Originally Posted by
giampierod
About 10 years ago I got deep into cryptocurrency. I bought a mining rig and mined about 500K dogecoin (No, I don't have them anymore). And questions like yours really had me in a logical dilemma. I couldn't wrap my head around the contradictions. I am open to opinions here, but this is what I couldn't reconcile in my head.
There are 2 core use cases for cryptocurrency. As a store of value (Bitcoin, Litecoin, etc) or as a proof of contract/NFT (Ethereum)
So let's start with the first use case as a store of value:
Fiat currency is called fiat because it doesn't count anything but itself and thus has no intrinsic value. This is also true of all cryptocurrencies, they don't count anything but themselves and their entire value is based on belief of value. So really they are just fiat currencies with different controllers.
Cryptocurrency have no intrinsic scarcity by the technology itself. You can have an inflationary cryptocurrency or a fixed pool. For example, dogecoin is inflationary and bitcoin is a fixed pool. In principle the logic goes that since these coins are either low inflation or no inflation they behave more like commodities such as gold and silver. But in practice they have fundamental differences. Commodities are physical goods that will continue to exist in material form regardless of ownership. Even a vault of gold will always be in the same place, full of gold, whether you have the key or not. Cryptocurrencies can vanish when someone loses their key to the wallet or loses the wallet file itself. That means that the total supply of the Bitcoin is decreasing as people lose wallets or lose control of their wallets. And this is a "gone forever" kind of deal. Evidence of this is someone who has been searching a garbage dump for years for a hard drive that has his bitcoin wallet worth millions on it. This consolidates the value into the hands of a few people who got in early and held on. There isn't enough supply of bitcoins left for everyone else. So for people who are not tech savvy, don't have good backup strategies, or are not good with password management they will likely get screwed. UNLESS, they put their money into a crypto exchange who shares the keys with you to the wallet and also take a cut of every transaction made from your account. They see every transaction and can track it. Basically a bank just like any other. And you might think that you can avoid one of these things, but if you ever want to purchase something with bitcoin the clearing time of a transaction is, on average, 10 minutes but can be an hour. You are not going to wait 10 minutes for every customer in a restaurant to clear their transactions. It would slow down turnaround and profits. In 10 minutes the stock market makes millions (billions?) of trades. When you try to do anything with Bitcoin that is outside of just a storage of money you almost always have to translate it to some other currency (likely fiat), to actually do something with it. And you need a crypto exchange to accomplish that. So basically, anything practical you want to do with Bitcoin requires a bank of some kind.
And, no matter how bad it is, fiat money has 1 major technical advantage. It can be created out of thin air. Sometimes banks lose a bunch of money or lose access to it because of computer issues. With constant cheque-clearing (because that's how US banks still work) and fractional reserve banking, any significant limitation in access to money from any of the big banks can completely stop the economy from moving. However, for a short period of time, the central bank can loan money to the big bank until they fix their issues. This money is made out of thin air. Now imagine a large crypto exchange suddenly "losing" access to a bunch of wallets. That's it, they are gone and every person who is affected is just screwed. No recourse, no fixing it. No amount of lawsuits will get those Bitcoins back (because no on has them).
So bitcoin has the scarcity of commodities without the permanence and has the value assignment of fiat currency without the ability to generate liquidity on demand. It seems like it took the worst parts of both mediums of exchange.
The second major use case is proof of contract or NFTs
In this case we use the cryptocurrency as a token that guarantees a transaction has occurred. This verified by the blockchain and, mathematically, it is a very robust system. But in this use case, the value of token should be as close to 0 as possible. Because the value of the token is additive cost to the transaction you want to promote lots of transactions. Further, the transaction should close as quickly as possible to promote more transactions. This is a high-volume, low-margin game for the cryptocurrency. Tokens are created out of thin air and are counting things that are not themselves. The only winner for the small value of the cryptocurrency is the minter of the currency. NFT exchanges, Ethereum foundation, etc. No one else will make money on this.
I haven't even touched things like energy costs of mining and transaction clearing (which seems quite high per transaction on the face of it).
Would love to hear other thoughts
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