• Friday, March 29, 2024
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BusinessDay

Crypto and money: Notes and arguments (3)

Cryptocurrency trading

To many crypto enthusiasts, there is only one valid cryptocurrency: bitcoin. Bitcoin “maximalists,” they call them. And who can blame them? Bitcoin “allows value to be sent from one person to another anywhere, anytime, with no one who can stop it (Leising, 2020).”

You would have to shut down the whole internet to stop bitcoin. With quantum computing, you could overwhelm the bitcoin blockchain, though. But the field is not yet advanced enough to do that.

A description of bitcoin by popular enthusiast and investor Marc Andreessen in the New York Times once is apt: “Bitcoin gives us, for the first time, a way for one Internet user to transfer a unique piece of digital property to another internet user, such that the transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer (Leising, 2020).”

In his popular book, “The Bitcoin Standard: The Decentralized Alternative to Central Banking”, author Saifedean Ammous describes bitcoin as “a sovereign piece of code.” This is because “there is no authority outside of it that can control its behaviour (Ammous, 2018).”

There is literally just bitcoin and the others. But there are other notable cryptocurrencies like Ethereum, Binance Coin, Tether, Cardano, Dogecoin, Ripple, Polkadot, Litecoin, Bitcoin Cash, Monero, Stellar and so on.

Ether, the cryptocurrency of the Ethereum blockchain, which comes second only to bitcoin at the moment, is increasingly seen as having greater potential. But they are not really competitors.

In early June 2021, for instance, El Salvador announced it would make a law allowing bitcoin to be legal tender. Many other countries are likely exploring the possibility as well. But that is not something they are likely thinking about when it comes to ether. An explanation is apropos at this point.

A great deal of our lives today takes place on the internet. Now imagine if all of our online lives can only take place using a single digital currency. “The first global computer”, according to Leising’s “Out of the Ether,” Ethereum aims to be a better internet. An internet that is truly decentralized and not at the behest of current big tech monopolies in e-commerce, search, and social media. But to use that better internet, you must acquire its cryptocurrency, ether.

On Ethereum, you “could create new cryptocurrencies, or derivatives or crop insurance or voting mechanisms for corporate governance (Leising, 2020).” Non-fungible tokens (NFTs) for buying and trading digital art, buying music directly from artistes, decentralized finance, collectibles, online games, and varied social networks are just a few of the decentralized applications (“DApps”) already atop the Ethereum blockchain. Many more DApps are being built every day.

There is little doubt now that Ethereum founder Vitalik Buterin’s vision of a decentralized global computer is possible and increasingly within reach. But if you could not do anything on this better internet without ether, how is what supposedly aims to “re-decentralize” not already planting the seeds of its future centralization? That is a discussion for another time, however.

From the perspective of money, ether is not so much a competitor to bitcoin and other currencies, digital or otherwise, as it is about how “money” becomes money. A practical example might be useful at this point.

To buy goods in the Ethereum “store”, you need the ether “coupon.” But what if over time, you could only buy goods or the really cool stuff at the Ethereum “chain of stores?” Yes, you could very well over time be able to spend ether outside of the ethereum “chain of stores” if you choose to. But that is not the primary goal of the ethereum “franchise”.

Bitcoin and its blockchain do not want to sell you anything, however. For bitcoin, the goal is that you would earn, save, invest and spend it as you would any fiat currency. And perhaps even prefer bitcoin. Thereafter, you could use your bitcoin to buy ether, the American dollar, gold, or whatever else your heart desires. And the recent move by El Salvador proves that point already.

That said, bitcoin remains extremely volatile. Of what good is a digital currency if I spend one bitcoin to buy a car, say, and before even leaving the car dealership, I find that I could have bought the same car for half a bitcoin? The reverse is also as annoying; albeit more diminishing. Before heading out to buy the car, one bitcoin could have sufficed. On getting to the car dealership, however, the car’s price had gone up to 2 bitcoins.

Thus, even as bitcoin clearly has potential as a hard private digital currency, it is not as yet a reliable medium of exchange. But that is changing fast.