How Can We Understand Cryptocurrency?

A simple explanation of what Cryptocurrency is: It is a digital currency. You can use it to buy and sell things. Since it is digital, you won’t be doing the transaction with coins or bills. Instead, cryptocurrency is held in a digital wallet and transactions are done through a phone or a computer. You may view the full list of cryptocurrencies on Coinmarketcap and Coingecko.

“Why do I need to care about cryptocurrency? What I’m using now is fine.”

What we’re using now is fiat currency. It is backed by our country’s government. The government determines the value based on the nation’s economy. The government can print as much of it as it wants and if it prints too much money, the value of its currency drops. This means that the amount of value that we own can be affected by the government creating more of what we already have. Our $5 gradually loses its purchasing power over time. It allows us to buy a Happy Meal today, but only a miserable packet of small (and usually soggy) fries a few years later.

Fiat currency loses its value over time. This is why we keep a small percentage in cash for everyday transaction and emergencies. Following which, we invest the rest into assets (E.g. stocks, bonds, gold, etc.) that are likely to appreciate, or at the very least maintain their value. We keep a small percentage of our wealth as a medium of exchange and invest a large percentage of our wealth as a store of value. Cryptocurrency falls in both category. You can use it as a medium of exchange, at the same time, you can hold it as a store of value.

You need to care about cryptocurrency, because it improves the way we trade and that improvement potentially makes it a better store of value as compared to other assets.

Meet Bitcoin.

There are six key attributes of a successful currency — scarcity, divisibility, utility, transportability, durability, and counterfeitability.

1. Scarcity — The supply of Bitcoin tokens is capped at 21 million. You can’t magically print out more Bitcoin the same way you can’t miraculously drill out more crude oil. If you bought 10% of the maximum supply of Bitcoin in 2010, you’ll still own 10% of it today.

2. Divisibility — Bitcoin is divisible up to 8 decimal points which allows everyday transactions to be possible. You can pay for your Happy Meal with 0.00000001 Bitcoin.

3. Utility — Bitcoin uses blockchain technology. The nature of blockchain technology allows you to transact with anyone without approval by regulatory authorities such as a government or a bank. All records can be viewed by anyone with Internet access, which makes the transaction transparent.

4. Transportability — You can transfer any amount of bitcoin to anyone anywhere within minutes.

5. Durability — It is digital. Your dog might eat your dollar note, but it can’t eat your bitcoin.

6. Counterfeitability — Bitcoin uses blockchain technology. The nature of blockchain technology prevents information to be edited and tampered with. This means you can’t double-spend with Bitcoin.

Imagine going down the aisles of the supermarket in Conor Mcgregor’s victorious walk with a bar of gold in hand. You take out the broccoli that you’ve cherry-picked for 5 minutes and place it on the check-out counter. Can you purchase your vegetable with that bar of gold? No. Can you purchase it in Bitcoin? Yes.

Should you purchase it in Bitcoin? No. Bitcoin is both a currency and a payment system. You don’t need third party service providers such as credit cards or PayPal. The real power lies in its ability to transfer value in a peer-to-peer manner, without the need for a third party. This nature of blockchain technology drastically reduces transaction fees. Imagine having $445 million in Bitcoin transferred for $0.25. It makes more sense to use Bitcoin to transfer large sums of money from one end of the world to another as compared to using Bitcoin to buy your $2 broccoli. With more people adopting Bitcoin as a payment system more than a currency, it can be considered a potential good store of value, especially when we take its scarcity into account. At its core, money is a shared belief. Do you believe in the blockchain technology that weaves together the currency feature with a payment system?