Basic economics of Cryptocurrency
Unlike regular fiat currencies, cryptocurrency is not tied to a central bank that is controlled by a government. Instead, it is regulated by complicated mathematics and a public log called a “blockchain.” Blockchain acts like a public ledger, keeping record of all transactions. Cryptocurrency is digital property with a numeric value that can be recorded like a cashbook, checkbook, or another bookkeeping method of an account. However cryptocurrency is not actual legal tender currency. Cryptocurrency can be traded for other cryptocurrencies or can be traded for regular money online. In some cases, cryptocurrency can be traded for goods or services, but this is not common in the USA.
Cryptocurrency internationally
For many decades (with a few exceptions) the US dollar has held a high value compared to most of the other nation’s currencies. This naturally eliminates desire for any changes to the currency system among Americans. But with other nations such as China and the European nations, trading cryptocurrency for goods and services instead of using their nation’s regular currency is more common.
The less valuable a nations currency is, the greater the desire becomes to try an “alternative.” Cryptocurrency can become that “alternative.” But trading with cryptocurrency does not make cryptocurrency actual currency. It’s really just bartering digital property that has a numeric value like money.
With cryptocurrency being a fairly new thing, it has become that “alternative” for some groups among the foreign nations with a currency of low value. If any nation or localized economy experiences hyperinflation, it will greatly devalue their currency. In this situation, having an “alternative” such as cryptocurrency will become highly desirable. Trading cryptocurrencies for other types of cryptocurrencies can be similar to trading foreign currency for other types of foreign currency.
A little history and conceptualization
The first cryptocurrency was “Bitcoin” because Bitcoin was first to use “blockchain” to create cryptocurrency. Bitcoin, the first blockchain cryptocurrency, was created by an unknown person or people using the pseudonym Satoshi Nakamoto. This person or group of people intended to offer a peer-to-peer digital cash system with the use of peer-to-peer networking. This would remove the need for keeping money in banks. It would be like everyone using cash for trade, and never depositing money into a bank, except it would be digital so you wouldn’t need to carry physical money.
Instead you would carry your smartphone and access your cryptocurrency from an app on your smartphone. Also, you could use a computer as well. You would basically be your own bank, holding your cryptocurrency in an online exchange and/or in your own digital wallet. However, it’s not really a “cash system”- it’s a digital property trading system, with fees (of real money) for transactions.
Crypto ideology
Some have speculated that the unknown person or group of people using the pseudonym Satoshi Nakamoto, who created bitcoin, had the idea and/or mind set to create a universal digital currency for the purpose of replacing other currencies. However, things have changed since Bitcoin was first created. Today there are more different and separate cryptocurrencies than there are nations on earth with regular fiat currencies. So the idea of Bitcoin (or any cryptocurrency) replacing conventional money just isn’t realistic anymore.
Imagine if in the United States, every state, county, city, zip code, and neighborhood used its own separate currency with its own market value for buying and selling. That’s what it would be like if the dollar was dumped by all Americans and replaced with cryptocurrencies. That would be terrible for businesses and consumers alike, as the real cost of everything would be in a constant fluctuating state of chaos. It would be a really bad digital bartering system in place instead of a monetary system.
People would be bartering cryptocurrency for other types of cryptocurrencies to obtain the right type of cryptocurrency to make a purchase with a cryptocurrency that a seller accepts as a form of payment. Businesses would not be able to accept all forms of cryptocurrency. This is because cryptocurrencies all have a different market value and it would be impossible for most businesses to have different price tags, one unique price tag for every type of cryptocurrency (which comes with a fluctuating market value), for hundreds of different cryptocurrencies, for every product they have on the self for sale.
Having a universal currency, or at least a single national currency, for all citizens to use for buying and selling, is better for buyers, sellers, business, and individuals. Remember, the monetary system was invented to be better and superior to the bartering system, and the monetary system is better and superior to the bartering system, centuries of trade have proven this to be true.
Basic economic conceptualizations
Banks do not like this idea a peer-to-peer digital cash system with peer-to-peer networking, because this would theoretically remove the need for keeping money in banks. “Crypto-phobia” is a term coined (no pun intended) to be defined as “the fear of cryptocurrency.” Crypto-phobia runs deeply in banks. This fear of cryptocurrency is unfounded and based on illiteracy of cryptocurrency. Financial institutions simply fear what they do not understand. Fear of the unknown is a natural human feature. The reason this fear of cryptocurrency is unfounded is because cryptocurrency is not really a digital cash system.
Despite any efforts made by the bitcoin creators to make bitcoin a digital cash system, cryptocurrency is simply not a digital cash system, it’s a digital property trading system. Some people may hype cryptocurrency to be a digital cash system in their pursuit of personal gain. However, it’s still a digital property trading system, not a digital cash system. Bitcoin is a cryptocurrency, and all cryptocurrencies are digital property, not digital cash or actual currency, and therefore not a digital cash system. Anyone who claims otherwise has most likely been fooled by others into thinking cryptocurrency is a digital cash system.
Beware, there are many being fooled into thinking cryptocurrency is actual currency. This deception comes from false hype and predatory sales tactics. However, cryptocurrency is digital property which is an intangible financial asset, and is not cash or actual currency. This is explained in detail on our “What is Cryptocurrency?” webpage. It is highly recommended that everyone read our “what is cryptocurrency” webpage before continuing to read any other of our website pages. (Reading and understanding the information provided on our “What is Cryptocurrency?” webpage is considered a prerequisite for beginners, and should be completed before they continue on with learning the information provided by our other website pages.)
Receiving cryptocurrency as payment
Banks would never, and should never accept cryptocurrency in-lieu-of “legal tender” currency. Private companies can accept any form of payment or compensation they see fit; however, they need to keep track of their revenues in real money (dollars) for taxable income reporting. Public companies have more strict revenue recognition and financial reporting requirements for shareholders, stakeholders, and tax reporting. If a public company accepts and receives cryptocurrency in-lieu-of “legal tender” they will still need to either convert it to dollars and recognize the dollar amount as revenue, or report the cryptocurrency as an intangible financial asset on their financial statements.
Crypto-phobia in Government
Crypto-phobia exists in the government as well. Some government officials do not like this idea of a decentralized peer-to-peer digital cash system because they like to control centralized banks with banking laws and control the interest rates of central banks. Where there is money there is power, and government control over central banks gives the government a lot of its power. The idea that the businesses and the general public could just switch over to cryptocurrency and not need banks anymore if they don’t want them, can be a terrifying thought to many high-ranking officials who want to hold on to power over the banking system. But luckily for the government, simply switching over from US dollars to a cryptocurrency isn’t that simple, and it’s simply not realistic, so they don’t really have reason to fear cryptocurrency.
Debunking a cryptocurrency myth
Cryptocurrency will not replace U.S. cash and become the new U.S. currency. Unlike when it was brand new, Bitcoin now has many cryptocurrency competitors. It would be ridiculous to think each of the hundreds of different types of cryptocurrencies could act as a replacement for the one actual US currency (dollars). Cryptocurrency has its rightful place as digital property, a nontangible financial asset. But to say: “cryptocurrency will replace cash and become the new currency” is much like saying “Baseball trading cards will replace cash and become the new trading currency.” But that has never happened.
There might have been a time (for those who remember the frenzy surrounding baseball trading cards of the mid 1980’s, before smartphones and common internet connections such as Wi-Fi) when it may have seemed like baseball cards could have become a new form of currency. In March of 2020, there were those who said toilet paper was going to become the new currency. (come on now, don’t pretend like you don’t know what I am talking about here! ) But it was just Covid-19 craziness hype!)
Moving on, cryptocurrency is digital property which is an intangible financial asset. Despite the hype, cryptocurrency is not cash or actual currency. The idea that businesses and the general public might just switch over to cryptocurrency and not need banks or real currency anymore, is really just a fantasy dream made-up and hyped-up by (mostly foreign to mainstream U.S. culture) cryptocurrency techies who own (and perhaps digitally created) a lot of cryptocurrency. These people probably dream of owning a vast majority of societies currency. (I suppose most of us dreamed of owning all the money at some point in our youth, but then we moved on into reality.) So when you hear such roomers floating around the internet or elsewhere, there is no need to be concerned.
A more reasonable posture
Knowing that there is no reason to fear cryptocurrency, you may be tempted to just forget about cryptocurrency altogether if you are not a fan of it. However, it is highly recommended to learn enough about cryptocurrency to gain a solid understanding of the basics. This is because cryptocurrency isn’t ever just going to go away. It’s pretty safe to say that cryptocurrency is here to stay, just as smart phones are here to stay. They both just change overtime.
It is common place to spend some time learning the features of your smart phone and how the apps are capable of helping you out. Spending some time learning the nature and features of cryptocurrency (little by little over time) may someday benefit you when you become confident in your knowledge of cryptocurrency. Anyone who has ever used their map app on their smartphone understands the value of knowing how to use their map app, especially when they need it the most. In the same way, learning about cryptocurrency little by little over time, will most likely make your day someday under the right circumstances when you become confident in your knowledge of cryptocurrency.
As explained earlier, the term cryptocurrency is somewhat misleading. Currency is money and cryptocurrencies are digital property. This is important to understand, yet eludes most people who are new to cryptocurrency. Cryptocurrencies are digital properties that hold a market value. The market value is based in dollars (or a nation’s regular money). The value of cryptocurrency is based on how much money (regular dollars) you can get in exchange your cryptocurrency. (aka its market value.) So hypothetically, if everyone were to dump the dollar to go with cryptocurrencies such as bitcoin or Zcash etc. it would eliminate the ability of cryptocurrencies to have its market value (because the dollar would not be in place if it were dumped. No dollar = no market value, because the market value is based in dollars)!
This would eliminate the basic principle of market value for cryptocurrencies, since the dollar would not be there anymore for measuring the market value. If hypothetically, such a thing were to happen, then everyone would be bartering digital property without a market value. (Because for market value to exist, the common denominator being dollars, has to have universal value.) Regular money as we know it would be gone or considered useless. This would be bad for both business and consumers alike. Money was invented to be a superior trading tool than bartering, because money provides a numeric value for fair pricing of everything. With bartering, everything is up for negotiation, and there isn’t a stable fair market value to provide fair pricing. This would be bad for both business and consumers. Therefore, it is not in the best interest of the general public to dump the dollar and go cryptocurrency only. Perhaps it would be different if there was only one cryptocurrency in existence, but that is a big “maybe,” and that simply will never be the case because there are hundreds of different cryptocurrencies.
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