In 2010, my wife-to-be wanted to invest before we married. She thought we should buy a dollar house in Detroit, while I suggested investing in currency, both old and new.
Along with gold and silver, I mentioned a digital currency I had been reading up on called Bitcoin. At the time, it was about $15 for a digital token. She scrunched her nose and said, “What’s that?”
I attempted to explain, but she did not understand. In truth, I was still learning the mechanics of digitized currency, but I knew it was worth investing. Yet, I did not trust my gut.
If I did, and just invested $100, we would be Bitcoin multimillionaires.
Now cryptocurrency is buzzing and people who want to invest are wrapping their heads around the explosion of digital currency like I have been doing for the last nine years.
After the 2008 economic crisis in the United States, ideas around currency changed profoundly. Photo/Credit: Tim Evans
Cryptocurrency is an internet-based currency and payment that do not require banks to process payments. Unlike other traditional currency, the central bank does not hold cryptocurrency because it is developed and given value online through what is called cryptography, or algorithms.
Here is how it works: Online transactions are recorded through something called Blockchain Technology which is a global network of computers jointly managing the database that records online exchanges. Through Blockchain, online users operate as virtual miners who verify transactions.
After transactions are verified, those who provided a service or exchanged a product or good are paid via digital tokens. The transactions, how much is paid and who is paid was designed to be anonymous; however, you can cash out your cryptocurrency for traditional currency, as in most cases, it takes non-digital currency to acquire cryptocurrency, but at a lower value of the dollar. Several marketplaces called “bitcoin exchanges” allow people to buy or sell bitcoins using different currencies. Mt. Gox is the largest bitcoin exchange.
Evolution of Cryptocurrency
On Sunday, November 26, 2017, Bitcoin surged to US $9,671.84
The concept of digital currency began circulating around 2008, right after the United States’ economic crash. Online communities worked to find solutions to avoid the deep financial loss experienced by millions. In unveiling what led up to the crisis, it was discovered that banks were at the center of the economic plunge; and people grew tired of the institution’s monopoly of money and how it flows.
Along with rethinking the role of banks in financial transactions, the economic crash prompted people who lost access to sustainable amounts of cash to experiment differently with exchange systems such as bartering.
Online users transferred this system to the virtual and began digital bartering. According to the popular story that circulates around the creation of the first cryptocurrency is a man by the name of Satoshi Nakamoto who put forth the idea of a form of digital currency called Bitcoin, which was introduced in 2009 and in 2010 started at US $0.09.
Forms of Digital Currency
Now Bitcoin, Ethereum and Litecoin, and a host of other names make up a new system of banking called cryptocurrency, or digital currency in which internet users exchange goods and services through a currency not controlled by a centralized bank. Rather than a central bank determining a currency’s value, those involved in transactions and who verify the online exchanges shape the worth of the currency.
To give you an idea of how digital currency disrupts today’s banking, it is critical to understand how money works.
Before the cryptocurrency, the dollar, gold used to be money. Before or around the use of gold, many objects were used such as cowrie shells in Africa and South Pacifica, furs in the Americas and cast iron in Ancient Greece. However, gold was the royal metal, as it is today.
As people began to accumulate gold bars and coins, as well as, travel more and engage in international trade, it became cumbersome to carry the precious metal. Somewhere along the line, it was agreed upon that people would store their gold in vaults, called banks, then be issued receipts or promissory notes. From that, the dollar was created and so whoever wanted to redeem the gold could do so.
When the historic US Great Depression occurred in 1929 to 1939, the economic downtown sent people in a panic and they began to remove their gold from banks and hold it privately. Additionally, the government seized people’s money. Those who suffered the most were African Americans who just started to gain money since they were 60 years out of slavery.
Photo Credit: Olga Delawrence
To recover from the Depression, the federal government decided to remove gold from backing the dollar. In doing so, the infinite printing of a dollar bill commenced. This is the introduction of the term “fiat money” because the dollar was no longer pegged to anything or backed by anything — meaning the dollar you have in your pocket is pretty much worth nothing.
A New Fiat Money
With fiat money, the central bank began to determine the value and credibility of money. Countries began using other assets as a way to maneuver around a currency system generating money worth less than the paper it was manufactured.
The new dollar is cryptocurrency. It is the new vehicle of exchange, but they too are based on the concept of fiat money; backed by nothing as well. However, the difference is that a central bank does not decide its value. It is supposed to be the people. The predictions and rapid increase of cryptocurrency, and especially the first digital currency, Bitcoin, has seen a huge spike in the new form of exchange. Bitcoin alone increased 869 percent this year, and is well on its way to the $10,000 per digital token prediction.
Although Bitcoin is highly popular, it is not the answer, but in my opinion just the beginning. As with all new systems of anything, there are kinks that must be worked out. Because cryptocurrency is digital, and exchanges happen online, there is an issue with hacking. So with the new frontier comes risks with the reward.
Duane Reed focuses on the market and currency.
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