By: John Bellotti
Cryptocurrency is a peer-to-peer electronic cash system intended to be a currency for the people. While the Chinese first used paper money during a surge in financial growth in the Tang Dynasty (A.D. 618-907), the digital age has brought about the next evolution of currency: cryptocurrency. Although there have been recent swings in price, trust, and popularity; crypto is here to stay. It may be a decade before you’ll use it to buy a cup of coffee, but you should start learning how they started, why it matters, and how you’re impacted as a citizen of the world.
The Beginning of Cryptocurrency
Bitcoin was the first basic digital currency born from the failed developments in the late 1990s and early 2000s for a digital money system. Bitcoin is, in essence, code. The original Bitcoin code and whitepaper was created by Satoshi Nakamoto, an unknown author and possible pseudonym. In 2008, Nakamoto released the first open source code of the Bitcoin-client in a whitepaper. Nakamoto then “mined” the first 50 Bitcoins. Mining means that a transaction is confirmed by another user on the blockchain, an online public ledger each transaction is stored on. These confirming users are called miners, who are awarded a piece of a bitcoin every time a transaction is confirmed, or “mined”. Eventually, after more internet users became aware of and started mining and transacting their own Bitcoins, Satoshi passed off the official website (Bitcoin.org) to other moderators, and has not been heard of since. The Bitcoin Foundation was formed in 2012 to usher in the growth of the new digital asset.
How does a transaction work?
How does cryptocurrency have value?
The value of Bitcoin (and cryptocurrencies in general) comes from the value put on it by the users. As more users attach value to each Bitcoin, its valuation grew. If nobody thought Bitcoin was worth anything, then it would be worthless. There is a finite amount of 21 million Bitcoins, which Satoshi Nakamoto decided during the creation, so the currency cannot be inflated. Bitcoin is deflationary by definition because there is a fixed amount of currency. As of today, one Bitcoin is worth $6,700, one Ethereum is worth $480, and one Litecoin is worth $82. The first users of Bitcoin saw value in the unbreakable code and the trust-based system.
Cryptocurrency Pros and Cons
The importance of all the time and effort that has been going into seemingly arbitrary digital money is that there is no third party controlling cryptocurrency. This is crucial because most, if not all, forms of money today are backed and controlled by government. One of the issues cryptocurrency users cite with a government controlled currency is centralization. Every country’s currency is created, distributed, and managed by one governing body. If the government has corrupt individuals or is poorly managed, money can easily become worthless. Citizens of Argentina have been watching their savings turn to dust as the country’s peso is falling in value. Their government has consistently made poor financial decisions, negatively affecting its citizens. Today, one Argentine Peso is worth $0.044 when five years ago it was worth $0.18. That’s inflation of 25%, which is increasing daily. Cryptocurrency solves this problem of centralization with a multi-user trust based system. Therefore, as it becomes easier to communicate with people around all over the globe, international transactions can be taken to the next level by using currency out of reach of any one government.
The issue Bitcoin is having right now is that its value is volatile and is better at being an appreciating asset, rather than a currency. Cryptocurrency has also been given a bad rap because of the exclusive use of Bitcoin on the infamous Silk Road, a now defunct online black-market best known for selling and purchasing drugs on the dark web. In addition, although Bitcoin may seem anonymous, buyers and sellers on the market have been caught because of the digital footprint transactions make on the blockchain. The FBI and other intelligence agencies are keeping up with the technology, while weeding out scammers and criminals trying to take advantage of the rebellious digital money.
Types of Cryptocurrencies
Bitcoin is the most well-known crypto, or cryptocurrency, because it was the first of its kind. Every coin and token today is based on the original source code. After Bitcoin, Ethereum is the next largest crypto, and is used mainly for its smart contracts. Smart contracts are defined as “a computer protocol that facilitates the transfer of digital assets between parties under the agreed-upon stipulations or terms.” These types of transactions are used if there is a specific item that is being purchased.
Litecoin is another notable crytocurency that specializes in speed and cost-effective transactions. Recently, a $99 million transaction took less than 3 minutes and only cost $0.40 to complete. With a traditional bank, it would take days and thousands of dollars in fees to finish. Although this is not your everyday transaction, it shows the extreme speed to which one could move his or her own money.
In the privacy sector, there are coins such as Monero and Zcash to anonymize transactions. These transactions can be useful if one is trying to move their savings outside of a country that has a corrupt government.
What does this mean for me?
Bitcoin and other cryptocurrencies are still in early development and in the beginning stages of actual currency. More governments around the world are letting cryptocurrency grow and work out the obstacles holding it back. You can even put digital assets into your IRA! Accredited investors are adding crypto investment funds to their portfolios. Hundreds of companies are pouring resources into understanding cryptocurrency and how it will affect their business. Many more are creating their own coins and tokens to create new markets (unfortunately many of them won’t be around in a few years). It’s worth learning about a new frontier for currency.
Is cryptocurrency just for people who want to overthrow governments and banks? In my opinion, no. Is Cryptocurrency ready to be used in everyday transactions? No. But is this new technology worth learning? Absolutely.
If you’re interested in learning more about Bitcoin itself, there are trusted sources online to do research. If you want an enriching history of Bitcoin, I’d recommend reading “Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money” by Nathaniel Popper. And if learning about monetary systems and why they are always changing is more your speed, read “Debt: The First 5,000 Years” by David Graeber.