The Past, Present, and Future of Cryptocurrency | A Virtual Love Story
It is often crises that trigger change. This is also the case with money. A few decades after paper money was invented in China, a Persian ruler named Gaichatu had a problem. The rinderpest and his lavish lifestyle were emptying the state coffers.
So at the end of the 13th century, the king decided to print banknotes in his own currency to put the ailing state finances in order. He allowed only the banknotes of the royal house as means of payment, of which he could produce as many as he liked. But Gaichatu did not reckon with his people, who rejected the new currency and took to the barricades.
Then as now, money was about trust. It will continue to be so in the future. Today, the dollar is the most important means of payment; after all, it is backed by the USA, the world’s largest economic power. People trust that the green will retain their value in the future.
New currencies like Bitcoin are so popular not least because they are considered particularly fraud-proof and offer anonymity. However, one reason why cryptocurrencies have not yet established themselves as an everyday means of payment is the highly fluctuating prices: You can’t count on what your coffee will cost tomorrow, let alone how much Bitcoin your condo will be worth next year.
Stability is just as critical. How we pay and manage our savings in the future will also depend on it.
The Big Crash
The birth of Bitcoin was anything but stable. The year was 2008, and the financial markets were in free-fall after the Lehman Brothers investment bank went bust on September 15 and banks suddenly stopped lending money to each other.
A dramatic economic collapse followed, and all over the world, central banks – which watch over their respective currencies – began pumping more money into the system and lowering interest rates to near-zero to help companies get their money back, to stop the downturn.
In contrast to the “Great Depression” of the 1930s, when governments did not act so decisively right away, at the beginning of this century there remained a “Great Recession” – but for many, confidence was gone. In the financial markets anyway, but also in currencies.
After all, the value of money is also based on the fact that you don’t put it into the world in arbitrary amounts. This was the experience of the Persian king.
The Great Birth
In the crisis year 2008, someone with the pseudonym Satoshi Nakamoto made people sit up and take notice of his idea for a new currency. The concept was based on transactions taking place directly between two players, without the involvement of banks, many of which were threatened with collapse at the time.
It’s about a system of electronic money “that does not rely on trust,” the first paper on it says. To date, it is not clear who is really behind the name of the presumed author. However, the new money called Bitcoin has since soared. It is considered the oldest cryptocurrency, but there are now more than 6,000 different ones.
The Blockchain Principle
The digital currencies have in common that they were not created by a central bank or other government institutions. They are transferred, stored, and traded with or without a Bittrex trading bot electronically. Bitcoin is based on a technology called blockchain – a type of database in which transactions are stored as blocks, sequenced, and chained.
The sequence is irreversible and older entries cannot be changed. Information is never deleted, changes are appended to the chain so that it is possible to trace back to the origin of what was changed – and by whom. Whereby the actors only appear as encrypted number sequences and always remain anonymous.
Besides, the database on which the blockchain resides is not stored centrally in one place, but by all participants simultaneously. The interactions can also be seen by everyone in the system as a kind of decentralized cash book.
Information is constantly reconciled, so anyone wanting to manipulate the system would have to do so on all separate computers at the same time, which is almost impossible. The more participants a blockchain has, the more secure it is in theory.
Each new block requires computing power, which participants in the blockchain network provide and also receive payment for, in the form of their own currency. In the case of Bitcoin, this is a limited resource; the absolute number is capped at 21 million, which is intended to ensure that the value of the currency is maintained.
The financial incentive for the so-called “miners” serves to keep the blockchain running; after all, as the number of blocks and participants increases, so does the computing power required. This also means enormous power consumption: the annual energy expenditure for mining the digital currency is almost as high as that of the Netherlands, a circumstance that constantly earns Bitcoin criticism.
Without a Middleman
But in stark contrast to the system that the mysterious Nakamoto found in the midst of the financial crisis, Bitcoin is meant to offer stability, security, and transparency, according to its founders.
Just as in many other areas of life, the digital approach could now revolutionize our understanding of money. After all, digital currencies like Bitcoin allow money to change hands directly, without the intervention of banks, which usually also charge fees for this.
This principle has already turned the investor market on its head and put established banks to the test. Some platforms rely heavily on artificial intelligence and investment algorithms, keep costs to a minimum, and now have a powerful clientele of several million, mostly small investors.
With Bitcoin, there is also the fact that the system is decentralized. It is controlled by everyone and does not run the risk of being manipulated by individuals. This obviously goes down well.
Last October, one Bitcoin was worth over 60,000 US dollars, a tenfold increase within four years. And major monetary authorities are also increasingly focusing on crypto-money. The European Central Bank (ECB), for example, has begun preparing for the possible introduction of a digital euro. The U.S. is also tinkering with the digital dollar, but the central bank there, the Federal Reserve, is still divided on how to proceed.
Crypto Annual Plan
In China, where paper money was first put into circulation some 1,000 years ago, plans for a digital state currency are already more concrete: The People’s Bank of China (PBOC) has been issuing a digital variant of the national currency, the yuan, for months for testing purposes.
The e-yuan is only accepted by a few places, but according to observers it could be part of a government plan to digitize the entire currency system within a few years. At the same time, Beijing recently shook up the crypto market again when the People’s Republic – one of the most important markets for digital currencies – declared all crypto transactions illegal.
The Bitcoin price plummeted as a result, while miners and traders have left the Chinese market in droves. Besides the state-owned e-yuan project, the government would not tolerate any competition, analysts explained.
El Salvador, on the other hand, caused waves of excitement in the crypto scene this year: the Central American state became the first country to allow Bitcoin as an official currency, giving away $30 in Bitcoin to its citizens via an app.
Many businesses were required to accept Bitcoin and the government set up 200 new ATMs to exchange cash for the digital currency. Bitcoin should make it easier for Salvadorans living abroad to send money home cheaply, according to the country’s president, Nayib Bukele.
However, parts of the population oppose the move, and protests erupted after its introduction. There are fears that the new currency could lead to further instability and rising inflation in the impoverished country.
Not only in the streets of San Salvador but also on Wall Street there are doubts about the future of Bitcoin & Co. A few weeks ago, Jamie Dimon, head of the world’s largest investment bank JPMorgan Chase, spoke out. “I personally think Bitcoin is worthless,” Dimon said at a conference in New York. He expects governments to heavily regulate cryptocurrencies, especially to counter money laundering and tax evasion, the CEO said.
Another stock market celebrity, Elon Musk, founder of electric car maker Tesla, helped Bitcoin’s share price soar as he announced that his company would likely accept Bitcoins again – after briefly moving away from the currency due to environmental concerns.
Facebook, with its 2.85 billion users, is planning to launch its own digital currency system, complete with crypto-money, in the first place. The project, called Diem (formerly Libra), is based on blockchain technology and is intended to allow Facebook users to move their money cheaply and quickly. After criticism from politicians and regulators, Facebook kept postponing the project and most recently relaunched it.
Sam Altman, a legend in the American startup world, even wants to create a basic income for his users with the help of his own cryptocurrency by having basketball-sized scanners illuminate their irises and generate biometric profiles – in return, you get digital money. The seemingly utopian project called Worldcoin has already produced prototypes and is said to have received 25 million dollars from investors.
Whether states set the tone or not, many experts agree that the future belongs to digital money. Cash will only play a subordinate role. No wonder, because physical currencies are extremely cumbersome. Cash has to be printed, delivered, stored, and counted. According to one study, this costs the economy around $200 billion a year, not least because consumers spend an average of almost half an hour a month going to the ATM.
In countries like Sweden, cash is already a fringe phenomenon. In 2020, only 10% said they had paid in cash the last time they made a purchase – in 2010, this figure was still 39%, according to the Swedish central bank. Only half of the people still used cash within the last month, according to the survey.
Money Parallel Worlds
So the wallet revolution won’t happen at the same speed everywhere. Physical money will continue to be important, especially in places where people have had bad experiences with the monetary system in the past. However, we could also be at the beginning of a time when digital currencies coexist with cash in the longer term, with usage varying by country and social class.
In any case, a look at history shows that you have to have users on your side. After all, without trust and stability, money isn’t worth the paper it’s printed on – or the chip it’s stored on.