Cryptocurrencies are the latest buzz in the financial world. Since Bitcoin — the first truly peer-to-peer (P2P) digital currency — was unveiled in 2009, the financial markets have already seen over 1500 cryptos and assets being created. As of this writing, the overall market cap for all crypto stands at slightly over $800 billion.
As a result, media attention is exclusively fixated on movements in its price, leading to a general feeling about likely path to riches that this latest sensation offers. But, what exactly is cryptocurrency? In our first part series on cryptocurrencies, we answer this question. Let’s dive in.
To jumpstart the discussion, it’s important to answer the biggest question of them all — what is money?
What is money?
This should be the most straightforward question to answer — after all, we all use the money to carter for our daily basic needs.
Money is basically a medium of exchange. It is one way in which you can trade what you have for what you want. Ideal money has three essential properties: it acts as a means of exchange; it is an economical product, and it’s a means of economic calculation.
Before the current (fiat) money was invented people engaged one another in direct barter. For example, if you were a farmer producing oats and wanted to buy milk, you would find someone who had milk to sell and wanted oats. You can imagine the hurdles of finding that trader who had what you wanted (milk) and wanted what you had (oats).
These hurdles gave rise to the use of commodities as economic goods. Various products were used as economic goods, but the problems of marketability and durability often arose. At the time, food became a highly fungible commodity. But the main hurdle with food was that it was highly perishable.
Later, precious metals (gold and silver) were accepted as universal and standard means of exchange. Perhaps this was due to their durability nature. Over time, these precious metals were replaced by government-printed paper money due to deceit arising from the goldsmiths. Gold miners would take gold to the smiths for minting, and in turn, the smiths would provide miners a receipt which was redeemed when minting was completed.
Miners would instantly trade the receipt as if it was a precious metal and go back to the mines without waiting for gold. Over time, goldsmiths realized that the receipts they were giving out were being used as means of exchange. To enhance their buying power, miners started to use fraudulent receipts that had no precious metal backing. This resulted in a significant number of outstanding receipts which increased inflation while reducing the value of all the outstanding receipts.
This is why governments came in with the paper money. Government paper money — which is regulated by central banks — such as the U.S. dollar has value because governments grant them the legal tender status and only accept citizens to pay taxes on them.
But central banks have increasingly messed the issuance of these currencies the same way the miners did with the precious metals. Many central banks in various countries are issuing more paper money than they have for precious metals to back them. The results have been disastrous on a global scale.
History shows that when government controls the factors of demand and supply, the results are disastrous. Because of government frailties, errors, and weaknesses, fiat money’s popularity has been declining. This is the gap that cryptocurrencies are filling.
So, what is cryptocurrency?
Cryptocurrency is electronic cash. It consists of virtual tokens like covex , without a doubt known as “coins” which the cryptocurrency owner creates. Cryptocurrencies use cryptographic techniques to validate transactions as well as controlling their supply.
Cryptocurrencies emerged out of the 2009 worldwide economic crisis. Earlier, relevant banks and their regulatory regulations created financial resentments. Here is an example:
· Alice, who lives in the US wants to transfer some cash to Bob who is a resident of the United Kingdom. Alice will go to her financial institution to transfer the money to Bob.
· Alice’s financial institution will notify the Federal Reserve of the transfer which quietly informs the IRS, FBI, or DEA, NSA or even CIA!
· If these institutions approve the transfer, the Federal Reserve will get in touch with a bank of Bob’s country (The Bank of England) which contacts Bob’s local bank.
· Later, Bob withdraws the cash from his local financial institution in the United Kingdom.
As you can see, the above process is complex and is the main reason for financial resentments. Here’s a breakdown of what has just transpired:
· Six steps have just came about for the money to be transferred from the U.S. to the United Kingdom. In all these steps, there’s a likelihood of human errors. Besides, there are also excessive transaction costs at each phase. This makes the complete process complex.
· Alice and Bob have lost their privacy rights to the price of cash they have worked hard to create to third-party corporations which include FBI, IRS, FBI, and CIA.
· There also are many “black boxes” like the maximum money that Alice can transfer to Bob.
The above challenges are only a tip of the iceberg. We may additionally by no means understand how the Federal Reserve is printing cash every day for the reason that most crucial banks never disclose this data to the general public. From basics of economics, we know that value is determined by way of demand and supply. Consequently, if we don’t understand how great deal money is in supply, we may have no faith in the money.
It’s because of these challenges of fiat cash that cryptocurrencies were gaining popularity among the populace.
The value of cryptocurrencies isn’t always managed by a regulator like a valuable financial institution or authority’s institutions. Rather, their supply, how they are spent and produced is controlled via the community of humans who accept to use them.
The number one philosophies of cryptocurrencies are:
· Decentralized. There are centralized regulators.
· Security. Cryptocurrencies rely on complex cryptographic computations to secure the network. If Alice decides to send money to Bob, then Bob must get it.
· Anonymity. Nobody needs to know that Alice has sent money to Bob.
· No forgery. If Alice sends money to Bob and Bob sends money to Clare, Clare can trust that Bob has not copied or forged the money along the transmission link. In other words, there is no “double spending” problem or “duplicate currencies.”
· Controlled supply. Every user knows in advance the number of coins in supply and under what conditions that supply will stop. For instance, the maximum number of bitcoins that can ever be generated is fixed at 21 million.
by:CoVEX
