Cryptocurrencies: Valuable because someone says they are
Cryptocurrencies are poised to be the next big thing, potentially replacing those cumbersome Dollars, Euros, and gold. Not only are they digitally cool and easier to carry than a metal bar, they also provide users with the potential ability to circumvent some very uncool government regulations when it comes to money laundering.
Money has its roots in various object that could have a consistent measure of value, resist weathering, and which can be transferred between individuals. Money categories included shells, gold, copper and a lot more.
In practice this physical bundle was a bit limiting, so there has been a consistent effort to decouple the value from specific items. Money became paper currency backed by given amounts of precious metal; then it devolved further to token money – a currency that is valuable only because the government or the central bank says it is. Sometimes this does not work out well when the government gets carried away with the printing presses as has happened in the past with Germany, Zimbabwe, and, most recently, Venezuela.
Going it without the government
This tendency for governments to debase currencies and inflate their way out of debt has had economists long wondering how to create a currency which is secure, easily transferable, uninflatable, and perhaps even untrackable.
Then along came the blockchain technology which seemed to make it doable. This is a decentralized digital ledger that records and verifies transactions across many computers. The records can’t be altered retroactively without upsetting the entire network. These strings of incredibly complicated but verifiable transactions have led to the world’s first cryptocurrencies. Some of the hot names on the list are Bitcoin, Litecoin and Ethereum.
Unlike traditional currencies, which have value because the government says they have value, are needed for paying taxes, and the central banks and businesses agree upon, these cryptocurrencies have value because other individuals and agencies in the cryptocurrency exchange say they do.
(Don’t) follow the money
Having a unit of value that can be easily exchanged, which is untraceable, and which is outside of the government’s ability to tax and control is a great thing — especially if you are engaged in some shady businesses. Intended or not, criminals have been major advocates of cryptocurrencies.
With an untraceable and easily transferable currency, criminals have had an ideal tool for selling illicit substances and monetizing malware. The Silk Road was one of the first markets – since shut down – for selling drugs with cryptocurrencies as the medium of exchange. Ransomware – malware that locks and encrypts infected computers until a ransom is paid – has been a major user of cryptocurrencies as well.
Cryptocurrencies isn’t all shady stuff though. Legitimate e-commerce businesses have needs for a currency which is secure, instantly transferable, and which is accepted anywhere on the globe. The Enterprise Ethereum Alliance, a consortium behind the Etherium currency includes some well-known companies such as Microsoft, JPMorgan, and Mastercard and Bitcoins are accepted as payments in shops like Newegg, Steam, Zynga, Microsoft, Subway, and more.
For the love of money
The current boom in cryptocurrencies has lots of people interested: Chip manufacturers, currency miners, investors, speculators, governments, and yes, at least a few criminals are all interested in grabbing a piece of this fast-growing pie. But what does this mean for ordinary people except that graphic cards for gamers are getting more expensive by the day? Will it go away anytime soon? And what is “Bitcoin” mining? Find out soon in our next article on cryptocurrencies.