A cryptocurrency is electronic (digital) “money” that is not issued by a government. There are no physical coins or paper notes – although some have been produced to provide marketing awareness. Consumers of a certain age and disposition just don’t get it because it’s tied up in computer programming that is unfathomable to non-geeks. However, it is certainly something that deserves attention.
The lazy excuse for not being interested is that it will never catch on because it can easily be manipulated – not being controlled by central government and not having a touch and feel impact. But the nonsense of that last sentence is astounding. What we call money today (euros, dollars, sterling) is currency that a government has declared to be legal tender but is not backed up by anything other than trust. The unshakeable belief that a piece of paper with €50 emblazoned on front and back can be exchanged for goods and services. If this belief in trust ever became suspect the whole system would unwind – badly.
The current type of money that we use is called fiat money meaning that it is not backed up by anything other than unsubstantiated trust – fiat translates from Latin as “so be it” or “it shall be”. The French voilà may be just as pertinent.
Cryptocurrencies are not illegal but they cannot be declared legal tender because they are not issued by sovereign governments. Instead they are issued as a form of currency calling for the same level of trust as with standard fiat money. (The US government, for example, has declared cryptocurrencies to be commodities and not money). Fundamentally, consumer acceptance comes down to whether users trust the issuers of cryptocurrencies more than they trust the issuers of fiat money. With the confidence in governments at historic lows this threshold may be easily met.
The value of fiat money twists and turns on the twin functions of demand and supply. The demand comes from consumers who trust the money. The supply is satisfied by the issuers (governments) and retail banks (providing new loans in fiat money). Money can be devalued at the whim of governments. On the other hand the supply of cryptocurrencies is determined by a computer programme and the demand comes from those who trust the money precisely because it is outside the control of central government and cannot be devalued by any government agency.
It is not unknown for consumers to switch from one currency to another (holidays) or to invest in shares, commodities, property, etc. as values ebb and flow. But to-date all of this activity is denominated in fiat money. If the matter of trust in cryptocurrencies could be overcome it would make perfect sense for consumers to consider investing in a form of money that cannot be devalued by a government and that would preserve wealth.
The technology underpinning cryptocurrencies is called blockchain and the “techies” say it’s robust. [Think cryptocurrencies using blockchain just like e-mails using the internet]. Blockchain is a giant digital accounting ledger of all transactions and it is likely that the know-how will be rolled out into other areas soon (compiling land registries; operating peer-to-peer stock exchanges). When consumers come to accept that there is no bank and no government – cryptocurrencies will gain in popularity!