Cryptocurrency is a relatively new phenomenon that is based on the mathematical and technological achievements of the last twenty years. It uses modern cryptography to solve the puzzling problem of creating a currency that avoids centralized control.
Its protocol functions as a peer-to-peer network, where any of its members can perform anonymous transactions without intermediaries, meaning the buyer directly transfers the money to the seller without needing confirmation from a trusted center.
The monetary units in this system are unique cryptographic hash codes. Thanks to the cryptographic technology, all coins are signed by all participants of the transaction, after which the transaction is recorded in a block where the full history of all transactions is stored. Each participant of the network has a copy of this block, hence, each coin is unique and cannot be used twice. Previously, digital e-currencies were always suspected of being reused, and they required confirmation of transactions by a third party. With cryptocurrencies, this is no longer necessary. As of the beginning of 2014, the software behind practically all cryptocurrencies was based on the open source code of the Bitcoin system.
In 2009, a man under the pseudonym Satoshi Nakamoto published the first specification of the Bitcoin system and practical proof of this concept in the public domain on the Internet. By the end of 2010, Satoshi left the project, explaining that he was busy with other things. The identity of the creator of Bitcoin has remained undisclosed to the present, as well as the reasons that prompted him to create a system. He simply submitted his invention to the world and disappeared.
The system is open source, therefore, since 2010, a lot of developers have taken up the development of Bitcoin, thanks to which the Bitcoin community has grown noticeably. In the summer of 2011, the project attracted media attention, which led to the massive waves of purchases of the currency and a rapid growth rate. A bubble was formed, which was slowly blown off during the second half of 2011, after which the value of the currency began to return to the peak value of mid-2011. On September 27, 2012, the Bitcoin Foundation was founded with the aim of standardizing, protecting and promoting Bitcoin.
Nowadays, the Bitcoin economy is growing relatively rapidly due to the daily increase in users, even though many think it already failed as a currency. It is not surprising that some people seriously talk about the potentials of a new economy built on Bitcoin as an alternative to fiat currencies. Cryptocurrency is often compared to electronic gold, emphasizing the following advantages.
In other words, unlike fiat currencies, which happen to be controlled by the state, the Bitcoin system allows anyone to transfer any amount to other users of the network, without fear of being spied on, blocked or have some stolen from you. The system protects itself from outside interference with the power of the users of the network, which means that counterfeiting or artificial depreciation of coins is impossible.
Enthusiasts express the opinion that all these qualities will allow Bitcoin to become a world currency, free from state control, fraud and transaction tracking. However, critics point out that it is the decentralized deflationary nature of the system that is its main problem.
The main danger for an economy based on deflationary currency is stagnation. The constantly growing exchange rate encourages people to use money for accumulation, not consumption. That is, it stimulates users not to produce goods and services, but to make a profit by storing money. This threatens to cause a severe crisis of the entire economy. No less dangerous is the speculative market. When the exchange rate by its nature is forced to constantly grow, the formation of bubbles is inevitable.
The viability of a currency is determined by its compliance with the parameters of the economy that this currency serves, and not at all on the value of inflation or deflation. Regardless of the predetermined growth rate, and depending on the situation in the global market, it can adversely affect the economy. Even a deflationary bitcoin in low demand can lead to high levels of inflation.
Cryptocurrency is a new phenomenon, therefore today it is impossible to predict with certainty the dynamics of its course based on modern theories developed for fiat money. At the moment, its instability is mainly due to speculators, who at this stage of development make up the bulk of the users. With the involvement of new users and an increase in commodity-money turnover, the share of speculators will decline. The widespread distribution of Bitcoin and the increase in the turnover of goods bought and sold with cryptocurrency will stabilize Bitcoin’s exchange rate, bringing it closer to major national currencies like the US dollar.
Bitcoin has a limited and predetermined amount of possible units, equal to 21 million coins. Enthusiasts believe this is a good defense against the rapid depreciation of money caused by the launch of the printing press. No one can control the emission of Bitcoins, while the state has the monopolized right to issue national currency whenever it pleases. This tool can be used for the benefit of the economy and the country as a whole. But at the same time, everyone is supposed to believe that a narrow circle of people, whose personal motives are unknown to anyone, won’t exploit it. Experience and history show us that this is not the case.
However, what is worse – having no control of the situation, or control by people with an unknown set of motives? It all comes down to the fundamental question of the organization of any human community. Is human society capable of organizing itself in such a way that power will be exercised by people with maximum professionalism, while their personal goals and motives will remain minimal or non-existent?
While it is too early to say with certainty that Bitcoin should replace fiat currencies, it definitely has the potential to do so with its numerous advantages and decentralized structure.