Humanity has long relied on physical currency as a means of representation and transfer of value.
Some of the earliest examples of coins date back thousands of years. The Mesopotamian shekel is widely considered the oldest coin. West Asian tribes first minted the shekel – which means “weight” – 5,000 years ago. This example of ancient coinage long predates the construction of the Egyptian pyramids and even the extinction of the woolly mammoths.
Digital currency, in comparison, has a much shorter history and represents the first time mankind introduced a purely non-physical currency. For this reason, various misunderstandings regarding the legitimacy of digital currency have been able to spread.
Let’s explore some of the myths surrounding this new currency.
What is a digital currency?
In the early 1980s, American computer scientist David Chaum published an article describing the concept of a purely intangible currency backed by cryptography. In 1990, he launched the currency through his company, DigiCash.
Known as eCash, it became the world’s first form of pseudonymous, cryptographically-secured, non-government-issued digital currency.
And it didn’t exist physically.
Some of eCash’s best features, such as anonymity and cryptographically secure payments, have appeared in other projects. These offshoots include Adam Back’s Hashcash, Wei Dai’s B-Money, and Nick Szabo’s Bit Gold.
Then, in 2008, a programmer using the nickname Satoshi Nakamato released the Bitcoin White Paper. It was a nine-page document illustrating a new type of cryptographically-secured e-money that improved upon the foundations of its predecessors.
A year later, Nakamoto launched the Bitcoin Protocoland brought to life the world’s first convenient digital currency.
What is a digital currency?
Broadly speaking, a digital currency is any type of money that is exclusively non-physical. Several elements separate it from traditional currencies:
- There are no paper notes or metal coins to represent its value.
- All units of digital currency exist as entries in a digital ledger.
- Users exchange electronic money over the Internet using computers and online systems.
- Some forms of decentralized digital currencies, such as Bitcoin, leverage cryptography to secure, partially anonymize, and verify transactions. This decentralization eliminates the need for an intermediary institution.
Digital currencies should not be confused with fiat currencies and online banking. Although these old currencies also use online systems, the digital balances of fiat currencies can be exchanged for their physical counterparts. For actual virtual currencies like bitcoin, individual “currency notes” cannot be withdrawn for any physical unit. Money exists as a purely electronic monetary system.
Is cryptocurrency real?
Let’s do a quick thought experiment. This thought experiment asks two different questions: can something intangible be real? And how can something intangible have value?
First, let’s understand if something can be intangible and real. We can answer this question easily. Yes, like many digital things, cryptocurrency can be both intangible And real. To understand how, let’s look at the Internet.
The Internet has been around since 1983 and is a vast computer network that allows people around the world to communicate and share information. Statistical reported more than 5 billion people use the Internet in April 2022, more than 60% of the world’s population. Data from Live Internet Statistics indicates that there are more than 1.5 billion websites online, of which 200 million are considered active.
No one would question whether the internet is real or not. In fact, we consider it one of the greatest inventions of all time. Still, it’s not a place you can visit, nor can you hold the internet in your hands. It exists as an intangible digital resource.
Cryptocurrencies share many of the same qualities as the Internet. Like the Internet, they operate on networks of interconnected computers. A wide range of apps are built on cryptocurrencies and millions of people around the world are using them to do amazing things. Like the Internet, cryptocurrencies have no physical representation. There is no box that holds the internet just like there is no wallet that holds your bitcoin. Even hardware wallets store digital representations of your assets and do not act as an offer.
Next, consider the principles of the theory of value. This theory seeks to interpret the subjective way humans attribute value to things. There are two main ways something can have value: intrinsically or instrumentally.
If something has intrinsic value, then it refers to something that has value simply because it is what it is. Gold and silver, for example, are inherently valuable items, at least in our current context. Conversely, instrumental value refers to something that gains value through its usefulness.
Gold, for example, is both inherently valuable due to its aesthetic appeal and earthly rarity. It also has instrumental value due to its physical properties: malleability, chemical inertness, heat, electrical conductivity, etc.
It can also be said that many cryptocurrencies have both intrinsic and instrumental value. Bitcoin, as an example, has a really rare maximum supply of 21 million and requires considerable effort to produce. Intrinsically, these factors make it desirable. We show this value by having millions of investors buy and sell it all over the world.
From an instrumental perspective, cryptocurrencies like bitcoin have many inherent characteristics that drive its value. Like a store of value, it is significantly more portable, counterfeit-resistant, and divisible than gold. As a cross-border payment method, it is a much faster and cheaper way to transfer value overseas than using traditional banking methods.
Other characteristics of cryptocurrency include partial anonymity, complete network transparency, immunity to single points of failure, global inclusiveness, and financial autonomy.
Ultimately, the problem facing cryptocurrency isn’t that you can’t hold it. Instead, the problem is that many view the technology as immature and complex.
Cryptocurrency is the first currency used by mankind that is unlike the one we have been using for 5,000 years. It’s an exciting new frontier that’s both powerful and purely digital. Bringing about a new financial frontier, like any momentous change in the way people do things, will take time.
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These materials are for general informational purposes only and do not constitute investment advice or a recommendation or solicitation to buy, sell or hold any digital asset or to engage in any specific trading strategy. Some crypto products and markets are unregulated and you may not be protected by government indemnities and/or regulatory protection schemes. The unpredictable nature of crypto-asset markets can lead to loss of funds. Tax may be due on any return and/or increase in value of your Crypto Assets and you should seek independent advice on your tax position.