Layman's Guide to Cryptocurrencies Part One: Unbacked Money!?

This article is part one of three. It covers an introduction to Cryptocurrency, and why Cryptos are worth anything at all. Part two covers the more technical aspect of it: how it works, what some of the "buzzwords" mean like mine, hash, wallet, difficulty, blockchain, pool, and so on. The third and final part will cover the differences in different Cryptos, and why not all Cryptos are created equal. In all of these I will attempt to explain things in layman's terms, for the benefit of even the most casual of reader.

I officially started my Crypto-Journey this past year (2017). I know, I know, I'm sure so many are thinking, "Well I was into Bitcoin before it was cool!" And no doubt that's true. I'm sure to so many at this point, I look like nothing more than a bandwagoner, hopping in at the same time as everyone else jumping on the train. But that's not the whole story.

While my Crypto-Journey of mining and investing began in 2017, my interactions with Cryptocurrencies goes back a few more years. However, like many others, I was too skeptical at the time to take it as a serious investment. You see, back in 2011, a former coworker of mine at the time was trying to convince me to invest in Bitcoin (BTC). Buy it, mine it, whatever was needed. He told me all I needed to do was invest $500 and one day I'd be rich. Let me pause here for a moment and explain the immense sorrow and regret I feel looking back at this.

In 2011, around May when I first heard of it, the price of one Bitcoin was about $3.50/BTC. Meaning if I had exchanged $500USD for BTC at that time, I would have received over 140 BTC. Right now, BTC sits around $15,000/BTC, meaning my initial $500 investment back in 2011 would be, at this moment, worth approximately $2,000,000 (that's Two Million). But that's my lamentation for now, so let's get back to the topic at hand before I stop to kick myself again.

Like so many, when I first learned of Bitcoin, I said, "So it's a digital currency, made out of thin air, and backed by nothing? Then it has no value. It'll never work, and people will never use it." Silly me, complaining about how "real" money is supposed to be backed by silver and gold (or perhaps for more industrious nations, even oil). You see, I failed to realize two important facts.

First, I was too busy holding onto what little amount of US Dollars I had at the time, thinking it was "real money." But it isn't. The US Dollar is centralized, meaning it is controlled by the Federal Reserve Bank and the US Government (the former more so than the latter). They determine what to do with it, when to print it, and so on. The Dollar is not backed by silver and gold anymore, though it was for many years. So this then begs the question leading to our second fact: why is the US Dollar worth anything?

You see, anything of value is only worth something because someone else is willing to exchange it for a given good or service. In short, money is only worth something because two people agree that it is. That's it. And you can exchange with anything. I might think a cow is worth two goats. If my neighbor agrees, then I can trade him two goats for a cow. But let's say he thinks a cow is worth three goats. What then? Well, if I agree with him, that a cow is indeed worth three goats, and I trade him three goats for a cow, then that cow has a value of three goats. Now let's throw money into the picture. Let's say that I use silver coins of a given size, shape, and weight (also previously agreed upon by our whole town). So if we all agree that one silver coin is worth one goat, then I could also equally trade my neighbor three silver coins for his cow. Or trade a silver coin to someone else for a goat.

Do you see where this is going? All of this is meaningful and valuable because people agree that it has value. Right now, people agree that one BTC is worth about $15k. Now maybe not explicitly – that is, you're not going to hear most people say, "I think a Bitcoin should be worth $15,000" – but implicitly it is. Due to the economic laws of supply, demand, and scarcity.

Because if I am the only person in the world who wants something, and there's a lot of it, it's not going to be worth much. No one will trade their silver coins or goats or Dollars with me for something they don't want. But when more and more people start wanting the same thing, especially when there is a limited supply of that thing, now it is worth something. Demand for that thing increases, and price increases with it. If supply also increases steadily with that demand, it will hold its value steady. However, when demand outweighs the available supply, the price increases accordingly.

To go back to our primitive example, think of the cows and goats again. A cow is worth three goats, right? Well what happens when there is a shortage (scarcity) of cows? What happens when fewer cows are available, but people still want them just as much, or even more so? Well now the value of those remaining cows will increase. If I have two cows, and decide to sell one, I may now charge four goats or six goats for it. And the person wanting the cow is now willing to also pay me with that many goats, since cows are harder to acquire.

So it is with BTC. When only a handful of people wanted it, there was enough to go around relatively cheaply. But when more and more people learned about it, they wanted a piece of the growing pie as a means of investing their wealth and growing it. So demand increased, and in our case it increased drastically. Since BTC is mined (we'll look at mining in part 2), there is an increasing supply. But it is not increasing quickly enough to meet the rising demand, and as such, the price goes up.

Now before closing out, I want to make my predictions and explain why I believe in Cryptocurrencies. I believe in the coming year (2018) and especially in the years following, we will see massive adoptions of Cryptocurrencies as methods of payment. Some places already have adopted crypto payments, and others are considering it now. Websites like Overstock.com (O.co) are already accepting it as payment, and in the last Qtr of 2017 they saw an increase in business by 250%. A leading executive at eBay has announced that they are looking into accepting Crypto payments. A company in the UK has started a business that offers Crypto debit cards. You link the card to your Crypto wallet (basically an account where a given Cryptocurrency is stored) and use it just like any other credit/debit card. But instead of pulling dollars (or in the case of the UK, pounds) out of your account, it pulls Crypto out and pays the vendor in pounds. Bitcoin ATMs are popping up all across the US now, allowing you to withdraw in cash from your BTC wallet. Schools, Churches, and other organizations are looking into accepting Crypto.

I predict 2018 will be the year of Crypto Implementation. More vendors, more acceptance, and easier ways to utilize Cryptocurrencies in the real world.

I realize that many people are still skeptical. They call it a bubble. They say the downfall is inevitable, that it'll never replace fiat (dollar, pound, euro, etc.) currencies. Well maybe not. But when credit cards first came out, most people said checks and cash would stick around forever. No one would use those cards if they have to pay a fee. No small business or artisan would ever accept them. Yet as always, a freer market has prevailed. Companies began to make it easier to pay with cards, and corporations like Square even made it possible for the small time artisan, photographer, painter, baker, and writer to accept card payments. And on that same note, when was the last time you saw someone buying dinner with a check? Or paying for gas with a check? Checks are disappearing, and cash is following behind it. Cryptocurrency is the next logical step, and while it'll likely never replace fiat monies completely, it will certainly add competition. And competition is always good for the consumer (you and me).

One final thought. I've found that some people are afraid of Government retaliation. Some countries are already cracking down on Cryptos. It's sad, but also expected, when people begin to exchange goods and services without letting the Government in on the transaction. However, at least for those of us in countries like the United States, we can pretty well rest assured that Cryptos will be around indefinitely. You see, the Supreme Court has already ruled that computer code is free speech. All a digital currency is, in essence, is computer code. Your wallet is digital, the blockchain is digital, the exchange is digital, and so on. Free speech cannot simply be cut off at the will of the dominating bureaucrats. While they will no doubt work hard to slow it down, hinder it, and regulate it, they will never be able to outlaw it. They'll work on companies like Coinbase, to make sure they can find a way to take their taxes. They'll crack down on exchanges that don't meet SEC and FTC regulations. They'll want to know who has how much and where. But in the end, regardless of what We the People allow them to implement, they can never ban it.

And those are my thoughts on the matter. I hope this has offered a coherent example of why Cryptos are in demand, why they have value, and why I and many others believe they are the future of money.