The graphs don’t lie as cryptocurrencies continue to be speculated about and continually invested in by traders of many. Many who cast their lots to this endeavour seek opportunity and return in a now decade-old field.
For each investor who sees potential in cryptocurrency is another who is sceptical of its credibility and even intrinsic value. A counter-question to ask if the money in our wallets and our bank accounts too, has ‘intrinsic’ or inherent value. To make sense of it, it’s important to see how money compares to cryptocurrency by looking back at the former’s history.
Written here is the perspective of a person who has had no prior exposure to the burgeoning industry, but now grasps the basics after an opportunity to work on a cryptocurrency account. What’s offered is a basis on how cryptocurrency works, based on its parallels with money and how it branches out as the next step in currency’s evolution.
What makes money valuable?
From as far back as 3000BC, precious metals were forged into various shapes and stamped to denote value in trade. Currency was inherently valuable then, regardless of where it was exchanged because it would always be reclaimable as a resource. Gold coins could be melted into jewellery and bronze ones into tools, for example.
Soon though, precious ores were discovered to be scarce, heavy, and often prone to theft. As marketplaces and trading circles grew to resemble basic economies, people pooled these resources and entrusted them to safe-keepers – the first bankers.
When money started to be issued by banks to rid currency of its inconveniences, they used paper which is more portable and discreet. This form of currency was called representative money because it represented the gold or silver that people could trust it to be exchanged for in banks’ reserves.
It is this collective trust that first gave money its value.
With time, we adopted the fiat system of money still used today. Fiat in Latin means “let it be done” in the sense of a decree – meaning it had value as decreed by a governing body or monarch. The note itself is the commodity solely because it has been established as money by government regulation.
While no longer exchangeable for gold at banks, faith in a government or a central institution is still what helps currency preserve its value.
Currency is still flawed
“In God We Trust,” is printed on the US Dollar, and “Wang Ini Sah Diperlakukan Dengan Nilai,” on the Ringgit. These words, now just words in the background, point out how money depends on a shared faith in governments and banks. Despite being portable and universally accepted, paper as a currency has flaws – mainly inefficient management and poor governance.
Mediocre performance plagues the finance industry, with money lost to banks when placed into savings accounts and trading portfolios alike. Figures by S&P Global end of last year point at a costly and inefficient banking sector, with meagre returns and efficiency ratios averaging at 50%. These metrics translate to money not growing by much because for every dollar, euro, or pound made by banks, half of it is spent as cost.
Poor governance by central banks has also escalated and ballooned to full-blown economic crises, somewhat demolishing faith in governments. In the 2008 worldwide economic crisis, distrust and contempt of existing financial institutions were at their height, when too many people in too many countries attempted to withdraw their assets at the same time – assets that banks didn’t have on hand, causing a years-long recession.
Cryptocurrency – money’s next iteration
In early 2009, Satoshi Nakamoto mined the first Bitcoin, known as the “genesis block.” It operates on the blockchain network, where instead of paper with numbers printed on it, there are unique cryptographically signed strings of hashes or codes of letter-number combinations.
Without involvement from banks, each and every transaction made across the blockchain network is visible and verifiable through unnumbered platforms online. Lower fees and quicker transfers come easy, without the need for costly middlemen.
By its nature, cryptocurrency transactions are secure, valid, and transparent, and promises lower transaction fees than traditional payment methods, and more importantly operation by a decentralized authority incapable of hiding behind secrecy.
Cryptocurrencies have also been called “digital gold”, as an abstract comparison to the real thing. Like gold, which is not issued and control by any central authority, cryptocurrencies are immune to geopolitical tensions or government policy.
Also like gold, cryptocurrency is acquired through mining, and a coin becomes more scarce the more it is mined. In comes the phenomena of mining, which is where ‘miners’ are paid to work as auditors. They are doing the work of verifying previous Bitcoin transactions using a computer’s graphics card or GPU.
Gaining trust and realizing its potential
Moving on then to how they’ll be used in a world outside of speculation and simple investment. Cryptocurrencies’ strongest applications will be where they can shine brightest – when trust between parties is lacking, when belief in financial institutions is strained, when transaction fees are off-putting, and when transfer speeds are critical.
Should another recession come looming, people may be more tempted to convert their assets into cryptocurrency, whose value does not depend on their own nations’ financial performance but is rather maintained by a non-hierarchical user base.
At the moment, its prices are undeniably volatile. The takeaway though is that when it comes to money, trust leads to value.
Like fiat money, cryptocurrency is capable of being a convenient and secure form of currency that hinges on collective trust. As more are educated on the subject and as trust in its value continues to gather in different pockets around the world, cryptocurrency use will be commonplace.
By Hongrui Chin, Public Relations Executive, Mustard Tree Communications