Cryptocurrency is a new form of money. This isn’t something you need to know about it if you are selling pizza. But if you are thinking about starting a business, then understanding cryptocurrency is important.
Cryptocurrency is digital money that can be used like money, but it is not legal tender. It has no central authority and no government backing. Instead, it’s built on mathematics and cryptography, which means its creation and use are controlled by mathematical rules, not political ones.
There is no such thing as legal tender in the sense of being tied to some particular country or king. But there are several kinds of legal tender in the sense that governments will accept paper money as payment for taxes and other obligations. Cryptocurrency doesn’t have that kind of backing.
There are also several kinds of cryptocurrency in the sense that they can be bought and sold like stocks or bonds or any other financial asset. But there may be only one kind of cryptocurrency, depending on your definition of “cryptocurrency.” There are cryptocurrencies with maintenance fees, cryptocurrencies with inflation rate restrictions, cryptocurrencies with total supply limits… yes, even cryptocurrencies with names like Bitcoin that have become synonymous with cryptocurrency in general.
There are many ways of making money. Try to understand what the different kinds of money are, and which ones you can use yourself.
The most obvious kind of money is the kind we know about. It’s called currency. You can go to a bank and exchange dollars for yen, euros for dollars, or whatever. Or you can buy dollars with dollars at a different place.
But there are also kinds of money that don’t work like that. If a business accepts “e-money,” as it calls it, then it has an account at that bank and an account with the bank’s customer service department (which may be called “customer service”). Transactions between the two accounts happen electronically: sometimes instantly, sometimes not for days. Bank statements are mailed to customers by e-money banks; bank employees may be called “customer service representatives.” Sometimes they wear very big earrings and speak with a friendly accent.
Cryptocurrency is e-money that is kept in accounts at other banks: in this case, cryptocurrency-only banks like BitInstant or Coinbase or MtGox or Paymex. This means that cryptocurrency transactions happen between accounts held by different people: someone does something for you, and then transfers the cryptocurrency from her account to yours on
The word “cryptocurrency” has several meanings at once, so let’s look at them individually.
The first definition says that cryptocurrency is a digital currency whose value derives from some kind of cryptography. That definition definitely doesn’t apply to Bitcoin, which is not a currency. It’s a computationally secure form of money. But it also seems to be the closest we have to a technical definition of cryptocurrency in common use, and it’s the one we’ll use here.
Cryptocurrency is a digital currency whose value derives from some kind of cryptography. Bitcoin is cryptocurrency, although not all cryptocurrencies are Bitcoin-like currencies. Blockchain technology is the stuff that underlies cryptocurrencies; it also underlies other kinds of digital transactions, like trading stocks and bonds or buying and selling property or services online.
Cryptocurrency is a technology for making direct electronic payments, without the need for a bank or a clearinghouse or any other kind of intermediary. It is not yet widely used, but it is likely to become so: with the growth of the Internet, payment systems are becoming easier and cheaper to use.
Cryptocurrency is sometimes called digital cash. The term “crypto” derives from cryptography, which means “cipher,” and “currency” derives from currency itself. Cryptography adds one more wrinkle: it replaces something that cannot be read (a person’s handwriting) with something that can (a digital signature).
Cryptography was invented in the 1800s by people who believed that if you could read people’s communications, you would know everything they knew, which would be dangerous. It also turns out to have been very useful: as we’ve learned over the last few years, it’s incredibly hard to fake anything that anyone sends digitally, whether it’s a letter or a song or an e-mail message.
Cryptocurrency is a subset of an enormous and growing field, “cryptography,” the art of secure communication. Cryptography is the basic tool that enables modern society to function. It’s how we do everything from e-commerce to banking to remote medical diagnostics. The first use of cryptography was probably cave painting, which required that no two cave painters ever see the same image.
Cryptography has a long history of applications in science fiction, but it is only in the last couple decades that it has become a practical tool for everyday life. Bitcoin was designed as an experimental new way to store money that didn’t require trusting banks or governments: in other words, like cash does now.
The main reason for believing in cryptocurrency is that the people who build it are exceptionally smart and well rewarded for their work; they have created something new whose economic importance cannot yet be measured.
Cryptocurrency is the most widely-used digital currency today. It is also the most controversial.
There are two kinds of digital currencies: one that doesn’t exist, in which you can pretend to have imaginary money and nobody will ever notice, and one that does exist, but nobody has ever used.
The first kind of digital currency is called “virtual” currency. It doesn’t really exist, which means it’s not real money. You can’t buy anything with it; you can’t invest in it; you can’t store any value in it; it doesn’t pay any interest; and if you go bankrupt, your creditors will get nothing but their original investment back.
The second kind of digital currency has a much more interesting history. It was invented by David Chaum in 1982:
“Digital cash isn’t just a matter of making transactions easier or more private,” he wrote in his 1983 paper “Security without identification”. “It is a matter of establishing a monetary system based on cryptographic proof instead of trust.”
Rather than trusting a third party like a bank, Chaum said, we should trust nothing at all: we should use cryptography to prove that we have paid for something before we send it to the recipient.
It’s a way to move wealth, and in practice they are usually interchangeable. But they are not the same thing, and unless you plan to get rich by counterfeiting, talking about making money can make it harder to understand how to make money.
Money is a side effect of specialization. In a specialized society, most of the things you need, you can’t make for yourself. If you want a potato or a pencil or a place to live, you have to get it from someone else.