Is it a get-rich-quick scheme or genuine alternative to traditional money?
Most of us have heard about it, but not many of us really understand cryptocurrency. Generally referred to as the original cryptocurrency, Bitcoin is a unique and non-governmentally issued digital money that has become more mainstream in recent years as its usefulness and reach have increased. Bitcoin specifically is widely known for the astronomic rises in its market trading value, as well as its spectacular losses in worth.
All this speculation in cryptocurrency does not relate to any inherent economic value creation, hence critics of Bitcoin, including value investor Warren Buffet, do not believe buying and selling Bitcoin to be a truly value-generative activity.
The CEO of the South African hedge fund, Protea Capital Management, Jean Pierre Verster, agrees and says he cannot logically say how much a certain cryptocurrency is worth, because it is not possible to apply fundamental investment principles to calculate this value (source: MyBroadband).
What is cryptocurrency?
As a basic definition, cryptocurrency is an independently created digital form of money with value, just like government-issued standard money, that can be used to buy and sell goods and services. In other words, it’s a medium of exchange in digital form.
The word crypto comes from the Greek ‘kryptós’ meaning ‘hidden’. Before cryptocurrency became a vogue term, the term ‘crypto’ was usually associated with words such as ‘cryptograph’, which is a device for encoding and decoding messages.
Cryptocurrency is created by way of complex, hard to fathom, formulaic digital means. In the traditional currency world, governments create and issue money, usually according to many well-established economic policies, standards and procedures, within a political framework.
This is not so in the instance of cryptocurrency. In the case of Bitcoin, for example, no-one knows the identity of its original creator. An individual who named themselves Satoshi Nakamoto is widely seen as the creator of Bitcoin, but nothing further is known about this originator.
According to bitcoin.org: “New bitcoins are generated by a competitive and decentralized process called mining, where the network rewards individuals for their services. Bitcoin miners are processing transactions and securing the network using specialized hardware and are collecting new bitcoins in exchange.”
Like we’ve said, pretty complex, right? The mystery surrounding the process of bitcoin mining and the complicated digital distributed ledger technology (DLT) framework that underpins it has the effect of cloaking Bitcoin in peculiarity and secrecy. Bitcoin uses a specific type of DLT called blockchain, which you may have heard about in the context of cryptocurrency creation before.
It is this network of systematic cooperation that makes a currency such as Bitcoin a useable and tradable form of money, as everyone has the same incentive to keep it intact, and because for the system to work, it needs all distributed parts to be present and linked, in blocks, just like a chain. (Hence, blockchain. Geddit?)
So, for this discussion about the impact of cryptocurrencies in the fourth industrial revolution (4IR) – the revolution we’re in right now – let’s accept that digital money is created and exists according to structures, systems and processes that safeguard the inherent nature thereof, just like central government-issued paper money (including its electronic form).
Cryptocurrencies are increasingly being used to buy and sell goods and services digitally, but digital money retains an unfortunate reputation of being the preferred currency for illicit goods and services. The ransomware file encryption hacking industry, which, incidentally, is run just like a real business, is notorious for its insistence to be paid in bitcoin to receive the unlock key to get your files back. Illegal trading hubs, such as the defunct Silk Road, traded almost exclusively in Bitcoin and similar cryptocurrencies. In short, the anonymity of Bitcoin tends to attract those who want, or need, to remain unseen and unknown.
Nowadays tech-savvy companies are gearing up to allow consumers to pay in Bitcoin. Elon Musk, the pro-cryptocurrency CEO of the tech-heavy electric carmaker, Tesla and other 4IR enterprises, recently announced that you’ll be able to buy a Tesla in Bitcoin. In preparation, the company invested approximately $1.5 billion in the cryptocurrency.