The economic crisis of the previous decade, which cast the banks in a bad light, is still fresh in the collective memory. It has been one of the main drivers behind the emergence of cryptocurrency as an alternative type of money and an investment opportunity. For cryptocurrency itself, the path has not always been straightforward, and some image issues still remain.
It is easy to say that the banks are evil. It is equally easy to say that cryptocurrency is evil. The reality is slightly more complex than that.
What it really is?
The Estonian Cryptocurrency Association defines cryptocurrency as “… a monetary system traditionally characterized by a cryptographic (mathematical) security structure, a decentralised and self-regulated system of payments, and transparency of the network and software.” What does all this mean?
While the funds in an online bank correspond to an actual and tangible pile of cash, cryptocurrency only exists in an electronic format. It means that cryptocurrency can function without reliance on a third party in the form of a bank or an exchange. This results in a freedom to use cryptocurrency anywhere in the world, without the usual restrictions imposed by the banks.
If something only exists online, is it easier to counterfeit? Transparency does not mean vulnerability — simply put, cryptocurrencies are built to be immune to counterfeiting. The immediate risks facing cryptocurrencies are related to value.
Rough, but profitable road
Any new method of payment is born out of necessity. Alternative currencies were often created during periods of recession when trust in the existing system had been undermined. Bitcoin, the current best-known cryptocurrency and the first to be adopted on a wider scale, was created in the middle of the deep crisis of the 2000s. The success story of Bitcoin and the reverberations of the crisis have since then resulted in several new cryptocurrencies coming to circulation.
The value of a payment method depends on needs. The advantage of cryptocurrency over regular currency is the fact that its value is not dependent on a fluctuating exchange or on the economic situation of a particular country, but on users themselves. It makes it possible to make payments and collect assets with as little restrictions as possible, which provides a further value boost.
It does not mean that cryptocurrency is a magic solution — several cryptocurrency projects have failed, because they could not generate sufficient value and, consequently, were unable to establish channels facilitating their use as a means of payment. However, even in this case, there is no single entity that reaps the remaining value — all participants win or lose together.
The joy and pain of investment
Cryptocurrency can gain value comparable to regular currencies only after users invest in it with their regular currency. Like any investment, this is associated with specific risks and benefits. For instance, irrespective of its profit potential, Bitcoin has for many years suffered from technical problems, which have caused fluctuations in its value. However, for many people, technical problems are preferable to the woes of a financial crisis, which can rock banks and exchanges.
The cryptocurrency technology is still developing, which makes its ebbs and flows somewhat similar to the developments on an exchange. Nevertheless, it is impossible to deny that, irrespective of problems, the value of Bitcoin has gone up over the years. A decentralised, alternative currency can be profitable — in July 2017, the price of one Bitcoin was stable around $2,000. However, at the end of January 2018, the price was around $11 000 (https://coinmarketcap.com/).
A victory path for alternatives
Taking charge of one’s own financial affairs has become a popular option in Estonia and in the world. Platforms such as Kickstarter and our own Hooandja enable everyone to serve as a patron for authors, performers or organizers. The Tuleva commercial association offers pension savers much more agency than they would have as clients of a bank.
Cryptocurrency is a response to similar needs — to distance the collection and movement of assets from bureaucracy, which seems redundant to many people. Artists, pension savers or traders in cryptocurrency no longer have to depend on factors over which they only have limited control. All gains and losses result from one’s own actions and are not contingent on some higher institution or power.
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Originally published on our dagcoin.org webpage on January 30, 2018.