The Lunacy of Cryptocurrency

The Real News Network has the segment Cryptocurrency Firms Regularly Lose Codes and Money.

Recent developments in the cryptocurrency world highlight the dangers of trading in this type of “coin.” But how important is cryptocurrency to the financial world and why should we care? We discuss the issue with white collar criminologist Bill Black.

I’ll add a couple of observations that Bill Black did not mention.

If you don’t study these things you might only stumble onto the knowledge that the USA has a sovereign, fiat currency. Being a fiat currency, its value is not tied to anything that backs up the currency. This is all explained by MMT (Modern Money Theory) which is mentioned all over this blog.

So why can’t you invent a cryptocurrency that is backed by nothing? MMT explains that what gives sovereign, fiat currency its value is that the sovereign insists that the only way you can pay the taxes the sovereign imposes is to use the fiat currency. If you want to pay your taxes to stay out of jail and prevent your property being seized for payment of back taxes, you need to get some of that sovereign currency. There is no such mechanism to a non-sovereign crypto-currency. Non-sovereign crypto-currency’s value in dollars is whatever the fad of the moment says it is worth. This is subject to manipulation in operations called “pump and dump”. The pumper makes a public announcement touting the great potential of the currency, people rush out to buy it, and the pumper then dumps the whatever he or she has “invested” in the crypto-currency.

The other thing that touters of crypto-currency seem to have no foresight about is privacy. People use crypto-currecncy because the government cannot keep track of your crypto-currency transactions. One of the key technologies behind this crypto-currency is the distributed nature of the ledger of transactions. The complete copy of the ledger of all transactions is available on a large number of computers around the world. Anybody can read the ledger, but the tie between a person and his or her transactions is hidden by an unbreakable encryption. There is something called data-mining which is very popular topic in comp0uters these days. Data mining works on massive stores of information like what Google and Facebook have (and out government has, too). Computers can sift through this data and make connections that most humans cannot imagine. If any government wants to apply data mining to the public ledger of crypto-currency transactions, I would be willing to bet they can figure out who made what transactions. The secrecy of crypto-currency transactions has been put in the minds of the users by the pumpers and dumpers.

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