Do you know much about cryptocurrency?
No, nor do I – other than thinking if you can’t understand it, don’t get involved.
This despite every now and then bumping into a convert who tells me it’s the road to easy riches.
In my experience the road to easy riches often ends in tears, but what would I know?
Several years ago I was visiting a mate and asked him what the noise was coming from his old shed.
He beckoned me to follow and inside were about half a dozen computers going flat-out making the noise my PC does when it’s in serious trouble.
There was an air conditioner going but the computers were generating so much heat that it was still warm in there.
“What’s going on here?” I asked my mate.
“It’s my son’s business. He’s mining cryptocurrency,” he said above the noise.
“What’s that mean?” I asked him.
“I don’t know but I do know that my power bill has gone up by $800 a month, which he reimburses me for,” he replied.
Intrigued, when I got home I googled up what on earth was going on.
It turns out that cryptocurrency mining is the process of creating new cryptocurrency by solving extremely complicated math problems that verify transactions in the currency. When a cryptocurrency is successfully mined, the miner receives a predetermined amount of cryptocurrency.
It seemed that you really could make something out of nothing and so long as everyone else believed there was something, the system worked remarkably well and could be extremely lucrative.
Was this some type of Ponzi scheme or the latest in the centuries-old “Emperor’s new clothes” syndrome?
Many people a lot smarter than me appeared to believe it was a genuine new way of accumulating wealth and using it to transact.
However, there are also clever people who say otherwise.
Cryptocurrency has been characterised as a speculative bubble by eight winners of the Nobel prize for economics. Investors Warren Buffett and George Soros have called it a mirage and a bubble. And Bill Gates just this year went as far as to say it was based on the “greater fool” theory.
I’d heard about Bitcoin, which was the first and most successful – but I was surprised to see there are now 9000 other cryptocurrencies out there.
If we consider Bitcoin, one can see the attraction to this brave new world.
It came into being in 2011 and one Bitcoin was valued at a modest 30 US cents. By 2013 it had risen to US$13 but a year later shot up to US$770.
Much volatility later, Bitcoin peaked at US$64,000 in November last year. It actually was the road to riches if you had entered the market at 30c but not so great if you were the one paying $64k.
That’s because the value has had a decent correction during this year and it’s currently down to $16k.
All the other cryptos have seen similar large drops, but that is not to say they won’t recover at some point.
However, in May alone US$2 trillion (about $3.25 trillion) of value was wiped out. This is serious money.
Confidence in the market has been shaken by several failures as well as theft and fraud as crooks have been able to get into the wallets and pinch other people’s coins.
Just in the past couple of weeks, FTX went into bankruptcy.
FTX was one of the largest cryptocurrency exchanges and had its own cryptocurrency as well.
The founder and CEO, Sam Bankman-Fried (his real name) resigned and now the forensics of this massive failure begin.
Certainly, mismanagement and a complete failure of corporate control but there has also been talk of the misuse of client funds, which would indicate the possibility of illegal activity.
Confidence and a belief in the robustness of this financial product is essential for this investment and FTX’s failure has rocked that.
Good luck to those who can live with this sort of volatility and stress in their investment, but I’ll stick to stuff I understand and know – like farming, thanks.
