What are digital currencies and why you should care

Written by Lizzie Learn On 19th Oct 2016

or millennia now various forms of currency have existed and been used as a universal way to trade goods and services and preserve the accumulated wealth. From cocoa beans and rocks to precious metals and paper-based currencies, money has been instrumental in forming the basis of modern day society.

A new financial revolution is well under way with the invention of decentralised digital money in the recent years that may hold the power to disrupt our current economic system.

Whilst most people consider digital currencies still in their experimental phase, investors and futurists alike are captured by the idea of independent worldwide digital currencies and actively pouring billions of dollars into its research and development.

This article is an introductory guide that aims to briefly explore the recent history of digital currencies and how it may impact everyone’s lives in the foreseeable future.

What is money?

There are three main elements in the definition of money that we need to understand.

Money as a medium of exchange is the way money is being used as the bridge that enables demand to meet supply. Money as a unit of account, referring to money as a tool to measure value and money as a store for this value, or the way money exhibits an asset property of saving the wealth for future use.

Despite the fact that we are living in an era where banks are cornerstone for economic stability, few of us can explain how exactly paper-based money magically appears from an ATM machine and into our wallets.

Regulated by the International Monetary Fund, banks are institutions, part of a centralised network of national and international financial institutions that are allowed to print money against a collateral, where each note has a unique number recorded in confidential centralised ledgers.

These ledgers keep track of bilateral loans and the amount of currency in circulation. Later years in history saw major events such as the collapse of Lehman Brothers in 2008 and the following economic crisis that followed unfold as a consequence of money printing and financial manipulations by this centralised network of organisations.

Coincidentally, in the same year a white paper was published by an unknown entity by the name of Satoshi Nakamoto that explained in detail a mathematical model for a decentralised anonymous digital money called Bitcoin.

A year later, the code was written and the new currency was released for people of the world to freely buy and trade.

Bitcoin

Bitcoin, the world’s first digital currency relies on cryptographic encryption in order to preserve the anonymity and ensure the authenticity of every transaction that has ever been made.

Transactions are made anonymously but all remain recorded on an infinitely expanding encrypted digital ledger called “blockchain” which everyone has access to. Without going into technical details, this way of currency issuing differs from the traditional centralised currency model in that there is no financial institution that regulates how and when bitcoins are created. Instead, bitcoin uses built-in mathematics, cryptography logic and hard-coded rules that allows it to self-regulate.

One example of these rules is the controlled supply of currency - the number of all bitcoins that will ever be in circulation was predefined prior to its launch, precisely 21 million.

Future of digital currencies

What followed the release of Satoshi’s whitepaper and implementation of the bitcoin blockchain was an evolution in the way people’s perception of what money can be since bitcoin, despite its complex nature, met the three criteria of traditional money discussed earlier.

Since 2008, the digital currency community has expanded to include literally hundreds of other digital currencies nicknamed “alt-coins” and companies that provide investment services, exchange platform and cloud storage to support this new digital infrastructure.

It’s early to say whether the digital currencies experiment will be successful in changing the economic system. Early signs of this financial revolution are that a few leading banks have invested in creating their own crypto currencies with open digital ledgers.

Speed of transactions is a clear advantage to switching to digital currencies since it takes as little as ten minutes to receive a bitcoin payment as opposed to 3-5 business days that normal banks offer for wire transfers. Transparency of financial operations and increased trust for financial institutions could also change the perception of people and shift the “all bankers are crooks” mentality.

Opening new opportunities for employment, digital currencies will require even more knowledgeable blockchain experts and developers to keep building and maintaining the infrastructure.

Once the initial adoption phase has been completed, there will be even more work for analysts and government graduates to create legal frameworks and standards.

There may never be such an opportune moment for anyone with aspirations for a career in digital finance and if this is you, now is the time to learn more about it!