I bet you’ve heard of Bitcoin. I mean, virtually everyone has. It’s the new big thing in town. The name Bitcoin already suggests a form of digital currency. Well, consider your bank balance. Your bank balance resides in the state of a certain information-storage device. In a sense you own that state (it is illegal for anyone to alter it without your consent at the very least), but you do not own the device itself or any part of it(which in this case will be the banking system and infrastructure). In that sense, a unit of currency is what may be called a configurational entity. It is a state or configuration of objects, not what we usually think of as physical objects in their own right.
“A digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank”
Indeed, cryptocurrency is digital money. In reality, we all use/have used some form of digital money for transactions. Cryptocurrency is not really an alien idea. Currency is controlled and regulated by law whereas cryptocurrency by technology. Now, Bitcoin has become so popular that it’s possible to think of it as what a cryptocurrency generally is (more curious readers could be aware of Ethereum, and possibly Litecoin). Well, Bitcoin is just one (and the first) implementation of the idea behind cryptocurrency. Cryptocurrency combines two ideas we are familiar with. Currency, which is a medium of exchange, particularly in circulation. The other idea is Cryptography, which is the science of securing our information from unauthorized access. Everybody uses crypto, in one form or another. We see crypto all around us:
- the keys in our pockets
- the signatures on our driver’s licenses and other cards
- the photo IDs
- the credit cards
- lock combinations
- door keys
- PIN numbers
- passwords and pass codes etc.
…All are part of crypto. Modern cryptography is very advanced, and certain motivations for its development can be identified, particularly political ones. The government should not be able to snoop into our affairs, protection of conversations and personal social exchanges is a basic right. These rights may need to be secured through technology rather than through law and the power of technology often creates new political realities. So a cryptocurrency can be seen as a necessarily secure and universal digital asset for performing transactions. This security is guaranteed by technology. The general trend in cryptocurrencies is decentralization, in fact, I think that’s the main idea behind it. Decentralizing money. This is also the main difference between cryptocurrency and conventional currency.
How will cryptocurrencies shape the future?
Well, this is a matter of speculation. Whether or not cryptocurrencies are widely adopted in the future depends on people’s attitudes towards decentralized currency and privacy. Of course technology will play a major role, and it is important to note that technology has been and is growing exponentially.Nevertheless, I do not think cryptocurrencies will replace conventional currency. Indeed, that is not a motivation. But going into the future, some groups of people will increasingly find it very convenient to perform their transactions through crypto.
**I’ve ignored taking positions on considering cryptocurrencies as a store of value, or a prudent investment option. This is because we do not expect the same of conventional currencies. This trend of cryptos being a store of value has largely been informed by Bitcoin, but that shouldn’t be so. In fact, there is no reason the value of Bitcoin could not literally drop to zero right now. The value of Bitcoin is informed by the cost of computational resources and electricity in mining a Bitcoin (forget the argument about value being independent of cost, it does not apply to Bitcoin) besides the normal dynamics of demand and supply. In the unlikely scenario all Bitcoin miners found something more profitable to do with their computational resources, and indeed stopped confirming transactions into the blockchain, the value could drop indefinitely because there is no possibility of future growth. Besides the value a Bitcoin is deemed to have by the Bitcoin community, a Bitcoin literally has no utility. The transformation between a Bitcoin and the computational resources (and electricity) put into the production of one is not reversible. So in reality, besides the value it is deemed to hold by the community, it has no physical utility. But, there are no good reasons for why the Bitcoin community could suddenly lose faith in Bitcoin. I imagine the same should hold for cryptocurrencies with no practical utility**