Dogecoin For Dummies

silver and gold coins on brown wooden table

Crypto currency is like the marmalade of internet. Its either the greatest thing ever invented or the worst (or the common 3rd option of not understanding a thing about it). Some believe that an item that doesn’t physically exist is worthless; others believe that crypto is the future. El Salvador seems to support this view as it recently made bitcoin a legal tender (the country previously only accepted US Dollars) and wants to build a “bitcoin city”. Honestly this stuff is complicated as all hell, so welcome to this dumb downed description of economics and crypto and why I believe El Salvador has screwed up.

Before getting into the knit and grit of crypto lets quickly cover the basics of economics. Every country in the world has some sort of legal tender that is accepted throughout the country. This is often assigned a value based on numerous factors such as supply and demand as well as having something ‘physical’ to be held against (commonly gold). 


For example, in the United Kingdom the legal tender is British Pounds, and their value is determined by the number of pounds in circulation and the amount of gold in the UK treasury. Printing more would decrease the value of those already in circulation, (simplified explanation of inflation: see what happens when a country just “prints more money” –  look at Venezuela), whilst increasing the national reserve would increase the value of an individual pound. Of course, this is super simplified as there a lot more factors (such as investment) that can affect a currency.

Crypto Currency is a whole other ballpark. For starters, it is technically not a currency itself; its value is wholly based on what others are willing to pay as there is no ‘physical’ item to be held against. Therefore, despite being considered one of the ‘safest’ currencies there have been several notable crypto scams such as ‘Squid Coin’ from earlier this year.


‘Squid Coin’ which could apparently be used in an unreleased online game of a certain TV show with a similar name. Starting at a meagre $0.01 on release it rose to $628.33 by Monday the 1st  of November before rapidly climbing to $2,856.65 within 10 minutes. The 5 minutes after that, the value tanked and fell to at $0.0007. Known as a ‘Rug and Pull’ this scam generated at least $3.38 million for the scammers (the exact amount is unknown). Now this is certainly a worst-case scenario, as there were several warning signs. For example, tokens weren’t able to be resold at least until the crash), but it proves the point clearly that the value of crypto can be decided on a whim. How can you fairly price something that doesn’t physically exist and in a lot of cases is made with very little effort?

So, have the people of El Salvador been mistaken? Not exactly, as there are certainly a bunch of positive factors, specifically for such a poor country, but there is also a lot more to lose. For instance, El Salvador owes several billion to the IMF (International Monetary Fund, essentially a mega bank for countries), who oppose crypto, as it is near impossible to track and tax. El Salvador plans to utilise this to keep more of their money within the country. 


The major issue though, is that Bitcoin is very expensive and isn’t really that useful for the majority of the populace. So, what was the governments solution? People can purchase ‘bonds’ that entitle them to a certain percentage of the government owned ‘stockpile’ of bitcoin that can then be used as currency. Yes; you’ve read that right. If we look back as the basics of economics you can see that what EL Salvador has done is basically substituted the normal reserve of gold (a resource with a fairly stable value, used for centuries) with Bitcoin (a resource with a fluctuating, highly unstable value). 


The only way for this to pay off for the country long-term, is for the price to rise, a lot. Sadly, it’s something that is near impossible to predict – though I’d never put my money on it. I’d rather stick to something that won’t be wiped out by a click of a button.

[John Steel – he/him – @_jrsteel]

[Image credit: RODNAE Productions]

Sources:

https://www.coindesk.com/business/2021/11/26/el-salvador-buys-100-more-bitcoins-as-crypto-market-falls/

https://www.toptal.com/finance/market-research-analysts/cryptocurrency-market

https://www.investopedia.com/news/how-bitcoin-works/

https://www.sofi.com/learn/content/understanding-the-different-types-of-cryptocurrency/

https://www.futurelearn.com/info/blog/how-does-the-economy-work#:~:text=So%20how%20does%20an%20economy%20work%3F&text=However%2C%20in%20essence%2C%20economies%20work,local%2C%20national%20and%20international%20level.

https://www.bbc.co.uk/news/business-59129466

https://economictimes.indiatimes.com/markets/cryptocurrency/from-2800-to-zero-in-5-minutes-how-investors-lost-millions-in-cryptocurrency-inspired-by-squid-game/articleshow/87501855.cms?from=mdr

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