Dakota Beacon

We live in fast moving and interesting times. Who would have thought a few decades ago that a challenge to the US dollar as a medium of exchange would arise? The advent of cryptocurrency has done just that. But not many folks grasp the idea of “electronic currency”. Come to think of it, what is the difference between a piece of paper on which is printed “One Dollar” backed by a verbal “promise to pay” and the idea of electrons standing for “one” of anything that people agree has value? As a neophyte in the world of cryptocurrency, what follows is what I have come to understand.

“Digital currency” appeared in 1983 and later experienced a bumpy ride. As the first of the cryptocurrencies to gain attention, Bitcoin became synonymous with all cryptocurrencies. However, many other cryptocurrencies designed for specific purposes and using different computer programs and mathematical formulas are generically known as “altcoins.” Some of these currencies include Bitcoin (the first and most well-known cryptocurrency), Ethereum, Litecoin, Solana, Cardano, and Dogecoin.

But I am getting ahead of myself. I’ll return to the cryptocurrencies after addressing the vocabulary because I found the terminology a bit puzzling. As with any specialized system, cryptocurrencies have their unique terminology. Metaphorical allusions used in the cryptocurrency lexicon can be challenging. I had trouble getting past terms like “coin,” “miners” (participants in a network competing to solve mathematical puzzles), and “proof-of-work” (computational effort expended by a miner). With a bit of research, I was able to “revisualize” the conversation.

Cryptocurrency is not a tangible item. It is “digital” currency generated with a computer and works independently of traditional banks or governments. Here is what makes digital currency unique:

  -- It is decentralized. No central authority (like a government or bank) controls it. Instead, it's kept by a network of computers (called nodes) around the world.

  -- It is blockchain-based. Transactions are recorded on a public ledger called a blockchain. Transactions are encrypted or coded. Consequently, they are unassailable, meaning that once data is entered, it cannot be changed.

  -- It is cryptographically secured. Ownership and transactions are verified using cryptographic or mathematical coding techniques thus making fraud and counterfeiting extremely difficult.

  -- Currency is constructed through peer-to-peer transactions. Users can send and receive cryptocurrency directly without intermediaries. Cryptologic transfers are often faster and cheaper than using traditional banking systems.

Now, back to Bitcoin. Bitcoin first appeared in 2008 through a paper posted to a cryptography mailing list. Satoshi Nakamoto, probably a pseudonym, was identified as the author. The paper titled “Bitcoin: A Peer-to-Peer ‘Electronic Cash System’” described the benefits and methods of using a peer-to-peer network to log every transaction without having to trust a third party like a bank or government.

In 2011 Bitcoin technology gave rise to other cryptocurrencies based on open-source coding. By 2012 over 1,000 merchants were accepting Bitcoin.

But is cryptocurrency money? While it's called "currency," most cryptocurrencies aren't widely accepted for everyday purchases. Instead, many people treat cryptocurrency as an investment asset, hoping its value will rise over time.

How are cryptocurrencies created? New coins are generated through processes like proof-of-work (used by Bitcoin) or proof-of-stake, which involve solving complex mathematical problems or staking existing coins to confirm transactions.

In summary, the following conclusion would be reasonable.

The essential fact about Bitcoins is that there is no promise to redeem them with anything. In that sense, they are just like Federal Reserve dollars. There may be a promise to redeem them – but with what? It seems doubtful that, with no tie at all to any asset, you could find cryptocurrency useful for ordinary exchange.

Bitcoin, or any altcoin, is equally a fiat currency, that is, it is not backed with any tangible asset. Of course, neither is the US dollar. Cryptocurrencies are an attempt to create a privately sanctioned currency. Like the US Dollar, they are tied to no assets. Unlike the US Dollar, they have no tie to government power. This is what makes them so intriguing.

In contrast, US national bank notes of the 19th and early 20th centuries were tied to US Treasury bonds as collateral. State bank notes were tied to the general assets of the issuing bank. It seems uncertain that, with no tie at all to any assets or cash flow, you can make a private currency useful for ordinary exchange or as store of value. Alternatively, Bitcoin and other altcoins may have value as an object of speculation. They show price volatility with high and low swings. This volatility makes altcoins a bit unsuitable for ordinary everyday payments and exchange. A person has no idea from day to day what their value will be. Therefore, cryptocurrencies are, as the Bank for International Settlements put it in 2021, “speculative assets rather than money.” While successful at becoming speculative assets, they are struggling to be a competitor to a central bank’s fiat money as money.

Much, much more may be said about cryptocurrencies. Even so, this may be good for starters.

Dennis M. Patrick can be contacted at (JavaScript must be enabled to view this email address).