcoin, the most valuable crypto currency is by design, limited to only 21 Million units in existence. Etherium however, at present, the second-most popular/valuable crypto currency has a fundamentally different model, with a virtually unlimited number of potential units being released, limited to 18 Million PER YEAR. Yes, people are "investing" in something that dilutes itself by 18 million units every year!



Because most crypto blockchains are designed to maintain a permanent record of transactions, it's becoming increasingly possible that the crypto currency someone is holding, could be "tainted" and traced back to criminal activity. You could be doing nothing illegal and have your accounts frozen by various authorities if they can trace the crypto you've been trading to something nefarious.



There are tens of thousands of crypto currencies out there (There's even a web site dedicated to making note of some of the many crypto currency failures) - Anybody can create a crypto currency. In the near future, I predict you'll be able to go to a web site and create your own crypto, and it will be for all intents and purposes, as potentially valuable as any other. It's not unlike to see in the future individuals who have their own currency. By the way this breathes new life into the corporate business model of "points" you can give customers based sales. Every company can now claim their "brand-bucks" program is cyber-currency and a commodity. Expect everybody from Starbucks to Amazon to have their own alt-currency.



Because of the transparency of blockchain, by design, some crypto currencies can be prone to what is called "front-running" where one transaction can be overruled by the other. Executing crypto transactions are often prioritized via a offered transaction fee (with ETH it's called "gas value"). Higher transaction fees are more valuable to miners and are prioritized earlier, even if other transactions showed up first. This creates a scenario where it's possible to undercut someone else's buy/sell transaction if you offer a larger fee. In other words: market manipulation. This can also create a condition known as "double spending" where the same currency can be spent twice, with only one ultimately being processed. If you're the merchant who had the transaction submitted, but then undercut by another move, that's fraud, which is why waiting for transactions to clear is so important, and why crypto currency transaction times are annoyingly long compared to traditional transfers using centralized systems.



So-called "stablecoins" may not be stable - In addition to regular crypto currencies, there are what are called "stablecoins" which are crypto currencies that are supposed to be asset-backed. Coins like USDT (Tether), PAX and USDC are supposed to be issued 1:1 with the asset (usually the US Dollar) in escrow backing up their value, thus they are supposed to be "stable" whereas 1 USDT = 1 US Dollar. The problem is, most of these stablecoins are not properly audited, and in the crypto space there is significantly less regulation and oversight. Tether for example, has never had a reputable formal audit and is being sued by the city of New York. Many believe these stable coins are likely to collapse, and become valueless. These are also the basis of setting other crypto prices via wash trading (see below).



Crypto Markets are being manipulated by wash trading - Wash trading is an illegal activity where one party sets up a sell order and then buys his own security. This is done to artificially create the appearance of a lot of traffic and volume in an exchange, or on a particular crypto/security. This practice is [technically] illegal, but it's not well regulated in the crypto markets. So even the appearance of demand for a crypto in the exchanges may be a fabrication.





People and institutions are now looking at crypto currency as an "investment" which is absolutely, positivily NOT what it was designed to be. And for this reason, a lot of people are going to lose a lot of money falling for the hype.



Crypto currency has even less intrinsic value than fiat currency.



Here's what's funny. Crypto currency advocates argue that fiat currency "has no intrinsic value", therefore there's not much difference between bitcoin and US dollars.



But this is a lie.



Let's say it again... Crypto currency has even less value than regular currency.



The US Dollar is a significantly more stable monetary concept than any crypto currency, for a number of very specific reasons:



It has maintained stability and usefulness for centuries.



It's regulated by the US government and a hierarchy of institutions with various checks and balances. (You may argue you don't like the nature of the system, but it still has checks and balances, much more than crypto as we'll see).



Everybody uses the dollar. It's the de-facto standard fiat currency in America and accepted in most other places around the world.



It's extremely easy to conduct transactions using US dollars.



There are numerous laws and regulations that guarantee peoples deposits in banks, and protect against fradulent transactions.





In sharp contrast, almost all crypto currency has virtually none of these benefits. There's tremendous value in a fiat currency that you know protects you from fraud, even if it involves your own incompetence. There's tremendous value in knowing that what a dollar buys today, you will also be able to purchase tomorrow. There's tremendous value in knowing that nobody is going to look at your dollar bill and go, "WTF is that? What do I do with it?" Or charge you a $20 "transaction fee" to convert it into something else. Beyond this, there's constant controversy about whether or not the blockchain technology has become unmanageable, and the de-centralized nature is giving way to a more centralized nature of exchanges, but the more popular an exchange becomes, the more likely it is involved in fraudulent activity.



But most importantly, with traditional currency at a bank, if the bank gets robbed, you're protected by the FDIC (Federal Deposit Insurance Company). And it's a lot harder to rob a bank of a million dollars than it is to break into an online exchange and instantly pilfer tens of millions in Bitcoin and other cryptos, which is now becoming common place. And when this happens, there is nothing you can do. Because you never really owned anything in the first place. You never owned anything that anybody guaranteed. You never owned anything that a majority of people in your community ever thought was of any specific value.



Why Would Crypto Currency and Blockchain Systems Be Considered A Ponzi Scheme?



In and of themselves, crypto is not a scam.



The scam part comes with anybody trying to tell you to "invest in crypto". That's when "blockchain", "bitcoin", "crypto", etc. BECOME A PONZI SCHEME.



The best way to illustrate why investing in crypto is a scam is to compare it to another popular investment: stocks.



Both crypto and stocks are sold in shares and have a particular value per share.



Investors buy these shares in hopes the price will go up. If they sell the shares when the price is higher they make money. If they sell when the price is lower, they lose money. That's pretty basic.



There are companies now promoting crypto like stock shares, offering what are called, "ICO's" - an "initial coin offering" much like an IPO is an initial offering of public shares. It gives people a chance to buy into crypto currency in the beginning. But, THIS IS A SCAM.



Because there's an inherent difference between investing in stocks verses crypto.



A stock represents shares in a material organization. If you own shares in Apple, you actually are a part owner of Apple, and part owner of all the assets Apple has. Even if Apple's stock price drops, you still have a proportionate share of the company's assets. And you can determine the relative value of their stock based on the company's assets. Traditional stocks have material valuation.



In stark contrast, crypto currencies have nothing. You aren't owning anything material. You do not have a share of anything you can examine or valuate. You merely have some numbers that indicate if you can find someone else to buy those numbers at a higher price, you might be able to turn a profit, but at the end of the day, you own nothing of value and never have.



With crypto currencies, the value of these shares is solely based on what you can get someone else to pay for them. This is completely arbitrary. At any point, this entire market could completely implode into nothing. That would never happen with a traditional company -- a traditional company has assets, and investors have a fiduciary duty to monitor and maintain the company's viability. There is nothing of the sort with crypto currency, except the standard network-marketing-style approach of constantly enticing other people into buying your crypto at a higher price than you paid.



The Only Way You Profit In Crypto Is At Someone Else's Expense



With traditional stocks, you earn profit often through the growth and success of the company. When they do well, the shareholders do well. Everybody benefits.



With crypto, you only earn profit at the expense of later investors who, are now required to hype the crypto up to a higher level, in order to create profit. This is an impossible, un-tenable business model. It's the exact definition of a Ponzi Scheme.



Crypto Actually Compounds The Severity Of The Problems It's Meant To Solve



One sad truth about crypto-currency, is that it's a "work-around", a "hack" to the monetary system. It's not an actual solution, and in fact, it exacerbates all the troubles it promises to alleviate.



For example... if you think government is too corrupt/inefficient and taxation is unfair, the solution to this problem isn't hiding money outside the system (that's not going to work anyway, and in doing so, all you do is deny tax money to the system which makes government even less efficient and capable). The solution to this problem is to fix government: make it more efficient, reduce taxation, make government work more for the people rather than special interests.



The adoption of crypto is a way of saying, "I don't believe in government.. I'm going to stop trying to make it work for me, and instead work around it.." which if done on any large scale, effectively hurts the overall community. The bottom line is, government does much more good than harm, and the more people give up on trying to fix it, the more likely they're going to suffer. It's like saying, "My political leaders never seem to represent my interests, so I'm not going to vote any more." It's an absurd "solution" that fixes nothing.



The same issue applies with crypto as a means to support a black market for illegal things that you think should be legal. How is that a "solution?" The real solution is to lobby to legalize, regulate and monitor the stuff you feel you shouldn't have to skulk around buying from criminals and murderers in third world countries. Crypto just compounds the problem instead of addressing it.



Crypto Isn't Bad As Long As You Don't Consider It An Investment



I'm not panning all crypto. It works for what it was designed.



The problem is, what's going on now, with "Initial Coin Offerings" and "blockchain technology investing" is bullshit. These are people and institutions that smell money and want in on the scheme.



The only way crypto would ever be ubiquitous is if it became very similar to existing fiat currency, and we have hybrid systems like this in place right now, such as credit card payment companies. So true crypto is only really useful when it's largely valueless, and used in small, inconsequential transactions (like 2 pizzas for 10k - that makes sense). Beyond this, it becomes another "Pet Rock" or "Dutch Tulip" that salespeople are trying to get you psyched over.





So does this mean, "I hate Bitcoin?" Not at all. I love the idea of crypto currencies.



What I hate are all the predators who are now in the market, trying to make the intangible medium, seem like a security. This makes the housing markets' "default credit swaps" look like gold bouillon. Please don't fall for it. There are better ways to create value without becoming part of a scheme that centers on misleading people.



This is my big problem with Crypto currency. It's not a solution. It's a temporary hack that actually compounds the problems rather than address them.











- Mark Pile, BSAlert.com







