Cryptocurrency is a new form of money, and like all new forms of money it has been controversial. But there is no doubt that the whole idea behind it is exciting, and that some people think it’s going to change everything. So with one exception (see below), I’m going to talk about the thrilling aspects. I’m going to avoid going into the technical details in any depth.
Cryptocurrency is a decentralized virtual currency that can be exchanged for real money or other cryptocurrencies. It is typically created by the process of “mining,” which involves using a computer to solve complex mathematical problems with a reward of cryptocurrency being given to the first person or computer that solves them. To date, these virtual currencies have been created by an enormous variety of organizations, from tech companies to central banks, and in many cases they have been created with no intention of ever actually being used as money.
But there are some crucial differences between cryptocurrencies and other virtual currencies, which I will describe here:
The first difference is that this currency is not so much money as a promise of money. Most virtual currencies have no intrinsic value, even though they are widely traded and accepted as valid payment for goods and services on websites around the internet. But if you exchange your virtual currency for
Cryptocurrency is a digital form of money. It’s what happens when you turn math and computer science into money. In 10 years, cryptocurrency has become ubiquitous. Bitcoin itself, the most famous and largest of the cryptocurrencies, has nearly as much value as all other cryptocurrencies combined.
But try telling that to the people who use it. Cryptocurrency users have a reputation for being self-consciously unserious. Worse, they seem not to take their own financial situations seriously.
I find it hard to believe this is always a conscious attitude. There are always enough jokes and memes in cryptocurrency culture that the self-awareness feels forced rather than authentic. “The smartest thing I’ve seen in crypto is probably a gif of Fred Flintstone saying ‘money’ in an incredulous tone,” wrote one observer on Twitter . “You do know that anyone can make money out of nothing, right?”
Perhaps this confusion stems from our own imperfect understanding of what financial transactions are and why they work. Suppose someone hands me $10,000 in cash and tells me to use it at my discretion to buy things I want or need or both. What exactly is he expecting me to do with that money? Do I just get to spend it? Do I get to invest some of
The modern world is a world of risk. If you want to get rich, you have to take risks, and sometimes those risks turn out badly. But that doesn’t mean we shouldn’t try to make money. It just means we have to be careful about how we do it.
Cryptocurrency is an attempt to make money without taking any risks. It’s like a lottery ticket: you buy a ticket, and if the numbers come up as they’re supposed to, you win big. But in many cases the odds are against the ticket-buyer, since the people who set up the lottery have so much power over the numbers that they can rig them in their favor. And even if your numbers come up, there’s no guarantee that anyone will give you the money for which you are owed.
The cryptocurrency world is full of stories like this: people who bought bitcoin in 2013 thinking it would rise in value now regret not having bought more when it was cheap. People who bought ether thinking they were getting a new kind of internet currency were left out of pocket by a bug in Ethereum’s code.
If you want to get into coin investing and make money, this isn’t the way to go about it.
Everybody makes fun of cryptocurrency. (The word “cryptocurrency” is a play on words. The Greek root “crypto” means hidden or secret and the prefix “cyber” means electronic, so “cryptocurrency” refers to a currency that is totally electronic, like a credit card.)
It isn’t obvious why everyone should make fun of cryptocurrencies, because they are very practical. There are hundreds of millions of people in the world who don’t have bank accounts or credit cards, and they need some way to pay each other for things. Cryptocurrencies offer that. Many fewer people have them than have smartphones, but it’s not impossible to imagine something even more useful; an e-wallet that uses your fingerprint as protection against fraud.
Cryptocurrency is the latest incarnation of a decades-old idea. The idea was originally called “crypto-anarchy,” but the term is already so hackneyed that it’s hard to get anyone to take it seriously.
The basic idea is that money should be like software, where anyone can make a copy for free, and anyone else can copy your copy for free. But unlike software, money should have a feature called scarcity. It should be possible to tell at a glance how much money there is in the world, and there should be no way to change that number. Cryptocurrency has come up with a different way of implementing this idea, but the basic idea remains the same.
It seems like you want to take this seriously. It just seems like you don’t.
As recently as 2000, the idea that a currency could be created and distributed electronically seemed a little silly. After all, what would a coin be worth if no one accepted it? And if everyone did accept it, why would anyone want to use it?
The answer is that in the early days of digital money, when the only way to spend it was to exchange it for cash (and even then you had to go to an exchange), there was no serious problem. The money looked like a joke but worked fine. The problems only started when e-money reached the point where there were many alternatives to cash: credit and debit cards, online payments, and so on. Then people started wondering whether these other payment methods were really better or just cheaper. When they found out they weren’t, they stopped using them.
Cryptocurrencies have been designed explicitly with this problem in mind. They are meant not to be used by most people; instead they are supposed to be used by those who want privacy or know-how or don’t trust banks. They have been designed specifically as an alternative for those who cannot use traditional payment methods.
The earliest currency was gold, which was backed by the trust of government, and by the trust that government would protect your holding from thieves. But one day someone discovered that gold was easy to steal. Gold’s great advantage is that it is a very durable object. It doesn’t rust or tarnish; it doesn’t break or rot or go bad. And because of its great durability, you can use it for a lot of different things: for making jewelry and electronics and coins and even paper money.
Currency systems have to change over time because they rely on trust and durability, but some things stay constant. For example, in most currencies, gold and silver are still used as reserves, not just because they are trustworthy but also because they are durable. Gold and silver are often used as currencies too: you can use them to buy anything else Currency systems change when there is a discovery that something has become unreliable as a reserve. The discovery might be something like how easily paper money can be stolen: it might be anything from malaria to hyperinflation.
Central banks today have many of the same functions that gold had: holding reserves in case of panics or wars or hyperinflations, issuing currencies and managing exchange rates between currencies. But before the 19th