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The Future of Cryptocurrency

Harrison Lee

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The death of MTGox is the greatest thing to happen to cryptocurrencies in a long, long time. You might ask why considering the numerous calls for regulation and unbridled chaos its dissolution has left. The unfortunate reality is that roughly $400 million USD in Bitcoin was lost and isn't coming back. No one except the people responsible at Gox can fix that. As crypto users, however, it's our responsibility to ensure this never happens again by keeping online exchanges accountable, decentralized and transparent. MTGox screwed customers over by withholding withdrawals, leading many to wonder where their money was (and still is, for that matter) and ensuring their was confusion as to what was really happening. Shutting down and reorganizing isn't the answer to fixing the problem.

 

A core point of BTC, to avoid placing currency in unstable banks, was thrown out the window the moment MTGox became popular. I get that folks wanted to protect their hard-earned scrap, but an online wallet handled by programmers that were way in over their heads wasn't the way to do it. MTGox was a trading card site that somehow became the most popular cryptocurrency exchange on the net. MTGox used outdated security protocols and a shifty proprietary wallet system; there were red flags everywhere. And while Bitcoin industry leaders have recently assured users this will not be repeated, it's ultimately up to us to keep cryptocurrency use alive.

 

As mentioned before, the first step is doing away with online wallet banking and centralized institutions. We've all seen how that's worked out for physical currencies and Bitcoin users. Banks are not secure; offline wallets are far safer alternatives. While I understand the fear of unreliable hard-drives, the simple solution is to back-up your wallets to various safe locations. An online wallet is an even bigger gamble than the crypto gaming sites. If you're worried about thieves hacking and stealing your coins, encrypt the wallet. It's as simple as that.

 

The second step is to decentralize the currency system. In other words, every coin on the market needs to divest itself from Bitcoin. Each altcoin has a purpose and use. The value of said coins should not be dependent on Bitcoin. Achieving relative independence can be done through more exchanges that convert cryptos to and from existing world currencies. It will be a challenging process but can ultimately make adoption easier and strengthen the overall health of the market. Bitcoin is important, no doubt, but other coins need not be tied into BTC since they're not being backed by the grand-daddy currency.

 

The third step is to make widespread adoption a feasible, desirable option. This means opening more markets and businesses to cryptocurrency use. Imagine paying for your coffee with Dogecoin or buying a brew at the local bar with Litecoin. Some entrepeneurs have already taken the initiative and integrated crypto payment systems. We have to take it a step further, however, and solidify cryptos as a viable means of payment. We don't need to back these coins with precious metals or cash, but it's important to stabilize the crypto economy in order to introduce the coins to a larger audience. Paperless payment is the future.

 

Step four is simple: introduce your friends and family to cryptocurrencies. There's been this prevailing notion that cryptos are for the tech elite and geeks. While some technical knowledge is required to mine, the general process can be easily taught in a matter of minutes. All it requires is you to help guide the way and get them thinking in the way of the future. Cryptos shouldn't be made cryptic when we, more than ever, need to bring in new users. If they start with Dogecoin, that's perfectly fine. If they wish to start with Bitcoin, that's fine too. Help your friends find the coin they enjoy and like to use. It's all about founding crypto communities before we get to the Moon (a shibe-ism, if you aren't familiar). Locking out potential adopters makes little sense when cryptos offer so much promise.

 

Where will the future take cryptocurrency? That's a good question, but the growing market rebound from the MTGox scandal has already shown that we're a resilient lot. No budding currency is going to progress without extreme growing pains. When all is said and done, we've come a long way in providing a glimpse at an alternative payment system not dependent on weakening banks. And even though there are bad eggs, we've made a lot of progress without regulation. What currency can claim to have experienced the same growth cryptos have? We're on the edge of a new digital frontier. It's up to us to keep pushing the boundaries and make this frontier a home.

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Even though I have read your posts and a bit about cryptocurrency on various sites, I still don't really grasp the scope of it. Well, like most people, I guess I've spent a lifetime very focused on fiat money. 

 

So people transfer their coins to these online banks (much like physical banks)? What exactly has led users to believe these companies are legitimate or prepared for a huge swath of users in the least? I mean, it's not as if they have a multitude of years of success which implies to people they will have continued success. Of course, we know even physical banks are not impervious thanks to recent events. Also, are these online banks simply digital storage lockers or do they invest in other things as physical banks do?

 

I am also unsure as to why it apparently is the case that all coins basically defer to Bitcoin for their own valuation. Was Bitcoin the first coin or was it just the most successful/well known? Certainly the global market is still keen on using American dollars as a sound investment (who knows how long that will continue) but I don't really see why there would be anything similar going on in the crypto world. This economic entity has sprung out of the ether, it seems, so it doesn't need to follow in the exact footsteps of fiat. But since it appears to be somewhat, I can't help feeling it will make many of the same errors as fiat if more economists and such don't jump on board to steer it in better directions. 

 

Also I have a question which was not brought up in your piece but I just wanted to know about. Is there any possibility of hyperinflation in the coin markets? If coins are always mined at about a steady pace then it isn't, right? Or are there other avenues to sudden coin production? For example, when you buy one coin with dollars, is that coin being summoned out of nothing immediately, or are you buying coins that were previously mined? 

 

The hardest thing for me to grasp about coins as a whole is why they have any value at all. I'm sure some other people have or still do wonder the same. But then I remembered that fiat currency (dollars, euros, yen, etc) are worthless too. They are not encrusted with diamonds, backed by gold, or anything of the sort. The only reason they carry value is because the government has deemed they do. As long as everyone agrees that a bill with $5 printed on it is worth 5 bucks, then you can use it as such. Just thought I would put that there for others who had the same question. 

 

.....Though that makes me then wonder what sort of regulating bodies are in place for the coin world. The American dollar has the government and Fed. What is keeping coins in a good position? Is it purely the will of the userbase? That is very intriguing, if so. 

 

PS: Sorry for a million questions!

PPS: Thank you for being the go-to cryptocurrency guy of GP :)

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Hey Marcus, all very good questions!

 

1) The online banking system, which is essentially online wallets held by a group of owners, is usually run by those heavily active in the cryptocurrency scene. They usually have had some measure of success as a currency exchange that slowly gains popularity. In the case of MTGox, folks stored their BTC there in preparation for when they wanted to sell, convert, or just store their money. It was a risky endeavor and one of which I can't support, given how shaky most financial institutions are in the first place. Why users trust them is somewhat unclear. Then again, even transferring cryptos between users is an act of trust. I suppose using an online wallet from what looks to be a reputable group isn't a huge step up.

 

2) Bitcoin was the very first cryptocurrency and currently dictates the market. Because many altcoins are not able to be purchased with fiat currencies, people have to purchase BTC first, then convert the BTC to altcoins. Therein lies the problem; if the price of BTC goes down, every other market coin follows suit. In many respects, cryptos are a lot like fiat. BTC is more like a combination of stocks and gold in its behavior, but until more exchanges offer direct fiat-to-altcoin conversions, inflationary currencies will model similar behavior.

 

3) Hyperinflation won't be an issue since, as you said, coins are mined at a relatively consistent pace. When someone buys cryptos with fiat, those coins have previously been mined and are already "in circulation", so to speak. A whale could dump their coins and deflate the currency for a temporary period but hyperinflation is unlikely to occur.

 

4) Value of cryptos, like many things, is in the eye of the beholder. People like cryptos because each coin is a verified piece of unique data that, once spent, can't be used twice by the same user unless transferred to another user and given back. The transaction system and limits on how many coins can be mined are key to crypto value. And while it isn't backed, folks don't seem to mind as this is an experiment in a completely different way of thinking. As it is right now, the system is unregulated, which is the way users want it. That said, we need accountability systems to ensure online exchanges are kept honest.

 

Hope these answers satisfy your questions!

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Ill read everything and the answers to marcus when i get home pretty interested in the subject.

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I haven't done so yet but if anyone is interested, I'd be down for doing a group Skype call at either 9 PM EST tonight or sometime after 12 PM EST tomorrow. I'll explain a lot of the ins and outs as I understand them, as well as answer any questions you have.

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Thanks for your help! Another question popped up so here we go again....

 

Is it the case that having a more powerful machine will allow for increased efficiency in mining coins? I've seen people creating their own rigs for the purpose of mining which is where I got this notion from. 

 

If this is the case, does difficulty of mining increase with time across the board? Like, since more powerful processors will be around every six months or so, is coin mining compounding in difficulty alongside these technical advances? 

 

And if it is increasing in difficulty does that mean anyone who doesn't keep pace by upgrading their machines yearly is doomed in regards to long-run coin mining success? Of course, if someone initially makes bank off of some coins they could easily reinvest that in upgraded rigs, but I guess I'm asking if "casual mining" is beneficial beyond the short term. 

 

PS: Bonus question! What do you think will be the effect of continued stratification in the coin market? Bitcoin, Litecoin, Dogecoin, and Peercoin seem to be accepted to some degree in tech communities but there's certainly nothing to stop the continuation of altcoin development. Does it pose an issue if there are like 20 competing altcoins that will develop in the coming year? I guess some of the startups would fall by the wayside. 

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Most mining is done off of graphics cards. The majority of miners upgrade their rigs to add more video cards for mining. In the case of Bitcoin, the difficulty curve went so ridiculously sky high that GPUs became useless because specialized ASIC hardware hit the market. Many of the existing altcoins are actually scrypt-based, meant to heavily resist any sort of ASIC usage. This should keep the difficulty increasing at a much slower, steadier pace. Digging dogecoin, for instance, is profitable for me because I get good hashrates and don't pay for power, and it will continue to be so for a while as I make a good deal of doge a day.

 

As long as the difficulty doesn't skyrocket, anyone should be able to keep up with cards that have great hashrates. Casual mining is not always profitable but might be a fun place to start, especially if you have no experience with any previous e-currencies.

 

As for stratification of coins, that's hard to say. It's honestly a lot like currencies from different countries. Each has a certain number of coins in circulation and has different values/uses. Right Bitcoin is the vast majority of the market so I doubt stratification means much to the regular populace. When they hear virtual currency, they think Bitcoin. It will take time for the best altcoins to emerge and steal the hearts of consumers.

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