The author of this article is Gleb Markov, COO @ Crypterium.
Brief history of money
Money or its equivalent has been around for nearly as long as humanity – before it was expressed in coins and banknotes, it was anything of value that could be traded for things one wanted: furs, tools, food, precious stones, etc. In this system, the actual value of exchange is arranged by the buyer and the seller, depending on the time of purchase and the current market needs. The more popular a particular form of payment, the more sense it makes to accept, accumulate, and use it. Over time, for various historical, economic and social reasons certain payment methods may grow or decline in popularity.
The money as we know it came into being many millennia ago, to add a level of objectivity and to simplify the calculations of the rate of exchange. How many roosters is a bull worth? What is a fair value of a plough in chicken eggs? These answers are subjective, which makes trade hard to predict. Money took on the role of a universal means of payment. Initially, the money was backed by some form of security, but all money in today’s world is symbolic and based on trust. And wherever trust is involved, it can be lost.
For money to be considered legal tender, it must meet certain criteria, most of which are nearly impossible for an average consumer to analyze. The history and structure of money has been studied extensively, and many scientific works zero in on a key question: the role of the issuer of money. Who should be allowed to issue it? Does the position of an issuer affect the value of money, and if so, should this role be delegated to a central authority? In the traditional model of money, the central issuer is a mandatory requirement. In today’s world, this function is assigned to Central Banks, which issue the money, which is then held for consumers by banks. This model is problematic – for it to function properly, the stability of banks must be trusted, and this cannot be guaranteed as it depends on too many factors to control.
Rapid technological development brought with it a solution to many of the issues which traditionally plagued money – i.e. the control over money supply. In the words of Albert Gore, US Vice President, Winner of Nobel Peace Prize, “I’m a big fan of Bitcoin […] Regulation of money supply needs to be depoliticized.”
The emergence of blockchain technology almost 10 years ago paved the way for exactly that – the birth of the next generation of money called cryptocurrency. Although first digital money was issued in the early 1980s, blockchain-based cryptocurrencies offered a radical difference – 100% decentralization, blockchain’s key characteristic. In cryptocurrencies, an issuer plays no role whatsoever, which makes it a uniquely convenient and fair form of payment. Cryptocurrency is a self-acting network, with its data distributed among all network participants. All transactions are implemented peer-to-peer, without intermediaries. And that is why cryptocurrencies are now quickly taking over the world.
Advantages of crypto money
Cryptocurrencies offer consumers multiple advantages not found in fiat money. To begin with, they are free of territorial boundaries. All existing cryptocurrencies can be used anywhere in the world – the first “real world” money. Because of their inherent decentralization, they cannot be restricted, and no cryptocurrency user can be treated differently from other cryptocurrency user. This new economy is independent of any particular country. Users have complete control over the value and use of their cryptocurrency holdings, which means that consumers do not depend on Central Banks or credit institutions. Cryptocurrencies can be bought and sold both for fiat currencies and for other cryptocurrencies, which offers consumers greater leverage over the value of their assets.
Blockchain-based cryptocurrencies like bitcoin and most altcoins are issued via predetermined, publicly available mining algorithms, which by their very design cannot be tampered with, not even by the algorithm developers themselves. They would not be able to accelerate the issue of new coins, which means that the rules of the game are the same for all players. Also predetermined by the mining algorithms is the upper limit of the number of coins that can be mined – for bitcoin, it is 21 million, out of which over 15 million has already been mined. This makes cryptocurrencies “ideal money” – a quality only available in cryptocurrencies. Because it is a finite commodity, cryptocurrency’s value is immune to a “collapse” due to uncontrolled issue by third parties.
Although cryptocurrency rates, similarly to fiat currencies, are subject to volatility associated with supply and demand on stock exchanges, the above advantages serve to ensure the constant mid- and long-term growth. A particular cryptocurrency’s growth rate is determined by the number of its holders: the more popular it is, the steadier the growth rate. This in turn means that the more providers of goods and services are willing to accept it, the more users are interested in buying or mining it. Cryptocurrency mining algorithms are designed to slow down the production as the upper mining limit is approached – so-called “mining difficulty increase.” As the efficiency and profitability of mining drops over time, users are forced to turn to other ways of cryptocurrency acquisition, namely, purchase, which further increases its value.
Blockchain-based cryptocurrencies also allow to anonymously track all transactions, which guarantees a high confidence level and better protection from theft, loss, and fraud, as all operations can be independently verified. Although the identity of the users is unknown, their wallet addresses are visible, and upon the wallet owner’s explicit instructions the funds can be safely withdrawn from or paid into it. Unlike conventional banks, the amount of funds in the user’s wallet is unknown to anyone.
There are no limits on cryptocurrency transaction amounts – users are free to decide how much and where to spend their money. Transactions occur in real time, virtually effortlessly, and irrevocably, with full certainty that the funds reached the desired addressee.
These are just some of the key advantages offered by cryptocurrencies. With every passing day it is becoming more and more obvious that cryptocurrencies are the way of the future. They offer unparalleled investing opportunities and allow for entirely new business models, such as Initial Coin Offerings, to evolve. Cryptocurrencies are still in their infancy, and the public is still trying to come to terms with the concept and learn how to make the shift towards the new payment paradigm. But their use is spreading, and more and more businesses are open to accepting payments for their goods and services in cryptocurrencies, and more and more people are receiving their salaries in bitcoin. This means that cryptocurrencies are becoming a daily reality for an ever increasing population.
The cryptocurrency market will continue to grow, and this progress is unstoppable – one can bet 100 bitcoins that the 2018 cryptocurrency capitalization will be greater than that of 2017. The only variable will be the pace of its growth. 20th century saw the radical shift in just about every aspect of people’s daily lives, and it will be unreasonable to expect that by the end of the 21st century we will still be using the morally outdated fiat money. The transition to cryptocurrencies is the logical and natural progression in the continuously digitized life of humanity. At the time of its introduction, the traditional money concept met the requirements of the ancient market. But priorities change, and with them come new needs. Blockchain-based cryptocurrencies fit the endlessly more sophisticated realities of our times and offer abundant advantages over their fiat “parents.”