I was in a conversation the other night that started a little something like this. “Bitcoin, what’s that?”
This is a forty-something, middle class adult, with full access to the internet in America. When looked at as a percentage, no one knows what cryptocurrency is, let alone really understands it.
As the conversation progressed, I shared how I had started using Steemit last summer and ended up with over $30k in Steem assets that I’m now drawing some of to make this summer awesome, including purchasing a much needed upgrade in the form of a use SUV. That, in addition to the $30k I took in cash payouts last year! Most of the people at the table were interested, but one gentleman, sporting a tucked in button down and a crewcut knew all about it.
“It’s a scam,” he said with certainty. “I read all about how people got robbed of it, but it’s not real money anyway,” he pulls out a dollar bill. “See this right here?” he indicates the line that reads, “This note is legal tender for all debts, public and private.” “That’s what makes this real, the rest of that stuff is just a bunch of numbers in a computer.”
I size him up, and think to myself about the amount of hassle it will likely be trying to explain Fractional Reserve Banking to him. Not worth it. So, I smile quietly and change the topic. He smugly puts his dollar away, thinking he’s proved me wrong, but that couldn’t be further from the truth. My bitcoin is so much more “real” than his fiat currency that it’s not even funny. It’s scary, actually.
From its inception in 1913, the Federal Reserve banking system has been run on Fractional Reserve Banking. Here’s the basics, whatever “assets” the bank holds, it can offer loans or credit at several times that value, typically ten times. So, they hold 10% of the assets of any cash that is currently in the system. While we operated under the “gold standard” a bank had to hold those assets in physical gold, meaning that the reserve was backed up by actual, tradeable assets, here’s where it gets dicey.
That ended in 1933 for a variety of reasons, but the key thing you need to know is that it was suggested to FDR, not by a financial analyst, but by a farmer. That’s right, based on his study of how to get chickens to lay more eggs, he came up with a theory that allowed the Federal Reserve to print money out of thin air.
So, now, this privately owned institution, has the power to print all of the money in US, a power granted to congress in the constitution, but shifted to the Federal Reserve through a shell game, prints as much money as it damn well pleases, whenever it damn well pleases. Here’s basically how that works.
The United States Government sells bonds. Here’s a definition of a bond from the financial dictionary, on Freedictionary.com.
*A security representing the debt of the company or government issuing it. When a company or government issues abond, it borrows money from the bondholders; it then uses the money to invest in its operations. In exchange, thebondholder receives the principal amount back on a maturity date stated in the indenture, which is the agreementgoverning a bond's terms. In addition, the bondholder usually has the right to receive coupons or payments on thebond's interest. Generally speaking, a bond is tradable though some, such as savings bonds, are not. The interestrates on Treasury securities are considered a benchmark for interest rates on other debt in the United States. Thehigher the interest rate on a bond is, the more risky it is likely to be.
So, the government borrows money, based solely on their need of it, with no actual collateral offered. They can do this simply because everyone agrees they can. There is no financial basis for this at all. That debt is sold as bonds to private investors, foreign governments and banks. When the Federal Reserve wants to print money, it buys these bonds, with air. Not joking. It creates a check, that is deposited in the sellers account, for which a credit is then generated. But, nothing is exchanged.
They buy the debt and then, by the magic, seriously, it must be there’s no mathematical equation here, of Fractional Reserve Banking, they print money from nothing to represent a small fraction of the bank’s ability to buy, trade and extend credit. So, the money he showed me is, in actuality, a series of ones and zeros in a computer system that is OWNED by private investors.
The paper currency, represents a small fraction of the actual debt being traded and they don’t even pay for the printing of it with anything of real value. Then we carry it in our pockets and agree to buy and sell based on this system. Messed up, right?
It gets even worse when you consider that the very process of creating fiat currency (dolla dolla bills y’all) actually guarantees that the value of the currency will go down, because interest is being paid to the lender against that tender. So, as they pay back the bond buyer’s investment, the amount of money they borrowed grows, instead of shrinking. This is how we get the “national debt” and the “deficit” but that’s a story for another time.
So, how can I say Bitcoin, or any crypto currency is more real than that? Simple, something other than a decision from a non-elected banking board must take place for a bitcoin to be issued. It is born out of a transactional record of a solved equation in a process called “mining”. When enough of these equations are lined up, they become a “block” in something called the “block chain” and a reward, in the form of coins, is issued, increasing the supply of that crypto currency.
As the chain gains blocks, it becomes more trusted. At every single turn, every action is recorded in a transparent, permanent record, that cannot be altered. This prevents fraud, or makes it extremely unlikely to happen.
Not only is everything recorded and transparent, but at every step of the way, the transactions are confirmed by others. That’s why when you transfer bitcoin, it takes a few minutes, up to several hours to have the transaction confirmed. It’s not being done out of thin air. The block chain issues coins based on the trust it builds, that is its value. Now, here’s where it gets really interesting. Bitcoin, is a completely decentralized currency. What does that mean? No one person controls it. The market has complete sway.
The record of the bitcoin, or “ledger” is warehoused on a network of independent computers called “nodes”, each node is updated with every transaction, so that each node carries a complete record of the entire blockchain, that must match all of the others. It’s as if thousands of bookkeepers all over the world were keeping a ledger and they all had to match.
Just as fiat currency (what we spend in the US and other countries) is serialized, so too, no bitcoin can be duplicated. This means that in order to “steal” your digital currency, the thief would need your exact serial number, or “key”. Unless you’ve chosen to create something called a “paper wallet” ( an actual, printed, paper record of your bitcoin keys) they cannot be physically stolen.
Since each up to date node (some may lag due to internet inconsistencies, or processing power issues) contains the full blockchain, it’s also nearly impossible to interrupt it. Even if you managed to shut down the majority of nodes, as long as one remained, the entire blockchain could be replicated and go right back to where it started, with new nodes coming online to produce a new network.
Now, this sounds like the perfect money, but there is a downside. Since it is not manipulated carefully by a central bank, that steals a few percentage points as it loans us our own money every year, it can be very volatile. As coins are bought and sold on exchanges, the price can rise, or drop rapidly. What cannot happen, however is the rapid inflation that steals the value of paper currency, when too much supply is introduced into an economy. In other words, your bitcoin does not get watered down with every new coin introduced into the system.
Not only that, but, rather than being a slave to the greedy policies of a group of shadow bankers that rake in trillions in profits, block chains are not “run” by anyone. The programming decisions are made in public and once the policy is set, the machines themselves govern the process. It’s much more difficult to corrupt. In fact, at the beginning of a blockchain is the only place to insert oneself for your own benefit. Once the process is started, the only advantage you can have is to produce more coin than another user. It doesn’t get much more free market than that!
My conclusion, after studying this at some length is this; there is a very real analogy to be made between mining crypto, and printing fiat. Here's the big difference while worthless paper currency is printed at a 1:10 equation, with 1/10 of the money in circulation actually existing in any real form, crypto is created 1:1, every single coin must be mined, recorded and confirmed. It cannot come into existence without the consent of the eco system it serves. By this measure, crypto currency is 10x more real than fiat paper currency, or "real money" as this gentleman put it.
With Steem, it’s even easier to understand. The mining process is the content creation and curation of Steemit. The coins are created at a steady rate, then distributed, based on votes, to the various stake holders. Your blog posts are not earning you money, they are literally creating it! The “reserve” if you will, of Steem, is based on cash investments, and the content created across the Steem blockchain in a thousand different ways and with every single transaction (we now overshadow all other crypto currency in number of daily transactions) the blockchain becomes stronger.
This is what I would have liked to say to this smug Baptist Deacon as he folded up his funny money and stuffed it into his pocket. Because, you see, ironically, my crypto is so much more real than your fiat currency ever was, or ever will be.