Cryptocurrency

On September 15, 2008, the investment bank Lehman Brothers failed after their stock fell sharply because of two Bear Stearns hedge funds that collapsed, and this became the largest bankruptcy in U.S. history at that time, and it was among the most significant events of the financial crisis of 2007–08.  On Friday, October 10, 2008, stock markets crashed across Europe and Asia.  London, Paris and Frankfurt dropped 10% within an hour of trading and again when Wall Street opened back up for trading.  The 2008 financial crisis began with cheap credit and lax lending standards that fueled a housing bubble.  When the bubble burst, the banks were left holding trillions of dollars of worthless investments in subprime mortgages.  Our nation was on the edge of falling into a second Great Depression, as confidence in the financial system was vanishing and panic was spreading.  Seeking to prevent the collapse of the financial system, Secretary of the Treasury Paulson called for the U.S. government to purchase several hundred billion dollars in distressed assets from financial institutions.  With the Emergency Economic Stabilization Act the government prepared a $700 billion stimulus to save the banks and this helped to save the U.S. financial system from collapse. The bank rescue involved Fannie Mae and Freddie Mac, Bear Stearns, and The American International Group (AIG) and the federal government bought $20 billion in shares each from Bank of America and Citigroup.  The idea for cryptocurrency first emerged in 1983, but it wasn’t used till 2008 when an anonymous programmer or a group of programmers under a pseudonym, Satoshi Nakamoto allowed it to be used for verification that a digital asset had only been spent once, and this eventually became the Bitcoin.

Banks make money by loaning out money and charging interest on the money that is borrowed, but the problem is that banks can lend more money out than the number of actual deposits that they have on hand.  Some banks invest extensively in different types of assets and while some of those investments are simple and secure, others are complicated and risky.  When large groups of depositors withdraw their money from a bank fearing that the institution will become insolvent, this is called a run on the bank, and it creates financial havoc like what happened to George Bailey in A Wonderful Life with his bank in Bedford Falls.  The Stock market is a game which is controlled by rich people, as the value goes up or down so you could make a profit or lose your money.  In the 1600s the price of tulip bulbs in Holland soared.  A single bulb could cost more than a house and in some cases tulip bulbs were used as a form of currency.  Single bulbs would be sold multiple times, and investors would buy the rights to tulips yet to be grown.  This created a futures market allowing people to buy or sell something at a predetermined price for delivery at a specified time.  The dotcom bubble, also known as the Internet bubble in the late 1990s, grew out of a combination of the presence of speculative or fad-based investing, the abundance of venture capital funding for startups, and the failure of dotcoms to turn a profit.  The dot com companies became all the rage and many people invested money in these tech companies hoping they could get rich.  Timing is important and the dot-com era was doomed to failure because there were too many companies chasing what at the time were too few users. 

Cryptocurrency is a digital payment system that doesn’t rely on banks to verify transactions and Bitcoin is open to everyone and you don’t need permission to use it, so it has downsides, as it’s a perfect aid for tax evasion, money laundering and the financing of terrorism.  Money launderers can move illicit funds through hundreds of crypto wallets before depositing the funds and cashing them out at a crypto exchange.  Cryptocurrency provides anonymity, so some people who wish to keep their assets out of a divorce by hiding them from their spouse or even their own divorce lawyer will use this as an option.  People who don’t have access to, or perhaps don’t trust, the traditional financial system tend to use cryptocurrency.  Many of legitimate transactions take place with cryptocurrency, but there are also used for money laundering, fraud, drug trafficking, human trafficking, child exploitation, cybercrimes, and terror funding, with a suspected global total of $10 billion in illicit activities being used in 2020, as criminals and terrorists prefer not to open bank accounts to store their ill-gotten gains.

Transactions are made from one or more crypto addresses to one or more destination addresses.  A crypto address is a random set of characters, which is roughly the crypto equivalent of a bank account number.  The first time that I herd of Bitcoins was when my computer was hacked and I picked up a ransom virus, which is a form of malware, that infected my computer preventing me from accessing my data because the hacker encrypted most of my files.  They wrote me an email which told me that I needed to pay a ransom in Bitcoins within a stipulated time frame, or else I would never be able to recover my files.  I don’t pay money to terrorists, as that just encourages them to attack others, so I lost some things that were precious to me.  Many people believe that cryptocurrencies are the future of finance, but I will never use it or invest in it.  There are more than 250,000 confirmed transactions of Bitcoin daily and about 1 billion people around the world are thought to have used cryptocurrencies in 2022.  About 20% of the US population is currently using cryptocurrencies, because trading with crypto has become easy.  You can do online shopping, pay some of your bills and purchase different subscriptions with cryptocurrency and crypto companies are pushing their product by saying that you should buy now or regret it later, urging everyone to join the cryptocurrency revolution and step into the future.

Around ten days ago on November 7-8, crypto coin crashed and lost 80% in value from the result of a bank run on the exchange and on Nov. 11, 2022, several exchanges had to file for Chapter 11 bankruptcy.  In March, the Crypto billionaire Sam Bankman-Fried was worth around $26 billion making him one of the 100 richest people in the world and now his fortune is completely wiped out.  I didn’t lose any sleep over this as I never had confidence in the crypto industry, thinking that it was not real money and just some kind of a smoke and mirrors trick.

For Friday Faithfuls, I would like to know your thoughts on cryptocurrency and Bitcoins.  Did you invest money in this, have you ever used it to purchase anything, or have you ever been asked by a hacker to send this to them?  Do you think that cryptocurrency is the future of financial transactions, or do you feel it is just a way for criminals to hide money?