Glossary
Why Bitcoin?
We have already seen that the appearance of Bitcoin has some relation to the global economic crisis of 2008. However, peer-to-peer electronic money is an old dream of cypherpunks, crypto-anarchists, and libertarians. The purpose is to remove control from a central government over the money used by them.
Historically, governments have managed currencies in strict partnerships with private banks. Central banks are not an invention of the remote past. The federal reserve, for example, the central bank of the United States, dates back only to the beginning of the last century. The relationship between money and private banks is much older, and the power of private banks is significant. Currently, they only need to hold a portion of customer deposits; the more substantial portion can be utilized in loans. This makes private banks able to create money.
The possibility for private banks to create money in only a partially regulated way can lead to banking crises, as occurred in 2008. The central government had to considerably increase its debt to rescue giant banks that lost . This is perfectly possible because it is up to governments to manage the country’s fiat currency. Thus, governments can print money, devaluating the currency.
Fiat money can be printed, but even before it, governments were already degrading their currencies, especially in the case of coins minted in metals. One way to degrade metal coins is to change their composition by adding lower-value metals. This process is known as debasement.
Whether through debasing or printing more banknotes, the currency’s value decreases, what leads to inflation. This causes the deterioration of the savings of its possessors. Recently, countries with little financial stability have gone through periods of hyperinflation, what leads, in extreme cases, to devaluation and complete loss of value of the local currency. Savings held in local currency lost their purchasing power overnight.
Cryptocurrencies like bitcoin are not tied to any regulatory power, and their coinage is controlled by a previously determined algorithm. Bitcoins, for example, are created at a decreasing rate, and only 21 million bitcoins will be minted by 2140. This fact can only be changed if most network users agree to change the protocol.
Although bitcoin is inflationary (new coins will be minted by 2140), its minting rate is known in advance, and its inflation is well established. There is no possibility of a central power altering inflation, leading to hyperinflation. over coinage is the responsibility of the community.
Other coins have different minting and destruction rates, controlled by their own protocols. Tokens created through smart-contracts have algorithms defined in the code. In general, cryptocurrency governance is democratic and transparent.
Crypto assets can be used as a store of value since it is not subject to arbitrariness. This may be a use case for citizens of countries with a history of little monetary stability. As the blockchain is for public use, it is the first time in recent history that anyone can create money with their own rules.
It must be borne in mind, however, that such cryptocurrencies have no intrinsic value, as they are not backed by any asset. Its value is defined by the market and the trust of its users. Although cryptocurrencies are unbacked, it should also be noted that fiat currencies are also unbacked and are only guaranteed by the banking institution, usually central banks.
Until August 1971, the dollar was backed by gold, but the end of the gold standard was decreed by President Nixon that month. Other fiat currencies were backed by gold through the dollar and thus lost their backing. From then on, central banks can issue money at will; currently, all we can do about that is trust our governments. And hope for the best.
