Cryptocurrency is digital money.  The most important difference between traditional money transactions and cryptocurrency transactions is that cryptocurrencies eliminate banks. The cryptocurrency itself becomes its own bank. One other thing it is necessary to know is that a "blockchain" is the encrypted record of a set of transactions, equivalent to a ledger in traditional accounting.

I know next to nothing about cryptocurrencies. I do not have a licence to provide advice about them and a jolly good thing too considering the depth of my ignorance. Therefore please do not take anything I write as advice. I do not want a rap over the knuckles or worse from the regulators and I do not want to be sued. All I want is to put my auditor's hat on and ask some questions.


What is the product?

Products come in two forms, goods and services. I feel comfortable in eliminating goods as a product. I have never heard of a cryptocurrency offering bread for sale or mattresses or Mediterranean cruises or any other tangible product. Therefore it must be a service and that service must be so valuable that a single bitcoin (for example) can be worth thousands of dollars in the marketplace. What could this income-generating service be? Cryptocurrencies do provide a transaction service which is said to be safe and secure. This might well be true. (The auditor in me says "verify"). Even if it is true, the transaction fees I have seen quoted are trivial and much smaller than the fees charged by banks. At this stage of my learning process it is not possible for me to believe that such negligible fees could cover costs, much less generate enough income to make cryptocurrencies so valuable. In fact cryptocurrencies themselves do not make such a claim.

There is a further issue to consider. It appears that the buyer and seller must both deal in the world of cryptocurrencies. If the buyer pays a transaction fee of, say, one cent and the seller receives one cent then, within the global cryptocurrency world, no wealth has been created. This is like taking one cent from your left hand pocket, putting it in your right hand pocket and saying that now you are a cent richer. If Westpac, Commonwealth, ANZ and NAB charge each other billions of dollars in fees the net result in terms of global banking profits is zero. The banks as a whole generate revenue only when they charge their customers. In my research to date I do not see cryptocurrencies collecting money from customers. I see them dealing only with each other. However, I do see money, big money, flowing in from investors who are willing to pay (in some cases) many thousands of dollars for a single coin. What value do these investors perceive when they make their purchases? If the answer is that they buy because the value of the coin is likely to increase then I am still uncomfortable. Surely there has to be some underlying income-generating service if the currency is not to collapse eventually when it runs out of new investors?

 I need an expert to explain this to me, bearing in mind that my definition of an expert is not someone who can use all those big unfamiliar words I am reading. Instead, it is someone who can simplify. Arcane and esoteric language can obfuscate.

Imagine for a moment that the dollar has just become the first currency. Before that, there was only the barter system.

"I'll give you five sheep for your cow".

"This cow's worth more than five sheep. Throw in two bags of grain and you've got a deal".

Then someone from Japan invents the first currency, the "dollar". It revolutionises commerce. The world goes wild. Headlines on Tuesday. "Dollar is selling for two cows". Wednesday, "Dollar rises to five cows". Thursday "Experts predict dollar to be worth 200 cows by end of year".

Now it is true that the dollar is hugely valuable as a medium of exchange, but try to sell it for $1.01 and see how many offers you get.

Why is moving from a dollar to a cryptocurrency different from moving from barter to a dollar? Isn't a cryptocurrency simply a different medium of exchange?


Where is the control of the money supply?

We all understand that money has value only if it is limited. Historically governments and central banks control this by the amount they print or mint. If a central bank printed unlimited dollar notes each note would be virtually worthless. How do cryptocurrencies control the money supply? Well, Bitcoin limited from the beginning the number of bitcoins that could ever be produced to 21 million. This was a sensible way to address the money supply problem.

However, there are issues.

Firstly, if someone can create bitcoins and limit the number to 21 million by hitting some keys on a keyboard, how can we be assured that in the future the same person or someone else will never hit some more keys and create more bitcoins?

Secondly, anyone who wants to transact in cryptocurrencies can create their own currency and "print" their own money. It is happening. There are already more than 1600 cryptocurrencies with names like ripple and ethereum.

The internet tells me that Bitcoin is worth $163 billion. As I write this the price of one bitcoin is $5621. I have to ask why I would pay $5621 when I can buy a coin from one of the other 1600 cryptocurrencies for a few dollars or even start my own currency?

Thirdly, no matter how efficient a dollar is at facilitating transactions it is still worth a dollar. Why is it different with cryptocurrencies?


Who controls a cryptocurrency?

Whom do I approach if things go wrong? That is the question.

Currently I can phone a bank or go on a chat line or go to a teller or a branch manager or a banking ombudsman. Imagine things went wrong with a cryptocurrency.  For example…let me think…oh yes… suppose I could not find my money? Whom do I contact?

It appears to be that no single person or group has control of a cryptocurrency. Instead the entire community of owners of the currency has joint control. This is achieved by providing every member with details of every transaction. There are safeguards to ensure that no single member can change a transaction.

This puzzles me. I am trying to envisage the sheer volume of all the computers that Westpac, for example, must use to store all the transactions of all of its customers. If every holder of a cryptocurrency has to store every transaction wouldn't that mean that he or she would need a skyscraper in the back yard to hold all the necessary computers? I am definitely missing something here.

A cryptocurrency network is described as a peer to peer network which, according to Wikipedia, is a network in which interconnected nodes ("peers") share resources amongst each other without the use of a centralised administration system such as a bank. It is described as an egalitarian network but there is at least a rudimentary hierarchy because there is the investor, then there are the "miners" who verify the transactions and add them to the blockchain, then there is the creator of the cryptocurrency. As far as I can see most of them appear to be anonymous.


Where are the auditors

Auditors are the super-heroes of the world of commerce. They should wear capes. There would be a lot of comfort for me if I could see an independent auditors report appended to a blockchain.

Preliminary findings

Will I invest in cryptocurrencies? At this stage I have not detected any income generating services produced, I worry that there is the potential for rampant oversupply of the currency, I have no idea who is in control and there does not appear to be any independent oversight.

For me the decision is easy because my dislike of losing money far outweighs my desire to be rich. There will be people whose desire to be rich far outweighs their dislike of losing money.

I will just plod along until someone enlightens me. By then, of course, it will be too late.

Stop Press. As this blog is going to press there is a prediction on the internet that a single bitcoin will rise in price to $4 million. This is not intended as advice.