Insert the word "cryptocurrency" in the conversation, and you will certainly hear a flurry of very different opinions. Some will say that this is the biggest technological breakthrough since the launch of the Internet, others - that this is a fraud. But how many people are really able to explain what it is?
Thanks to Bitcoin, this word reached the most unexpected places, including nursing homes, where it penetrated the conversations of grandmothers discussing the morning news.
But that's what. Despite the fact that bitcoins and cryptocurrencies rapidly broke through into the news, agendas of boards of directors meetings and billboards, most people still do not have a clear understanding of what is being said.
So, it's time to get acquainted with this phenomenon closer.
In the title alone, you can see two clues that can be easily deciphered: "crypto" and "currency."
“Crypto” refers to cryptography - this is the practice of encrypting plain text or data by turning it into an unrecognizable and incomprehensible form. Only if the intended recipient is able to decrypt this code, possessing confidential and secure means for exchanging information, will he be able to extract the information.
The word “currency” is traditionally associated with the monetary units of a particular state, but in reality a currency is any system of money used as a medium of exchange.
Bring it together - and you have a cryptocurrency, a digital form of currency, where cryptography governs the creation of new tools, and also provides transactions.
So, is a cryptocurrency just an encrypted form of digital money?
With this answer, you can’t go wrong, but it sounds rather useless. To understand why cryptocurrency is much more than just encrypted money, let's go back a few years ago.
The fact is that cryptocurrency is not the first form of digital money. Attempts to create digital currencies began at the dawn of the 90s, but all these inventions could not compete with electronic banking money or third-party systems such as PayPal.
David Schaum paved the way for digital currency when he launched DigiCash in 1989. It was an electronic network used to send currency anonymously. Ten years after the DigiCash bankruptcy, we saw similar E-gold and Liberty Reserve, which also went bankrupt after criminal charges. Soon the idea itself began to seem to people contrived and unrealizable.
Why did it all fail? You can just remember the saying that the first pancake is lumpy. But a more plausible explanation is that there was no demand for digital currency, since e-commerce has not yet appeared on the scene, like widespread access to the Internet.
And now we will be transferred to 2008. Then the mysterious figure, known as Satoshi Nakamoto, gave a new explanation to the previous failures: all these systems were centralized and therefore based on trust. And, according to the mysterious Nakamoto, this was the most serious problem.
A detailed explanation can be found in a document written by Satoshi in 2008: “Bitcoin: a p2p electronic money system” (Bitcoin: A Peer-to-Peer Electronic Cash System). In it, Nakamoto singled out two fundamental problems: the operation of ordinary financial systems and the properties of fiat currency (for example, the US dollar).
You may not have thought about it, but your assets in US dollars, pounds, euros or any other fiat currency make you depend on the state. Most of these currencies once represented real tangible assets (for example, gold), but these days are long gone, and cash has no value other than your faith in them. That is why any government can easily manipulate your means and thus interfere in your personal life.
And governments really do this: they devalue the currency by printing billions of new banknotes to contain inflation or to play at interest rates. The global financial crisis of 2008 and its aftermath are examples of how governments can manipulate our money supply and economies.
Seizure by banks led to a financial crisis, but instead of punishing banks received loans of $ 4 trillion. from the US government. The magic program of the Fed “Quantitative Acceleration” made it possible to turn this by buying securities from the market to reduce interest rates. Instead of allowing the natural recovery and recovery of the US economy, the government pumped borrowed money into the very institutions that caused the depression.
Considering that fiat currency itself creates problems, what can be said about centralized systems that we use to store and transfer money, that is, about banks, trust funds and online transfer services? They, too, to put it mildly, are imperfect.