Cryptocurrencies are a new way of transferring wealth. In the past, if you wanted to use money to buy something, you needed a bank to give it to you. Now the banks have been replaced by computers, which can create and destroy money much more quickly than any human institution. If all goes well, this will make banking much safer and cheaper, while also making it easier to get rich.
There are now hundreds of cryptocurrencies. The most popular ones are Bitcoin and Ethereum, but there are many more. Some of them make sense only as investments; some have interesting features that no one seems to have noticed yet. There is no single way to tell which ones will be successful; the whole thing is very experimental.
Cryptocurrencies are a new and unusual investment product. They are sometimes called “virtual currencies” because they aren’t issued by governments or other central institutions. They are not as old as money itself. In fact, many people wouldn’t know what to make of them if they met them on the street, because they don’t look like currency.
Cryptocurrencies are not your everyday stock or bond. As an investor, you are dealing with something that is completely new to the financial world. You can buy and sell the stuff, but it doesn’t have any of the traditional properties of money. It’s not backed by anything physical, like gold or silver or gold certificates, so it’s not real money. It’s not guaranteed by a government or bank either, so it’s not real debt.
Cryptocurrencies aren’t even real things in some technical sense: There is no such thing as a “crypto-dollar.” The word “crypto” means hidden (as in cryptography), so there isn’t even a word for crypto-dollars. If you want to talk about crypto-dollars and crypto-gold, you have to invent new words.
In short, there isn’t much to crypto-money except what you see on the
Bitcoin’s recent rise means it’s time to bring back a topic that we haven’t touched since the mid-2000s: cryptocurrency. Much of our coverage of this area over the past several years was focused on the technology behind Bitcoin and its successors. But as the first major currency to be created without backing by a government or a central bank, it’s worth taking another look at what cryptocurrencies are, what they’re good for, and how they work.
Cryptocurrency is a digital currency that operates independently of a central bank. It is not controlled by any one person or organization; rather, transactions are verified by an enormous network of computers around the world. This decentralized nature makes it possible for cryptocurrency to work even if some of its participants go offline, as well as providing a degree of security not found with other forms of digital money.
The concept behind cryptocurrency wasn’t new when Bitcoin debuted in 2009; many economists had been discussing “digital cash” for years. However, interest in this particular type of digital currency took off around 2010, when it became clear that Bitcoin could be used to buy illegal goods and services online and that it was difficult to trace its ownership through traditional financial channels. Although there are now many other types of cryptocurrency in development (called altcoins),
Cryptocurrencies are new, and they’re going to be big. But don’t forget that they’ve already been big—and not just in the past year.
Since 2009, the value of all cryptocurrencies has grown from a few million dollars to a billion dollars or more. They’ve grown in value even though there’s no central authority and no single place where you can buy them. And although their price has recently soared, it’s worth remembering that there have been other periods when they declined in value.
Yes, those other times were better than the current one: The entire crypto market is less than half its peak value from early December 2017. But that’s not because it’s overvalued. It’s not overvalued because it’s about to crash again, like it did every time this bubble happened before.
This isn’t a bubble: Compared with previous bubbles, it’s much more sustainable. The grand challenge for cryptos is to make their technology useful for ordinary people, who have little interest in spending their lives tracking coins and paying high fees to exchange them.
As the value of the dollar declines, people are looking for alternatives. Many of these alternatives are not a new idea. Bitcoin is just one example. But some are.
Blockchain technology is still in its infancy and has many pitfalls, but it is possible that it will transform how we interact with each other and our governments. If you want to put money in something that could change the world, here are some ideas:
Litecoin: The creator of Litecoin says: “It’s an open source peer-to-peer cryptocurrency that has strong technical limitations to prevent abuse.” This means that if someone wanted to create more coins than were created, they couldn’t do it on their own.
Dogecoin: Dogecoin was created for fun and for charity; it’s basically like a joke currency. Its creator says it’s “an Internet meme designed to give you the best of all worlds.” The Dogecoin Foundation says: “We aim to continually improve the coin through continuous development and outreach.”
Stratis (formerly Breeze): The creator of Stratis says: “Stratis was originally called Breeze but we decided to make a name change when we decided to enter the Blockchain Development world.” The developer says: “Stratis
Before Bitcoin or Ethereum, there was the predecessor of both, the altcoin. The altcoin was a kind of digital currency that came after Bitcoin but before Ethereum. It was not so much an alternative to Bitcoin as a competitor with it; if you wanted to become rich by buying these things, you had to buy them at about the same time as Bitcoin was shooting up.
There were hundreds of altcoins then. If you are new to cryptocurrencies, I recommend reading this essay by Brian Kelly from December 2013, which explains their history and how they got started.
The early years of cryptocurrencies are like the early days of Silicon Valley: everyone wants to be part of it, and plenty of people are making a lot of money. Like any other industry, for months there is a constant influx of new people who think the idea is good enough to invest in—people who think they have discovered a great company that will make them rich. And like any other industry, some do make money. But others don’t, and they lose everything they invested along with all their hopes.
Cryptocurrencies are a new kind of financial instrument, and they have a number of characteristics that make them good investments.
First of all, cryptocurrencies are designed to be secure. This means that the code for the system is open and transparent, with no back doors or other points of weakness. If a cryptocurrency were to be compromised, it would be simply a matter of hacking the network and changing the code. The result would be a distributed, decentralized system whose rules cannot be changed without consensus.
Cryptocurrencies represent an unprecedented increase in security as compared to traditional financial institutions such as banks and brokers.