What is a ‘Cryptocurrency’

A cryptocurrency is a digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of this security feature. A defining feature of a cryptocurrency, and arguably its most endearing allure, is its organic nature; it is not issued by any central authority, rendering it theoretically immune to government interference or manipulation.

 

BREAKING DOWN ‘Cryptocurrency’

The anonymous nature of cryptocurrency transactions makes them well-suited for a host of nefarious activities, such as money laundering and tax evasion.

The first cryptocurrency to capture the public imagination was Bitcoin, which was launched in 2009 by an individual or group known under the pseudonym Satoshi Nakamoto. As of September 2015, there were over 14.6 million bitcoins in circulation with a total market value of $3.4 billion. Bitcoin’s success has spawned a number of competing cryptocurrencies, such as Litecoin, Namecoin and PPCoin.

 

THE GOOD:

A) a standardized and neutral confirmation policy backed by software that has no human agendas.

What does this mean?

Imagine I want to send Joe dollars to buy his house. I need to trust all of the middlemen between Joe and me: local bank, central bank, lawyers, governments, Joe’s bank, etc to approve of this transaction if I do it in dollars.

This is ok but at each step someone can be untrustworthy. They are all humans, even the government (humans subtly influence the price of the dollar and also share details of the transaction with unfriendly parties (the IRS)).

Also, each step in the above has a transaction cost. So inflation is built into the system.

If this were a bitcoin transaction, enough miners need to approve that this transaction is valid. So even if a few miners are not trustworthy, the bulk of them will be and we can trust that the transaction between me and Joe is legit.

[This process is complicated. Suffice to say, it works on Bitcoin and any other “legit” cryptocurrency.]

This is the ENTIRE reason for cryptocurrency: avoid governments, borders, middlemen, extra transaction costs. As well as have high security and avoid forgery.

Imagine the history of money. Money is used as a store of value OR as a way to transact without having to use a barter system.

Store of Value

First it was the land you owned and the resources you developed on that land (wheat, grains, etc).

Then it was metals. Gold, silver, etc. You traveled with it by fashioning it into jewelry. Too much gold = harder to travel.

Paper currency. Backed first by gold but then…faith in God (“in God we trust”) or government. (Or a pyramid…with an eye in it????)

Electronic currency. Easily transportable. But transaction fees all over the system. Zero privacy.

And the next generation is Cryptocurrency. Easily transportable, little to zero transaction fees, no human intervention between payor and payee, high anonymity, and even functionality.

Money evolves, like anything else, and the natural evolution of money is always as a store of value that is easier to move, more secure, and more private.

Transactions

Transactions have the same history. And the same issues. How can you transact across a far geographic area with less fees, less costs, less chance for human error, higher security and privacy.

A natural evolution leads go crypto-currency.