Why crypto is a natural evolution of old money

First there was “Might is right”. Anyone with strength could snatch anything from anyone weaker. We evolved and came out of that with the barter system. A goat could be equal to 2 bags of wheat. A day’s labour could be worth a handful of rice. Every piece of goods could be exchanged with some other piece of goods or labour or something else. Of course, there was a clear pecking order with precious stones and metals at the very top.

This morphed into the gold system. Gold now defined wealth and it was the ultimate exchange for barter. You could carry gold when you travelled and buy a great number of goods with it. Kingdoms started hoarding gold. They started minting gold coins. Silver, bronze and iron coins followed. The monetary system was born. Soon we shifted to paper currency.

But this paper currency was pegged to gold. You could only print as much money as there was gold with the government. Governments who did not follow this rule went bankrupt and crashed. Then it was pegged to a “fraction” of the gold reserves and that fraction kept getting smaller and smaller.

When money became virtual

Finally we had the “Nixon Shock”. In 1971, the then US President Richard Nixon “Unilaterally cancelled the direct international convertibility of the United States dollar to gold”. The legacy of gold was thrown out of the window. The floating exchange ruled. In a way that’s finally when money became “virtual” and not “real”. The global financial system was ready for the online age. You didn’t need barter. You didn’t need gold. You didn’t need notes and coins.

Money could be virtually stored, shared, lent, recovered… But there was a caveat. Now the power was fully with the governments, banks and the financial moguls. They could manipulate at will. While there is such a thing as the free market, there is a great deal of pushing and pulling that these “powers to be” can do. You can see it in America today where for the government a trillion dollars is like a hundred dollar bill for a poor middle class citizen. The US is pumping out free money at a record rate. Will they crash like governments in the past. Nobody really knows.

The power of blockchain

In such an atmosphere, enter the blockchain, which promises transparency and empowerment, thanks to its unique use of cryptography and time stamps. The system is quite difficult to tamper or change the data that has been initially fed into it. The peer-to-peer network is almost foolproof in nature. More importantly, there is no need for a central authority that can take all the powers of the system.

Great innovation in cryptocurrencies

This system was brilliantly used by Satoshi Nakamoto (a pseudonym or group of persons) to create Bitcoin. The number of Bitcoins that can be mined are limited and hence it cannot behave like the US government, creating trillions of dollars out of thin air at will. Similarly Ethereum was created by Vitalik Buterin in 2013. It has the added innovation from Bitcoin of creating smart contracts.

Litecoin is a fork of Bitcoin, NEO comes from China, Monero is popular on the Dark Web, Binance coin and BAT (Basic Attention Token) are both utility tokens etc. There is great innovation happening in the cryptocurrency domain while the media usually focuses on other issues. Ripple is a currency exchange that deals with both crypto fiat and currencies along with commodities. In fact there are many cryptocurrency exchanges mushrooming up all across the world.

Why it will work

When it comes to any financial system it’s about trust. People trusted the barter and value of gold. They trusted the notes and coins in their hands. They trusted online money. Now enough people are trusting cryptocurrency to make it a viable option.

The second is that it has to be theoretically workable. People had excess goods or time (for work) that they wanted to exchange with something they didn't have. Gold was small and attractive and took everyone’s fancy. People immediately took to coins and notes. Once enough devices and connectivity came into the picture, online money seemed like a good bet. Cryptocurrency has very sound principles as explained above and theoretically is a superior system. Blockchain and cryptocurrency have very sound technical, practical and philosophical arguments.

The system has to be practically workable. Barter was great when the transactions were small and societies and kingdoms wanted exchanges in large numbers. Once it got really complicated, you needed some other standard. Gold is durable and it can be easily transported, stored and melted. Everyone in the world values it. It’s easy to carry around notes and coins all your life. But that too fell behind. With the broadband and smartphone revolutions, people actually find online money more convenient. Though complex, at the user level cryptocurrency is quite easy to buy and sell. We are even seeing Blockchain-as-a-Service (BaaS) startups who will simplify things for you.

Worth trillions now

The value of all cryptocurrencies on New Year’s Day in 2009 was zero, for the simple reason that it wasn’t invented yet. Bitcoin was strong even before Covid and the pandemic boosted some industries and destroyed others. First Bitcoin touched a market capitalization of $1 trillion and then all cryptocurrencies were worth $3 trillion. That’s at par with the GDP of India and its 1.4 billion people. This is just in a short span from 2009-21.

More importantly it is not isolated but being traded. As long as any form of money is in continuous circulation, it will survive. The same thing is happening with Bitcoin & Co. Investors are buying, selling and speculating. Global citizens are buying goods and services with cryptocurrencies and it is being integrated with all the markets of the world. There is no going back now.

What could bring it down

There is one thing that can pull it down and that is regulation and bans. But it is doubtful that all countries of the world will crack down on cryptocurrencies. Even if half of them do it will flourish in the other half. If by some outside chance all of them do, it will merely be pushed underground and become a favourite of black markets and the Dark Web. You can’t just wipe out $3 trillion overnight (the value can reduce drastically though) as the users are common citizens all over the world along with white money billionaires and black money operators.

Barter is limited. Gold is dead as a monetary standard. Notes and coins are going out of fashion. A new online financial order is being built and both blockchain and cryptocurrencies are going to play a huge role in that.

Bitcoin may or may not stay, but the cryptocurrency definitely will.