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Thursday, December 14, 2017

A Discussion of Cryptocurrencies

A friend asked me to weigh in on the various crypto-currencies. There are now over 1000 of them, and I can't claim to know much about more than a handful. That said, here is my take.

First, what is cryptocurrency? Cryptocurrencies are open-inspection distributed ledger systems. The value of crypto lies in the fact that these ledger systems put every transaction out in the open, essentially impossible to fake. Because the ledger is distributed across millions of computers, it is generally very difficult to corrupt or take down the system. If you need an accounting system with those characteristics, cryptocurrency does it better than any other accounting system. That is its value.

Those characteristics are worth money. No one is sure exactly how much, but as time goes on, more and more people are coming up with things where this crypto-currency distributed ledger system might be useful. Tracking mortgage transactions and title to land is one area. Tracking stock market transactions is another (e.g., Australia is moving to a crypto-currency ledger system for its stock market).  Every day, more use cases are being created, thus every day, crypto becomes more valuable.

While those are the general qualities of all cryptos, it is also the case that each of the thousand different ledger systems out there, i.e., each of the crypto-currencies, have slightly different characteristics. Some might be easier to program with, others may have faster transaction times, still others provide more guarantees of anonymity in every transaction. Thus different coins have different monetary values, based on whether the people investing think the characteristics of that particular coin are valuable.

Bitcoin is the most well-known and hyped, but is the least likely to win any long-term races for a variety of reasons. Its problems include the fact that it has relatively long confirmation times for trades and low transaction speeds. It is extremely difficult to program (Bitcoin code looks a lot like assembler, if you know what that means), so it is difficult to build applications on it. It is literally first generation architecture, the very first attempt at creating an open-inspection distributed ledger. On the plus side, because it is first, it gets all the hype. In addition, if you want to buy other cryptos, you generally have to buy some Bitcoin first. You trade dollars for Bitcoin, and Bitcoin for the currency you REALLY want. This means Bitcoin prices aren't going to go down until that changes. That won't change until a whole lot of cryptocurrency trading platforms allow for easier direct conversion of US dollars to cryptos beside Bitcoin. This is already changing, but there's a lot of room for improvement here. Improving this aspect of crypto trade won't take forever... a year or two at most. If you invest in Bitcoin, be prepared to switch to a different currency within the next few months/years.

What should you switch to?

Ethereum is a good platform, widely adopted, much better suited for general use. It is much easier to code, much easier to build applications on, and currently has faster, cheaper transaction times. A lot of big-name companies are building on Ethereum. There is little question Ethereum's value will outlast Bitcoin. It is definitely a more intermediate investment that will hold value for, hopefully, the next several years.

Monero's claim to fame is its privacy protections. It is very strong in that regard and those privacy protections are what drives the major value in this coin offering. Bitcoin claims to provide anonymous transactions, and that is kind of true, but not entirely true. While it is hard to do, it is possible to track a person's Bitcoin transactions. Monero takes "hard to do" and tries to turn it into "damned-near impossible." If you don't like having people all up in your business, then Monero is an appealing coin.

There are a few other cryptos I have looked at, but none of the others are really worth mentioning here, except for one. Of all the cryptos I know about, my favorite up-and-coming coin is Cardano. First, it is still extremely inexpensive.  Second, it has GREAT modular design. Third, it was created using the Haskell programming language, which theoretically reduces the likelihood of bugs. It's programming interfaces are very modern and allow the use of several of the most popular programming languages. In fact, it is, to my knowledge, the most modular coin on the market.

What does "modular" mean? It means various characteristics of the coin can be taken out and replaced without disturbing the coin's basic ledger system. Even the coin's base cryptography can theoretically be changed out at a moment's notice.

I mention this particularly because of something called quantum computing. Nearly all of the crypto-currencies out there are built on a cryptographic system called "asymmetric key algorithms." This kind of cryptography is gold-standard for regular computers, because it is essentially impossible to crack. It is used for nearly every kind of cryptographic transaction you can think of: banks, credit cards, spy stuff, even your Amazon purchases all use asymmetric key.

Sadly, asymmetric key is theoretically breakable with quantum computers. If quantum computing ever becomes a thing, not only are all of your Amazon purchase now at risk, anyone holding asymmetric-based crypto coins can have all of those coins stolen in just a few minutes. That may be the least of your worries: if quantum computing becomes a thing, every bank account in the world can be broken into in just minutes as well. The whole world depends on asymmetric key crypto, and quantum will break all of it.

The problem is simple: quantum computing will be able to solve entire classes of problems very quickly, so many big organizations, including IBM, Intel, Google and most national governments, are working to create big quantum computers. When they do, all asymmetric algorithms suddenly become much, much more vulnerable. It will be a freaking nightmare for security experts. 

But, while quantum (when it is more fully developed) can take out asymmetric crypto, it can't do anything to symmetric crypto. That's still safe. So, all existing asymmetric applications, including cryptocurrencies will, at some point (probably within the next 10 years), have to switch over to symmetric cryptography for their basic security. There are technical reasons why this has not been done yet (for instance, the key-size for symmetric crypto is not small), but everyone can see that it is coming. We've got maybe a decade, and then the deluge.

Because it is hard to code, Bitcoin is very badly positioned for such a switch. Ethereum is better off. Cardano is, from what I can see, as close to optimal for such a switch as we are likely to get in the near future. For this reason, I consider Cardano a definite long-term buy and hold. As more people become more educated about crypto-currencies in general, I expect non-Bitcoin crypto-currencies to increase. Cardano should, if my assessment is correct, go up by a factor of at least 100.

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