by Jerry W. Thomas
Cryptocurrencies such as Bitcoin have captured the public’s imagination and investors’ fancy as a new pathway to wealth. Bitcoins traded as high as $4,000 last week (August 2017), but as recently as 2010 you could have purchased a Bitcoin for a few pennies. Parts of Bitcoin’s mystique are its high technology, high security, and the massive computing power required to mine (or create) another Bitcoin. We might think of Bitcoin as a type of artificial currency, an imaginary currency, or even a counterfeit currency, but, of course, it goes by the moniker “cryptocurrency.”
The brilliance of Bitcoin is actually the blockchain technology that underlies the currency. It is among the most secure online technologies available; it is virtually impossible to hack, manipulate, or thwart. In addition to artificial currencies, blockchain technology offers great promise as an extremely secure system for online interchanges and transactions. The technology that underlies Bitcoin and other cryptocurrencies is part of the allure, the rationale, and the story. The technology mystique tends to make cryptocurrencies seem like something completely new, something legitimate, and something we should take seriously.
Let’s suppose, however, that we didn’t have any super new technology. Could we invent a new currency similar to Bitcoin? If we should find a large hickory tree with an extraordinary, one-of-a-kind chemical signature, then we could cut off some limbs and carve out a supply of wooden coins. Let’s call them “Hickcoins.” The ultimate supply of these Hickcoins would be fixed or quite limited. As the price of our Hickcoins goes up, we might cut off more tree limbs to make more Hickcoins, but the overall supply would be quite limited (at some point we wouldn’t have any more limbs to cut, and we would have to wait on new ones to grow). So now we have created a new currency very similar in concept to Bitcoin. Its supply is very limited. It’s very secure (remember the unique chemical signature). Only one ingredient is missing, and that ingredient is faith.
Faith is what gives a currency its value. If a large number of people begin to have faith in our Hickcoins and start buying and hoarding them, the price of Hickcoins would start to rise. We could occasionally carve a few new Hickcoins, but we must remember to limit the supply for the price to rise. As the price rises, more people would want to buy Hickcoins, so the price would continue to rise. Of course, the price would bounce around a lot, because sometimes some people lose faith. We have created, in this little example, an artificial or counterfeit currency just as legitimate as Bitcoin.
The creator of Bitcoin, whoever she or he is, wowed the world with dazzling new technology and used technology’s “smoke and mirrors” to overcome our doubts and boost our faith. Rising faith in Bitcoin led to its rising prices. These rising prices created more credibility and more faith, and even higher Bitcoin prices. Faith becomes easier and easier as the price rises higher and higher. And, when we want to believe—when we want the story to be true—our faith becomes even stronger. As our collective faith grows, the price of Bitcoins (or Hickcoins) will continue rising, until one day the price will crash. The tears will be bitter. The self-pity will be palpable. Our innocence will be torn asunder. We have been fooled once again.
About the Author
Jerry W. Thomas (email@example.com) is President/CEO of Decision Analyst. He may be reached at 1-800-262-5974 or 1-817-640-6166.
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