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500 Words on Cryptocurrencies

Such money. Big spender. Wow.It will likely come as little or no surprise that cryptocurrencies like Bitcoin, Litecoin, and Dogecoin (my favorite) are frequent topics of conversation among futurist types. After all, they're supposed to be paradigm-breaking disruptions of the status quo, or something. But I still haven't gotten over my sense that something isn't quite fully-baked about the current generation of digital currencies, and I'm going to spend my ~500 words here trying to spell out why.

Cryptocurrencies are computationally-derived mathematical artifacts intended to function as money -- they're to be used to store value and to be exchanged for goods and services. The difference between cryptocurrencies and the US Dollar (or other sovereign-state currency) is that the Dollar is backed by the "full faith and credit" of the United States, meaning that as long as the US is a functioning political entity, the dollar can be used to (at minimum) pay American taxes. Conversely, cryptocurrencies are backed by mutual agreement; as long as the market for it exists, a cryptocurrency has some value. The logic behind cryptocurrencies isn't new, and can be seen in the various complementary currencies that have been used for decades in communities around the world, often (as with some cryptocurrencies) with an explicit social or political goal.

Many supporters of cryptocurrencies prefer to draw a parallel to gold, which is not under the control of any single political entity and does not have a set value, instead being priced based on how much people will pay for it (in another currency). This floating value of cryptocurrencies is one recognized challenge for their continued utility. As economist Paul Krugman and others have pointed out, gold has a minimum value, due to its use in industry and jewelry; cryptocurrencies have no minimum value, and could in principle crash to a level where they have effectively zero worth. Hoarding, regulatory decisions, and fraud can all cause wild swings in currency price. This floating value, which for many cryptocurrencies can be extremely volatile, impedes use as stable media of exchange. If the trading value of a Bitcoin versus a Dollar varies throughout the day, a business owner that primarily buys and sells and pays taxes in Dollars takes a risk any time he or she sets a price in Bitcoins. Some businesses may be willing to swallow that risk in order to gain the support of Bitcoin advocates, but for many others, it's just not worth the hassle.

Solving the floating value problem will be difficult, not for arcane economic reasons, but because there are as yet no physical communities where a cryptocurrency serves as a primary currency, usable for a broad variety of run-of-the-mill transactions. No place for the currencies to create a persistent, mutually-understood perceived value outside of its value in exchange for a sovereign currency. Where the users know at a gut level what it means to say that something costs (for example) 100 Bitcoin, the way an American knows what it means when something costs $100. Until then, cryptocurrencies will always be secondary at best, somewhat more fungible than gold coins from World of Warcraft. And that points to what may be the source of my continued skepticism about the current generation of cryptocurrencies: advocates have embraced the argument that all money is imaginary, that the vast majority of transactions now are digital, and that we now live in a globalized market, but have neglected the corresponding social and political grounding that makes this digital decentralization viable.

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