What is a Cryptocurrency?

Guides, Opinion

By now, we’ve all heard of cryptocurrencies, but relatively few people own them, and even fewer understand them. This article tries to demystify cryptocurrencies.

The idea of cryptocurrency is tough to grasp because the idea is new on many levels. It’s this fairy cake mix of novel computer science, cutting-edge social engineering technologies, novel tradeable instruments, and monetary systems with a political icing. It’s also a disruptive technology that feeds on an acute need for change.

In a Nutshell

Simply put, a cryptocurrency is a fraud-resistant, decentralized monetary system. This is achieved through cryptography, which is the science of encoded information transfer. This guarantees cryptocurrency data is unique and secure using encrypted information as the basic token of exchange (instead of gold, or government-backed paper money).

The Value of a Cryptocurrency

Typically, something must be relatively scarce and widely accepted by others to serve as a mean of payment or trade. For instance, gold, silver, diamonds, and oil derive their value from being scarce and expensive to mine.

Similarly, the U.S. dollar has its value determined by the exchange rate, Treasury notes, and measurement against foreign exchange reserves. As explained by an economist, Doug Levinson, in a Ted-ED, the dollar’s intrinsic value comes from two major factors: its circulating supply (or liquidity) and its wide acceptance. It’s the only currency that the government accepts. It’s what the wider public uses for commerce.

Translating that to a digital currency like bitcoin, there is only a limited quantity of bitcoins available. Even with no government approval, people are widely using it.

Furthermore, there are no physical coins or notes in cryptocurrencies. There are also no banks involved and no governing authorities. They live natively on the internet and come with no third-party fees. The transactions are increasingly fast and ultimately secure. Therefore, they have great potential to disrupt, in a positive way, many aspects of our lives.

Use Cases

Sending money from one country to the other will save greatly on bank fees and processing time. All you need is a crypto wallet loaded with the cryptocurrency of your choice. No paperwork, no sassy clerk!

Since bitcoin lost some ground due to relatively high volatility and processing fees for small payments, other forks emerged with optimized features.

Robocoin, the first bitcoin ATM deployed in a downtown Vancouver Coffeeshop in October 2013. Credit: Wired.com

I personally lived off cryptocurrencies for quite some time and found it way more convenient than I had expected. My first attempt to dive into this new world was while working as a blogger. I requested payments in bitcoin and was eager to celebrate the reward of my first crypto paycheck. It would be French wine, a good steak and some laughter with friends. I was daydreaming.

However, the process struck me with its simplicity. I deposited my bitcoins from my crypto wallet to a MasterCard crypto cash card. The rest was as simple as a swipe.

Many options out there empower crypto enthusiasts to use their digital coins in harmony with fiat money. For example, in Australia, Living Room of Satoshi (LRoS) lets you pay for bills, credit cards, and bank accounts using cryptocurrencies.

The convenience stretches beyond paying bills, all the way to shopping or enjoying a good coffee break.

Worldwide adoption of crypto payments – source: coinmap

The Bubble Concern, Volatility, and Irrationality

None of the above explains cryptocurrencies’ values going through the ceiling, nor does it explain their volatility. In an article published by The Guardian newspaper, Ajit Tripathi, Fintech director at PwC argues that bitcoin’s meteoric rise and its creation myth have attracted more buyers.

“Bubbles are driven by sentiment and stories, and bitcoin has a great story with a lot of mystery and spectacle to it,” Tripathi says. “Is bitcoin at $40,000 by the middle of next year unthinkable? It’s not. But is there a logical and rational explanation for why it should be? I don’t think so.”

Whether it’s FUD or FOMO or some other inexplicable phenomena, there is no doubt that, while exceptionally useful and disruptive, cryptocurrencies’ ups and downs could be why they have not been adopted fully by the mainstream public yet. In time, it should settle down, and when that happens, you might just find yourself spending bitcoin for a coffee.

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Fell down the rabbit hole two years ago. Time to write about it.

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