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OpEdNews Op Eds    H4'ed 8/16/22

Bitcoin or Citcoin? That is the Question?

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Reza varjavand
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Anytime I make a suggestion to my son or offer him a piece of advice, he tells me daddy things have changed and we are living in a different time now, and he is undeniably right. For the old-fashioned folks like me, switching from what we have learned, experienced, and lived with for decades to a completely a new way of doing things is difficult if not impossible. Basic changes often trigger resistance or may seem totally unacceptable to those who believe in doing things the old-fashion way.

To the older generation, for example, investment means using your money buying CDs, government bonds, commercial papers, or if you are more risk tolerant, buying shares of stocks. These days, however, it has emerged a new generation of financial assets that are more complicated hardly comprehendible to traditional investors like me. They are known as digital assets. Investing in such assets, however, is becoming a craze for younger market enthusiasts and some fund managers.

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If you wonder what I am talking about, think about this term bitcoin that many people keep talking about it but these now a days. However, most of them have a vague idea what it really is? Bitcoin is a new means of financial investment that has inspired many investors and financial analysts. The person who first introduced the term bitcoin, nearly 14 ago, had no idea that someday it becomes almost idolatrous to many investors across the globe. Some of whom are even willing to invest their life saving in it in anticipation of higher/windfall gains. Others just wanted to jump into the band wagon or to show us their fetishes and financial intellect by buzzing about bitcoin, making us to feel like a nincompoop. But what is exactly this bitcoin? How it became so popular in such a short period of time? Is it like bonds or stocks? Real estate like your home? gold and silver? Or commodities like soybeans? Apparently, the answer is none of the above. So, why are some investors so enthusiastic about it?

To understand bitcoin, I believe, we should study its underlying computer technology, blockchain. The person who has been given credit for the creation of blockchain is named Satoshi Nakamoto. Thanks to his computer skills, creativity, and visionary capability, he has transformed and reinvigorated the financial market through blockchain and bitcoin. Blockchain is a digital system that allows the creation and the trading of digital assets like bitcoin. It is like an information highway that is built for speedy movement of digital cars worldwide. To put any kind of data on blockchain platform, you need a digital device that understand the language of that system. Using a simple analogy, if you travel to a remote area in Mexico for example, you need to know Spanish language to be able to communicate with local people. Likewise, without bitcoin, you can't put any kind of data on blockchain hence unable to communicate with other users. Simply stated, if you want to gamble in a casino, you need chips to be able to play. Although chips have no values pe se, they can be converted into dollar. Likewise, if you want to use blockchain, you need to use bitcoin as catalyst that enables you to post data and communicate with other users.

Why has bitcoin become so popular as the medium of exchange? The brief answer is mainly because of the many drawbacks of paper money, fiat money, the most prevalent form of money in the world. Fiat money is produced and injected into the economy by government via the central bank that is in charge of keeping its value within a reasonable range. People are willing to accept fiat money as long as it is popularly acceptable and preserves its value. The trust fiat money if it is backed by a powerful and stable government. However, often, central banks, pressured by politicians, breach this trust, and create too much money causing its devaluation and possible collapse of the entire monetary system.

Unlike for fiat money. there is no central authority behind the creation of bitcoin. It is created online and traded openly on blockchain platform worldwide. Although it was created as a digital reward for those who authenticate the data posted on blockchain and not as an alternative to fiat money, bitcoin has become a viable substitute for fiat money because people are willing to accept it and trust that it keeps its value because of limited supply. Those who created the blockchain network tell us that there is a total of 21 million bitcoin to be mined. So far, 18.5 million are mined the rest of them, 3.5 million will be mined until 2040 beyond which there is no more bitcoins.

I am not obviously a computer expert and thus unqualified to describe how blockchain technology works and how was bitcoin conceived or how it will be quarried on internet. Experts tell me if you seek to own a bitcoin, you should mine it by using the highly sophisticated expensive energy guzzling computers designed for this purpose by solving complicated math problems. Implying that if you don't have the necessary equipment and computer proficiency and mathematical skills, you are less likely to be able to mine, hence, to own bitcoins. Furthermore, often the cost of mining a bitcoin, especially in lesser developed countries where electricity is scarce thus expensive, may outweigh its benefits.

Alternatively, however, they say you can buy bitcoin online from the exchange companies who are in the business of mining and trading bitcoin. Obviously, as the law of economics predicts, limited supply coupled with frantic buyers worldwide will force its price to climb higher and higher. However, just like other risky financial assets - if you can call bitcoin an asset - high volatility may also ensue, and occasional price collapse and massive loss for investors are possible.

Baffled and confused? You should be as I am. We the kick the tire generation, may understand and digest the values of many traditional assets but not the rationale behind the price of digital assets like bitcoin. My advice to you, if you are unable to grasp the furies regarding digital assets, is to relax and go to your favorite all you can eat caffe and calmly blow on your favorite soup before eating it. Or better yet, put all your money in one secure riskless basket, sitcoin! To be precise, stuff all your cash in a durable duffle bag, put it under the cushion of your favorite sofa, sit on it and enjoy watching your favorite documentary, the Lifestyle of used-to-be Rich and Famous on PBS.

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Reza Varjavand (Ph.D., University of Oklahoma) is associate professor of economics and finance at the Graham School of management, Saint Xavier University, of Chicago. He has been an avid participant in many professional organizations and active in (more...)
 
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