What Is Crypto?

Definition Of Cryptocurrency

Cryptocurrency is a new kind of internet money. You can use it to buy things online, and you can send it instantly to other users anywhere in the world, at very low cost, needing nothing more than a smartphone and an internet connection.

Characteristics Of Sound Money

Sound money, effective as a medium of exchange or store of value, has these properties. It is durable. It is divisibile. It is fungible. It is portabile. It is recognisable. It is scarce.

A key property of gold is that it is almost impossible to destroy (durable) but can be melted down into smaller units (divisible), which are relatively easy to transport (portable) and when divided, each unit has identical properties (fungible). It is also very recognisable, which isn't surprising as it has intrinsic value due to its colour and shine.

Gold Standard

The reason scarcity matters is that creating more money makes the money you might have saved worth less. This is called inflation. In countries that totally lose control of their money you get hyperinflation, when your money is worth nothing.

Achieving Trust

Bitcoin solves the trust issue by taking control of the monetary system out of one pair of hands - the central authorities' - and into many hands of a wide network of dispersed users, none of whom have ultimate control. This is what the term decentralised means.

All these users locally run some software that maintains the Bitcoin network, creating an ongoing consensus of every user’s balance of bitcoin. All Bitcoin transactions are final and can’t be arbitrarily reversed unless all users agree, so as the network grows, it becomes more secure. These users are incentivised to support the network and maintain its accuracy.

The use of cryptography secures transactions against fraud and theft, while allowing anyone to mathematically verify the correctness of all transactions in the system. Bitcoin’s design makes it impossible to freeze, seize, spend someone else’s coins, or to spend the same bitcoin twice. If you try to double-spend your coins, only one of the transactions will go through - any others will fail.

But what about the principles of sound money, I hear you ask? Well Bitcoin has those covered too.

Scarcity - There will only ever be 21 million bitcoin in circulation, and new ones are mined at a predictable pace. This means that there won’t ever be a sudden tsunami of new bitcoin flooding the market generating inflation.

Durability - With so many users maintaining the network it would take an unimaginable catastrophe to knock them all out at once. Portability - It is just data after all so you can use your phone, a USB device, or even just a QR code on a piece of paper.

Divisibility - Bitcoin has its own special denomination to eight decimal places. Tick. Fungibility - The beauty of a decentralised system is that no one can make special exemptions; every Bitcoin is created equal.