Cryptocurrency is such a new technology that not much is known about it. In fact, most people who have some familiarity with it only have a rough understanding of bitcoin, which is just one form of cryptocurrency.

In the eyes of many, the technology still resides in the dark web — a currency that has no function other than to evade government enforcement and to transact illegal purchases of drugs, prostitutes, and guns. Nonetheless, the promise of cryptocurrency extends far beyond the internet underground.

What about the US dollar?

Presently, the US Dollar is backed by the abstract idea of “the full faith and credit of the United States.” Once, it was backed by gold. However, for a number of reasons, this system proved to be ill-equipped to support a more globalized economy. Therefore, the U.S. government pinned the value of the dollar based on the trust that people hold in the U.S. economy. This move away from the gold standard to a faith-based currency was seen as groundbreaking.

The effect of cryptocurrency

Cryptocurrency, if perfected, would not just be groundbreaking, but a paradigm shift on how we exchange value—and possibly the greatest shift since the invention of metal coins. It requires no government oversight, which essentially means that there is no governmental entity that will back up the value of the currency or support a holder’s right to gold or any other commodity.

What's the value of cryptocurrency?

The purchasing power of a bitcoin, for example, is inextricably linked to how much value the “market” for bitcoins ascribes to it. That is, the market of bitcoins, comprised of willing buyers and willing sellers, sets the value of the bitcoin based on nothing more than how much the sellers want in bitcoins for a good or service, and how much buyers are willing to pay.

This is different than the traditional currency exchange markets, where for example, the value of the U.S. Dollar fluctuates with the underlying health of the U.S. economy, as well as in response to the decisions made by the Federal Reserve. The value of cryptocurrency though exists entirely in the aggregate of individual buyers and sellers.

Why the bitcoin market is strong

Bitcoin’s programming is fixed, so that only 21 million bitcoins can ever exist. These are not yet all in circulation, as they need to be “mined”—a concept too esoteric for this series. What this means though is that, because there is a cap on the number of bitcoins, they can be traded in fractionalized amounts. Moreover, there can be no inflation through a deliberate flooding of the market.

What does the future hold for cryptocurrency?

As cryptocurrencies advance in the marketplace, it is still difficult to see whether they will replace or compliment government-backed currencies, or if governments will begin to back their own forms of cryptocurrencies. However, what is not in doubt is that as with the advents of previous technologies, the exchange of value is moving more and more toward complete abstraction.In the next post, we will discuss the technology that is the cornerstone of all cryptocurrencies—the Blockchain—and how it is more likely the true revolution. You can find that post below: