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David Sovka: A primer on cryptocurrency, a.k.a. a fool and his money are soon parted

Cryptocurrency is made up by a process called “mining.” I would give you a detailed explanation of this process, but the important thing to know is the process does not involve mining in any way
Cryptocurrency entrepreneur Sam Bankman-Fried is accused of swindling investors and looting customer deposits on his FTX trading platform. Ted Shaffrey, AP

Your 50s tend to be a time of reflection. You’re pretty sure you are more than halway through life, and start to ask what it all means.

You wonder about career choices, family ­relationships and why your back hurts so much all the time. Also: Why can’t you be rich beyond the dreams of avarice?

This is why so many people in their 50s have ­succumbed to the predatory schemes and bald-faced lies of the Charles Ponzis and Bernie Madoffs and Sam Bankman-Frieds of the world.

And speaking of overly complicated financial ­flimflam …

Cryptocurrency is a virtual currency secured by something called cryptography, which sounds both computery and James Bondy at the same time!

I know what you’re thinking: Dave! Doesn’t “virtual” mean that it is not real, it’s just made up, like what you write every week? First, yes in exactly the same way that money and the entire global economy is just made up. Second, thank you for reading.

To the extent that they exist at all, most cryptocurrencies live on decentralized networks using blockchain technology. Not Lego. A blockchain is basically a set of connected blocks of information on a virtual ledger. Each block contains a list of transactions that have been independently verified by each validator on a network.

There’s probably a simpler way of explaining all this, but that’s kind of cryptocurrency’s superpower: ­technical obfuscation. On the surface, the explanation makes little sense.

But then you dig deeper, and it makes no sense at all. Nevertheless, it is all safely based on the fundamental accounting principle: A fool and his money are soon parted.

“Crypto” refers to the various encryption algorithms and cryptographic techniques, such as elliptical curve encryption and public-private key pairs, used to protect your money from werewolves and Revenue Canada.

Don’t think about it too much. The point to remember with crypto is that bigfoot, chupacabra and Taylor Swift are totally real things and want your money!

You have probably heard of Bitcoin, the most well known and successful of the cryptocurrencies (as of Oct. 27, Bitcoin had a total market value of $656 billion US).

There is also Ethereum ($212 billion), Tether ($84.5 billion), Binance Coin ($62.6 billion), XRP, Terra, Solana, Cardano, Avalanche … CoinMarketCap reports there are currently 22,932 different cryptocurrencies, with a total market capitalization of $1.1 trillion.

So many people throwing their money here/away means it must be real!

You may be wondering, why are there so many types of cryptocurrency? Part of the reason is that ­blockchain technology is open source and can be ­developed by anyone with a computer and a pointy head. The other part is that, generally speaking, people are greedy idiots.

I don’t mean you, obviously, but consider all the ­people you know: your friends, family, colleagues. Knuckleheads to a man, am I right? Those people should definitely not be goofing around with global economy-wrecking technology, nor handing over all their money to somebody else doing that.

Crypto aficionados point out that because cryptocurrencies are not issued by any central authority, such as the Bank of Canada or your mom, they are theoretically immune to government interference or manipulation. Also, they are a great way to buy and sell non-fungible tokens, one of the hottest topics in the Decentralized Finance space.

If you think I do not know what is meant by the Decentralized Finance space, then pay no attention to that man behind the curtain! Anyway, non-fungible tokens are a way of tracking who owns “things” that do not necessarily “exist.”

For example, expensive digital artwork.

Here’s how it works: Let’s say somebody uses a computer to draw a dog’s bum with a hat, and names it after my mother-in-law, Margaret. Using blockchain technology, the artist can label a single digital instance of the artwork and sell it to you!

Anyone can look at Margaret online, but the ­non-fungible token proves Margaret is all yours. Doesn’t the empress look great in her new clothes?

Cryptocurrency is made up by a process called “mining.” I would give you a detailed explanation of this process, but the important thing to know is the ­process does not involve mining in any way. It’s really just hot computer homework. I mean that literally.

Here in British Columbia, B.C. Hydro had to impose an 18-month suspension on new ­cryptocurrency ­mining, an energy-intensive process involving ­computers and chupacabras and whatnot.

Cryptocurrency mining just takes too much of our electricity for too few people hunting for El Dorado. Reminder: We need that electricity to heat our homes, charge our electric cars and toothbrushes, power industry and generally keep the lights on. Reminder: El Dorado is not a real place, and never was.

Which brings us to our 50-something problem. My wife and I have always tried to manage our monthly finances by following two principles:

1. Spend a little, save a little, give a little.

2. Don’t spend more than you earn.

We have done fine over the years. We are wealthy by world standards and have no real wants. Except for the part about being really filthy stinking rich.

For that, let me suggest one more principle to ­follow (as soon as B.C. Hydro lets us start mining ­operations again):