Cryptocurrency - Who Holds the U.S. Dollars?

Buying cryptocurrency is like buying a comic book. After the seller gets your money, the deal is done and the seller runs off with your money with no obligation to you.

The word "redeem" has no meaning in cryptocurrency. You buy it, you sell it. That is it. A cryptocurrency has no value other than the selling price. It is not an IOU. It is simply something you can buy and hopefully can sell for more.

Think of it this way.

I draw a figure on a piece of paper. I tell you... "look this is art" it is worth $500. I can point to other people and say, look Sally over here bought my art for $500, and so did Jim. That is proof of its value.

Let's you buy my art. You give me $450 (because I like you I will give you a discount). You give me the money. I give you the piece of paper. The deal is done. And I go off any by whiskey and women with my money (and it is my money, because I earned it from my art).

Let's say you then try to sell my art. You put it up for $450, and no one buys it. You then try to sell it for $200 and no one buys it. You try to get $5 and still no one wants it.

There is no reason that I should give you the money back. You bought it for the agreed upon price. I fulfilled my part of the transaction. I didn't give you any guarantee that it would hold its value.

On the other hand, let's say the name of Max becomes more famous, and you find you can sell this piece of paper for $2000. I won't come around asking for you to give me the money you made either. So it's all fair.

It is just buying and selling for the agreed upon price.

maxdancona-

A criminal may hack my computer and then tell me to pay him one million dollars in cryptocurrency.

I then buy one million dollars from cryptocurrency [where do I go to buy it?].

I then give the cryptocurrency to the criminal [by giving him code numbers?].

I think the criminal is then entitled to cash in the cryptocurrency.

Am I wrong?

Yes, you are wrong. Let's keep using my analogy.

Let's say there are 10,000 people on the internet who think Max is a great artist and that a Max original artwork is worth $50,000. Of course Max can keep making new artwork (it just takes a pen, a piece of paper and about 10 minutes of time). The reason that Max artwork is worth $50,000 is because that is what people are willing to pay for it.

1. Sal bought 10 Max artworks for $50,000. Maybe he bought it from Max directly, maybe he got it from Tina. Maybe he bought it for less money (say $2000 because Max wasn't so famous then). It doesn't matter. it is worth $50,000 now because that is what people are willing to pay for it

2. You need $1,000,000 worth of cryptocurrency to pay the ransom, so you go onto a market and say you want to by 20 of the things (now worth $50,000).

3. Sal and Ursula respond saying that they will sell you their cryptocurrencies. You pay the $1,000,000 to the market. Sal and Ursula get their money. This is anonymous... Sal and Ursula get the money and have no further obligation.

4. You then give the cryptocurrnecy to the criminals.

5. The criminals then go to the market and say. We have 20 cryptos, we want to sell them.

6. Bob goes to the market saying he wants to buy 20 cryptos. The criminals give Bob the cryptos. Bob gives the criminals the $1,000,000.

At this point, the criminals have their money, and (if you overlook the crime) no one owes anyone anything.

So at the end of this.

- You are out $1,000,000.
- The criminals gained $1,000,000.
- Sal and Ursula sold 20 cryptocurrency (Max art) for $1,000,000
- Bob bought 20 cryptocurrency (Max art) for $1,000,000

Everything balances out.

maxdancona-

Thank you.

You speak of going to "the market." Please be specific. Where do I go
to arrive at this market?

When you buy a bitcoin, you are buying a very big number.

I don't know how technical you want me to get, the number is stored in the Blockchain. It has value because people think an entry with this number into this big shared file has value.

That being said, you can use a broker to buy and sell these numbers. If you can find a willing technically saavy person you can make the transfer yourself, but using a broker is much easier.

There are many reputable brokers, these are just private companies that buy and sell. You can google them.

maxdancona-

Thank you.

If I open a bank account and then forget about it or die, after a certain number
of years the bank will report the funds to the State as Abandoned Property. Subsequently, the bank will pay the funds to the State.

In this way, though the funds are lost to the original depositor, they are put to use for a societal purpose.

If instead of opening a bank account, I buy some cryptocurrency and then forget about it or die, does someone profit from my failure to sell my
cryptocurrency?

If you bought a collectable comic book, for $100. Then it increases in value to $500. Then you accidently put it in the trash and it gets incinerated, who profits.

The person from whom you bought it got $100 (although you could argue he lost $400). No one else profits in any way that I can imagine.

Think of a bitcoin as an item that you own. It is not a bank account. It is more like a coin.

I can go down a local coin store and buy a gold coin. I can take this coin and hold it in my hands and put it under my mattress. If I did this, I would have no real use for the gold coin other an investment, but I could put a gold coin under my mattress and there are people who do exactly that.

This gold coin may sometimes be worth $800, and sometimes worth $1200. The value varies. Generally people who buy gold coins believe that the price will go up, if you can buy it at $800 and sell it at $1200 you have earned a profit.

Here is where it gets a little confusing. I can buy an actual gold coin (that I can have for my very own). Alternatively I can buy a "gold account". In this case I pay some money to a broker who gives me a promise of an ounce of gold. This account will always be worth the value of an ounce of gold.

This financially is the same as buying a gold coin, but I don't need to buy or store or worry about the gold coin. Better yet, I can put more money to my gold account for fractional accounts. If I have an extra $300 and want to buy a gold coin... it is going to be difficult for me to find a coin that on that day is worth exactly $300. But if I am buying into an account, I don't have this problem.

In all of these ways, bitcoin work like gold coins. You can actually own a bitcoin... or you can pay a broker to give you the value in a bitcoin account.

maxdancona-

I think that when the United States government wants to create a new $100 bill, it takes a piece of paper that it already owns, adds some printing to it, and voilà, it has a $100 bill that it can sell for $100.00. Its profit is almost $100.00. The profit is called seigniorage.

When someone creates a new "brand" of cryptocurrency (e.g., Dogecoin), does he make a huge rate of profit as he sells something with no intrinsic value, for a large price?

I want to quibble over your use of the term "signiorage". You seem to be confusing money with paper currency. Most money today is simply an entry in a ledger. But I am not sure if that is relevant.

A famous baseball player can take a 5 cent piece of paper, and a pen worth $1.29. In 3 seconds he can sign his name, and this signature can be worth hundreds of dollars.

Value doesn't come from cost. Value comes from perception. If people believe that a Roger Clemens signature, or a stuffed animal, or a comic book or a pet rock has value... then it has value.

Bit coin is clever... the engineer who developed it created a system of "mining". To create a bitcoin you need to solve a costly math problem... by "costly" I mean it takes a powerful computer a certain amount of time to solve it.

The genius of the system is that as coins are created (and the math problems get solved) the problems get more difficult. It takes more processing power to create a bitcoin now than it did in the beginning.

This is engineered.... the creator wanted to replicate the "cost" of mining gold or diamond.

The intrinsic "value" of a diamond ring is really zero as far as I am concerned. Having a diamond ring doesn't get you food (unless you sell it) or cure you of diseases or help you pleasure yourself. It is sits there doing nothing.

Diamonds only have value because people believe they are valuable. And yet people spend thousands of dollars on them.

To get a diamond, you go digging in a mine. To get a bitcoin, you set up computers to solve math problems.

It depends on whether or not they have access to your bitcoin wallet.

Note the case of the guy who threw away the hard drive with his bitcoin wallet on it. It's not possible to transfer the funds without the wallet that they reside in.

oralloy-

Is that analogous to my losing some U.S. currency and no one finding it? I am out the money but no one else profits by the same amount (or any amount).

Yes, I think that is the same situation.

You don't want to know how much was in the wallet on the hard drive that the guy threw away.