Why do we need cryptocurrencies?
Perhaps the most important question with cryptocurrencies is, why do we even need them?
One answer is that we need cryptocurrencies because they solve several classes of problems with traditional currencies. I’ll explore three of such classes.
Problems with government control of the supply of money.
The first class of problems relates to government control of the supply of money. With traditional currencies, governments control the supply of money and manipulate it as a means to accomplish policy objectives. Some of these policy objectives are good, such as the Bank of England’s efforts to maintain 2% inflation and the Federal Reserve’s efforts to stimulate the US economy following the 2008 recession. However, governments sometimes abuse this power for destructive ends. One of the clearest problems of this class is hyperinflation where governments essentially print money, usually in order to satisfy debt obligations. This has happened throughout history, such as with the Weimar Republic in Germany which printed money to make the large reparations payments required following WW1 under the Treaty of Versailles; and contemporarily with Venezuela’s 800% inflation in which their government is again printing money to pay debts accrued due to the ruinous socialist policies of the late Hugo Chavez and now Nicolás Maduro regimes. Hyperinflation impoverishes a population and causes immense destruction yet it continues to happen anyway.
Cryptocurrencies solve the problem of hyperinflation through removing control of the money supply from government hands and instead defining it with software. The software determines the total supply of money and under what conditions the supply changes. There are another set of risks associated with this, such as infighting between developers of the software and certain forms of malicious hacking, yet there are various ways in which such risks are mitigated that I’ll cover in later posts on something called blockchain.
Problems relating to middlemen.
Transactions involving traditional currencies, outside of pure cash transfers, typically go through middlemen such as banks. These middlemen often impose onerous transaction fees, inefficiently execute the transactions, and dealing with them involves risks such as having a check bounce.
Cryptocurrencies solve this problem by cutting out the need for middlemen. Instead, transactions can be executed directly between peers and confirmed within minutes.
Problems that become solvable with properties of cryptocurrencies.
A third class involves problems that become solvable because of properties of cryptocurrencies. An example of this is actually my business’ latest innovation, BitBounce. Solving spam using payments for unsolicited emails was previously impractical because it could take days to confirm transactions and that’s too long for timely delivery of communications. With cryptocurrencies, transactions can now be confirmed within minutes meaning that we can now solve spam using this solution approach.
To conclude, cryptocurrencies are needed because they solve several classes of problems. They do so by defining the supply of money through software rather than government, cutting out middle men, and having various properties such as faster transaction confirmation times. For these fundamental reasons, I believe that cryptocurrencies have a very bright future.
Disclosure: I personally have long positions in cryptocurrencies. My business has also released a Bitcoin spam solution called BitBounce.