What the fish is Cryptocurrency? Part 1

It's all over the news. Good reasons, bad reasons but very few people actually understand what cryptocurrency actually is. Today we discuss Cryptocurrency for dummies!

Inventor of Bitcoin, Satoshi Nakamoto, owns 1 million bitcoins which is today Rs 24,00,00,00,00,000 (2.4 lac crores)

Well, long shot, trying to understand Crypto-Currency without understanding what exactly Currency is. So let's understand this first. And no, currency is not what you are carrying in your pocket, those are banknotes which carry a promise note - "I promise to pay the bearer the sum of *** rupees". Now you understand why it's a note and not currency? Congratulations, you've already learnt something new.

Currency

Try to imagine a time 1000 years back. If I would have taught students (which is a valued service I would give), the student would give me something in return for my service. Most students in Dehradun would have given me litchis in return because that was what was growing here. Let's say 100 litchis for teaching students Chemistry syllabus. In the end I would be carrying 1000s of litchis at home. Now to buy wheat for my family, I would carry some 100 litchis and trade them for wheat with somebody who had wheat or I would teach a student whose parents would then give me 100 kgs of wheat. This guy would eat some litchis and then trade 50 litchis for 100 tomatoes, then the 50 litchis would be traded for 100 potatoes, and so on. That's how trade happened from one person to another in early days. This was very difficult because I had to store 1000s of litchis and apart from teaching students, I would be running around trying to trade litchis with somebody who would give me wheat, rice, tomatoes, clothes etc. This was called barter system.


Then somebody in Mesopotamia (modern day Egypt) came up with an interesting idea. Why should we carry all the wheat, tomato, litchis around to trade. If you want litchis or tuition or wheat, you can just give a few metal coins in return representing the value of the product or service you want. Then I don't have to carry all the litchis, potatoes, tomatoes to sell and trade around Dehradun everyday and can focus on teaching my students. Simple and elegant solution. This concept of defining the value of every "good" and "service" in terms of an imaginary common unit was called Currency. So Currency is simply a store of value which can be traded to buy and sell any "commodity" - "goods" or "service".


But who decides the value of "goods" and "services" - it's done by the central bank of the country i.e. Reserve Bank (India), Federal Reserve (US), ECB (European Union) and so on. They decide what you can do with that one Rs or one US $ or one €. This is also called "Fiat Currency".


Imaginary?


Yes. Absolutely imaginary. It's only in our heads, this currency.


When something is imaginary, to be successful it has to buy faith of masses otherwise it will vanish in thin air. Like all of us have faith in Rupee or Dollar or Euro hence they are valid currencies in different parts of the world. Tomorrow if the world stops believing in a currency it will deteriorate and vanish. And this happens more often than we know.

Take example of Venezuelan Bolivar. The illegal activities, corruption, theft and scandals in Venezuela ruined the confidence of the Bolivar currency so the world lost faith in the value of the currency and it became useless. Today 1 INR carries the same value as 443 crore Bolivars. Same thing has happened to Zimbabwean Dollar in the past. And in a very small way today, thanks to the many hardworking honest individuals, few Indians through their corrupt, tax theft activities contribute to lower value of INR also. This must stop in your generation of educated Indians.


Today Dollar carries the most confidence and faith globally so it used to most international transactions between different countries in trade and commerce.


Crypto-Currency


Let's revisit what we learnt just now -

1. You know that currency is an imaginary store of value of goods and services. So crypto-currency is also an imaginary store of value.


2. You also know that central government controlled banks decide value of commodities in terms of the currency or the value of the currency.


Crypto currency attempts to bust the second point. It promises to create a democratic currency which is not controlled by central banks and governments. It is owned by the people of the world collectively. (Take it with a pinch of salt).

How will it do that? It's very simple, by buying faith of more and more people. When more and more people keep buying cryptos and more companies start trading their goods and services in return for cryptos, the confidence in them will keep increasing. When lot's of people have cryptos, shopkeepers will also want to have them and they will start exchanging clothes, potatoes, tomatoes, litchis and tuitions for cryptos. And bingo, trade in cryptos means it becomes a full fledged currency. This has already started happening in some parts of the world like USA and Canada. Example - Microsoft, Apple Pay etc.

If confidence in cryptos increases, people will sell their cryptos for more money because they think it is more valuable now. Which in turn will increase the value of cryptos. Seeing the value increase even more people will start exchanging (buying) their rupees and dollars and euros to buy cryptos like Bitcoin, Ethereum etc because they think that value will increase even more. This keeps happening until suddenly one fine day............... there is a theft or a scandal or a technical problem is detected and confidence falls down, people get scared and start selling cryptos to save their money.

When confidence falls down people are ready to sell it for whatever money somebody pays for it and so it's value falls down. Lot's of people lose their money because they bought it for more and have to sell it for less. Or they could wait if they have confidence in the crypto currency jumping back up.


So now you know why governments are concerned about it. Of course, there may be greedy reasons for the concern of all international governments but the key real concern is how will it work without any control of the government? Who will take care of theft, corruption, scandals and illegal activities if there is no government control? And these fears are not wrong. They are absolutely real because people do all these things, they are not all nice and innocent specially when it comes to money.


There is lot's to talk about Cryptocurrency to fit in one long boring blog. So we will continue in another blog. If you understood this blog then you can watch the bonus video about the fascinating mystery of the inventor of Bitcoin "Satoshi Nakamoto" who owns 1 million Bitcoins which is almost 2.4 lac crores rupees. Also remember to like, comment, subscribe to the blog and share with your friends and colleagues.


PS: This is a series of blog posts every weekend - Saturday and Sunday - for my students to learn and benefit from. A way for us to remain connected beyond school and tuition classes. I welcome suggestions from my students about the topics they would like me to research and write about. If your suggestion is selected, I will mention your name in credits of the blog. Please like, share and subscribe to the blog for more grown-up advice. Stay safe and stay connected always :).




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