At their core, all currencies rely on trust. Selling an old book for a little extra spending money? You trust that the money you gain will retain its value and that you will be able to use it again. But what confirms this trust? For national currencies, a central government vouches for the currency and regulate its use. Cryptocurrencies have changed this. No government backs them or claims they have value. Trust is still required, but that it is determined by the holders of the money, and that’s a big deal.
“Cryptocurrencies are digital gold. Sound money that is secure from political influence. Money that promises to preserve and increase its value over time. Cryptocurrencies are also a fast and comfortable means of payment with a worldwide scope, and they are private and anonymous enough to serve as a means of payment for black markets and any other outlawed economic activity,” according to Block Geeks, an online resource for learning blockchain coding, a key tool used in cryptocurrencies.
So how do these digital forms of currency create that needed trust? It’s all based on miners and the blockchain, as well as a little personal greed. To best explain it take a simple transaction using a cryptocurrency. A person first requests a transaction using their private key, a random set of numbers and letters generated from a seed. A seed is simply a starting set of words. This private key is a way of proving identity, and according to Steven Johnson, a writer for the New York Times, “there’s no known way to reverse-engineer the original phrase from the key.”
When the owner of a private key wishes to make a transaction, that key is “broadcast out to an improvised worldwide network of computers that tries to verify the transaction. The results of that verification are then broadcast to the wider network again, where more machines [also known as miners] enter into a kind of competition to perform complex mathematical calculations, the winner of which gets to record that transaction in the single, canonical record of every transaction ever made.” This list of transactions is called the blockchain, and each block is a set of encrypted transactions. Once the block containing the transaction is added to the chain, the transaction is complete, and the payment goes through.
This system is what makes the blockchain secure. Every few minutes, a new block is added and the entire chain changes. If someone wished to hack the blockchain, they would need to be able to do it before a new block was added.
Despite all this, when using cryptocurrencies to perform transactions, the user experience hardly differs from that of using a credit card. However, there are large implications with these behind-the-scenes changes, most of them economic. No government backs these currencies, making them highly vulnerable to changes in the market. At the time of this article, Bitcoin took a 15% drop in value. The crash occurred after “China indicated it would block access to platforms that allow centralized trading both inside and outside the country.”
Even with these vulnerabilities, cryptocurrencies do not seem to be going anywhere. Investorplace, a leading investing and financial news site, reported that as China cracks down on cryptocurrency, “Russia, North Korea and Venezuela all step up their use of cryptocurrency to get around sanctions. Russia has talked about trading cryptocurrency on official exchanges, Venezuela about launching a cryptocurrency backed by its oil, and North Korea has been reportedly stealing cryptocurrency through state-paid hackers.”
That is the amazing and terrifying power of cryptocurrencies. They have zero control, there is no centralized body to decide how this virtual money is spent or used, allowing for unlimited personal financial freedom and the perfect currency for illegal economic activities. The final thing to remember about these currencies: they can be very volatile and unpredictable. One Bitcoin is currently worth $10,966.99, but that is down almost $3,000 in three days. So even though the market looks pretty good now, don’t count on Bitcoin to help pay your tuition in the future.