If you’ve been paying attention to the news at all, you’ve probably heard about cryptocurrency. It’s been one of the big investment stories of 2017 and 2018, with values rising expansively and falling precipitously. But it’s equally likely that you may not understand what’s being referred to by cryptocurrency, or what exactly it is.
We’re here to fix all that. Let’s look at what cryptocurrency is, what it does, who is enthusiastic about it, and why.
What It Is
To understand what cryptocurrency is, you first need to understand what blockchain is. Blockchain is a digital ledger that is encrypted and shared among multiple parties. It is a method by which transactions and movement of goods can be handled digitally and securely.
The best way to understand blockchain is to think of one potential use. Banks and governments, for example, move money and financial systems to business and consumers all over the world, using their own computer systems and physical methods, such as checks, credit/debit cards, and trucks. Proponents of blockchain believe that transactions like this can be handled more quickly — and more securely via blockchain. But blockchain can theoretically be used for any transaction for which people could use a ledger, such as inventory in stores, music purchased, and so forth.
Cryptocurrency is a digital currency used in blockchain transactions. There are various kinds, such as Bitcoin and Ethereum. Cryptocurrency is open sourced and, unlike conventional currency such as dollar bills or yuan, not issued or backed by governments.
Cryptocurrency is the exchange vehicle for blockchain, a secure digital ledger that can be used for two or more parties.
What It Does
Cryptocurrency facilitates the use of blockchain by enabling digital transfers of wealth. Blockchain users trade cryptocurrency. Simple, right?
Who Is Enthusiastic About It and Why?
In exploring who is enthusiastic about cryptocurrency and why, once again, blockchain travels in tandem with it. Many people in the digital world and academia, for example, believe that blockchain will be transformative, replacing many existing forms of moving goods and services in a quicker and more convenient way. Many believe cryptocurrency will replace existing currency.
They may well be correct. In some ways, it’s useful to think of blockchain and cryptocurrency in their current state as analogous to the worldwide web before there were computers on everyone’s desk. Few people outside of academia and the military knew such a thing as an interconnected computer web existed. But once individual consumer and business tools were in place (i.e., computers), entrepreneurs brought it to market.
Once blockchain is better known, more widely utilized, and gains respectability, the thinking goes, it will be used more and more by mainstream organizations, along with cryptocurrency.
However, the fact is, right now, blockchain and cryptocurrency are not mainstream. There are several reasons for this. First, financial transactions, for example, are agreed to be one obvious potential use. But right now, nations control the issuance and flow of currency. Its issuance and flow are regulated quite stringently around the world. Cryptocurrency and blockchain are not currently regulated.
Second, worth is universally agreed upon and backed by the issuing nations. Cryptocurrency is an open market.
Third, cryptocurrency is open-sourced. It is not completely trusted by the mainstream as a result. Fourth, some form of regulation and general agreement on standard usage is likely going to have to occur before it becomes mainstream.
Geoffrey Garrett, the Dean of the Wharton School at the University of Pennsylvania, has pointed out that there is a whole gap between the Silicon Valley view of cryptocurrency and blockchain and the Wall Street view. Silicon Valley believes it’s the wave of the future, especially as Asian nations are very interested in both and Silicon Valley is on the Pacific Rim. Wall Street believes both are outré and, to paraphrase JPMorgan Chase head banker Jaimie Dimon, not worth caring about.
So Silicon Valley is enthusiastic, and Wall Street not so much.
Garrett believes that at some point cryptocurrency will become the digital form of existing national currencies under national and international regulation. In other words, there may at some point be crypto dollars, crypto euros, and crypto yuan replacing Bitcoin and its like. But that is a long way off, with many steps and stages in between.