Suddenly it was there, an alternative to the concept of money that has been with us for millennia. Most ignored it as a passing fad, but when values soared and millions were made the public took an interest. Now, as most everyone knows of cryptocurrencies, but not necessarily what they are, the market looks as volatile as ever but perhaps the golden days of astronomical growth are gone. We asked the experts if this concept is indeed a fad or here to stay.
To understand this phenomenon that has taken the world by storm you have to go back to the original concept of money. We are familiar with money because it is a physical entity that we have grown up with. In fact, it dates back thousands of years, to a time when a substitute was needed for product-based bartering or lending. The world needed a calibrated measure of value that was transportable and transferable, and before long minted coins proved the answer.
Such ancient coins are still dug up from time to time, but eventually the concept of value was transferred from something with a physical, intrinsic value, such as commodity money in the form of a gold coin, to an altogether more conceptual promissory note, letter of credit and ultimately, the bank note that we know so well. This transformation marked the beginning of an economic, financial and trade revolution that made the Renaissance and the Industrial Revolution possible.
Without it we may still have been agriculturalists living in thatched cottages, but it was only possible when and where a legal and state structure existed to support it, for where there is chaos and lawlessness conceptual money cannot exist. As the world developed, we created cheques, bank accounts, credit cards, ATMs, online banking and a whole raft of innovations, including easy credit, a process sped up by the abandonment of the Gold Standard in the early 1970s.
The embracing of so-called FIAT Money, which has no commodity value but is backed and regulated by individual governments, coincided with the electronic era and led to the spread of credit, producing an explosion of consumer spending that has fuelled much of the economic development in advanced countries ever since. Increasingly known as ‘plastic money’, it represents circulating sums that greatly outnumber the actual amount of currency minted and printed by the authorities.
The rise of cryptocurrency
“In a way, all of this paved the way for cryptocurrency,” says Conor O’Connor of Local Token Exchange, for while many find it a fluid concept that is hard to grasp because it exists outside of the familiar world of banks and cash-in-hand currency, it isn’t that far removed from the conceptual money we already deal with every day, such as bank accounts, online transfers, loans, credit and all manner of plastic swipe cards. Slowly but surely, cheques and cash are on the way out, and ‘virtual’ money is replacing it.”
The word ‘crypto’ denotes something that is hidden or disguised, which is not so different from virtual if you think of it and also lies at the base of cryptographic algorithms. Cryptocurrency took off and became a big thing just after the financial crisis hit, a coincidence that greatly fuelled its appeal among those who had burned their fingers and were suddenly weary of capitalism. Interestingly, while it originally appealed to libertarians and free thinkers it has since become a prime example of capital speculation.
Moreover, cryptocurrency was not born around 2009, as many believe; it has its antecedents in computer whiz kid David Chaum’s ecash, which dates all the way back to 1983. By 1995, when he launched DigiCash, the concept was already in full development, and as with paper money its rapid evolution was built on two supporting foundations: this time the digital technology already being used by the conventional financial system and the credit and financial speculation that were rife at the time.
The world was ready for the birth of this new concept, which saw b-money, bit gold and others pave the way for the digital value exchange, or if you like electronic currency system, to fully emerge a decade or so later, when the mysterious Satoshi Nakamoto published the now-eponymous Bitcoin Whitepaper and started the latest chapter in the evolution of what we consider money.
Terminology in a technical world
The crypto-financial world was created not so much by legal and financial minds as by computer experts – anoraks to you and me. This means that it comes with the usual ‘outer-space’ jargon straight out of an episode of the Big Bang Theory, but here are some of the basic concepts behind it.
Cryptocurrency exchanges are online platforms, which use advanced data transaction systems that offer a way to trade that is fast and safe. “Blockchain technology is the infrastructure that enables it all to happen,” says Conor. “It functions as a distributed open ledger of transactions within a network of accredited blocks, much like banks do but in a faster and more transparent way, and will increasingly find its way into the way conventional finance works too – especially in how it uses ‘timestamped, multi-party’ verification of transactions without the reliance on centralised organisations.”
“Fintech investors are jumping on the technology right now, and its open ledger system seems to be the future.” The systems are in full development, ever-mindful of the need for security, privacy and recordability. It is also becoming easier to navigate and manage your account, or wallet as it is called, which records your transaction history and proof of funds. “New cryptocurrencies are released through a process called an ICO [Initial Coin Offering]. Those that have their own blockchain system release a coin, those who share it release a token.”
Miners are people who effectively contribute to the ‘hashing’ or computer power of cryptocurrency networks, and they are rewarded for successful volume trading with coin shares and lower transactions fees, while whales are investors who move such quantities of cryptocurrency that they can influence outcomes. “More and more, experienced investors are backing new coin launches rather than the coins themselves, but while it offers greater potential rewards the risk is also greater.”
“In fact, there are different levels on which you can trade, from normal coin sales to ICOs and presale or even private purchases, but at the end of the day it is smart to start small, become familiar with the market, as there are anywhere between 15,000 and 30,000 offerings out there and it takes some knowledge and experience to invest successfully.”
Where next for Cryptocurrency?
For those sick of government intervention and manipulation in everyday life, Bitcoin and the many other alt cryptocurrencies that that have been created since, offered the realisation of a libertarian dream, namely decentralised currencies beyond the reach of central banks and statesmen. However, utopian notions soon gave way to hard ‘cash’ and as people began to trade in cryptocurrencies many experienced the kind of skyrocketing growth the stock exchange could merely dream of.
In fact, its pure, hardcore speculation is unregulated – unlike the ‘normal’ financial markets – and is in many ways reminiscent of the ‘Wild West’ scenario of the 19th century. Given the tendency to be as volatile as a bucking horse and the fact that all the fuss is neither about a tradeable item with an intrinsic value or one that is based upon production and commercial performance, but simply on the speculative notion of its perceived/traded value, cryptocurrency has come a long way from utopia.
It is now for many all about making money, and while all but a few financial visionaries and techy types ignored it a few years ago, news of its spectacular gains in value – and hence images of investors suddenly turning rich – have captured the imagination.
The public
There is a certain fascination with, if not a universal understanding of, cryptocurrency, and it’s not hard to see why. Savvy investors with the know-how and resources to enter markets in earnest are slowly but surely beginning to dip their toes in the water, in a kind of bottom-up way in which the younger and more flexible among them are more willing to embrace this strange and frightening but potentially exhilarating idea.
They have the means to spread their risk very evenly and still be significant players earning a royal morsel from the volatile elements within their portfolios, to which cryptocurrency belongs. But it is for the average man, be he a dropout or moderately successful, that Bitcoin has come to represent the possibility of economic mobility. Banks and financial markets offering relatively low-yield returns are not designed for people with rather small amounts to invest, but the vertical growth charts experienced by cryptocurrencies in recent years give small investors the hope that they too can benefit from the financial system and make headway.
It is, however, as the mass market gains interest that the most dynamic growth appears to have gone out the crypto world. Whether this is temporary or not is hard to tell, but for those who are willing to spend time learning the market, navigating the online systems and selecting the right products to back, it can still be highly rewarding. Alternatively, you can develop a strategy together with a broker and reduce the learning curve while playing it safer.
The authorities
Initially, they seemed amazingly disinterested in the phenomenon, perhaps distracted by the pressing realities presented by the financial crisis, or perhaps believing it would never take off. Now that trade volumes have grown spectacularly, the general public is gaining an interest and the systems used by cryptocurrency networks are beginning to rival or even date mainstream technologies and procedures, many a government has been ordering studies into the overall impact and potential threats posed by Bitcoin and its peers.
The growing acceptance of new currencies such as Bitcoins, and its increasing interchangeability with regular money – for instance in the form of ATMs and websites or businesses that accept Bitcoin payment – will speed up the arrival of state regulations and controls, especially as there is a potential for money laundering in an era of all-out war against this. Already, your virtual profits are tax-free but become taxable the minute you convert them into normal currency, and there is likely more control to come.
“I don’t see this as such a problem,” says Conor. “The Wild West days of light touch regulation, open speculation and towering gains will eventually be a thing of the past, but as with any new industry or sector it will mature, be regulated and take its place within the economy and society. In the meantime, however, it remains a far more rewarding way, on average, to invest than hoping for an elusive windfall to come from your traditional investment scheme.”
