6 February 2020
We have come a long way in the last 3,000 years. Since the days of bartering for goods, we have progressed through various currencies to digital money, and only 12 years ago cryptocurrencies were invented. As these are becoming more widely used, this is a good time to learn more about them.
What is money?
The earliest coins date back to 600 BC, and it is believed that the Romans introduced minted coinage to these islands. Each coin was worth roughly its weight in whatever precious metal it was made of, usually silver, and coins were often used as a means of hoarding wealth, as opposed to everyday trade. For two hundred years after the Romans left, no coins were minted in Northern Europe, and the development of coinage as a means of facilitating trade is credited to the Frisians in the 6th century AD. Bank notes were introduced in Britain in the 16th century but did not come into common use until the 18th. For more than four hundred years, the value of a bank note was underpinned by an equivalent amount of precious metal held in a bank vault or by the government.
Currencies are now all based on trust, the trust that the institution (government or bank) that created the money will always be able to guarantee its value. In fact, hard cash now represents a negligible percentage of all the money in circulation; generally, money only exists as debits and credits on electronic ledgers. These ledgers are maintained by financial institutions and to some extent underwritten by government. The responsibility for creating new money usually rests with a country’s government.
Can you trust your bank or government?
Advocates of cryptocurrencies are keen to point out that currencies that are issued by governments and managed by banks are always in danger from corruption or mismanagement. In the financial crisis of 2008, investors were exposed to the severe threat of financial loss caused by the insolvency of several banks. Governments in the UK, USA and Europe had to step in by effectively creating new money. Such a measure is inflationary in most normal circumstances, and examples of inflation caused by governments creating too much new money exist today, Venezuela being an obvious case.
So, in 2008 Satoshi Nakemoto (probably not a real name) invented Bitcoin, a currency that does not depend on any government or bank, but is in fact controlled by its own protocols and algorithms. Its claimed advantages are therefore that it is free from political interference, its transactions do not require a middleman, so they are cheaper, and it can be used by the estimated 2.5 billion people in the world who do not have a bank account (provided that they have access to a smartphone or PC).
Can you trust your cryptocurrency?
As far as security is concerned, cryptocurrency transactions are claimed to be more secure than traditional bank transactions. Instead of depending on a ledger maintained by a bank, cryptocurrency movements are recorded in a blockchain (also known as a distributed ledger). This means that each block of transactions is recorded and replicated on the computers of all the thousands of blockchain participators throughout the world. Any attempt to falsify or alter a transaction would involve the impossible task of identifying and then gaining access to a huge number of computers simultaneously.
Bitcoin was the world’s first cryptocurrency and is now accepted by more and more traders. It is possible to obtain a debit card on a Bitcoin account and in the USA there are even Bitcoin ATMs. There are now several other cryptocurrencies, collectively known as ‘altcoin’. These include Ethereum, XRP, Litecoin and Tether. Tether is the only cryptocurrency whose exchange rate is pegged against other major currencies.
Coming up
So, how are new Bitcoins created without causing uncontrollable inflation, how do you obtain and use cryptocurrencies, should you trade with them and should your business accept them as payment for goods and services? These are the subjects of later blogs. If in the meantime, you need to know more about how cryptocurrencies may affect your business, contact me at a.hulse@uhy-uk.com , or use our contact form.
