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This is a 3-minute read...
Flashback to 2008
Michael Phelps broke the record for most gold medals in a single Olympics, Barack Obama was elected president of the United States, and we witnessed the most consequential financial meltdown of the past 50 years. While Wall Street got bailed out by the government, everyday workers lost their jobs, retirement funds, and savings, setting the stage for a major money plot twist.
On the heels of the financial crisis
Bitcoin entered the scene. In 2008, The Bitcoin Whitepaper, an 8-page document outlining exactly how Bitcoin would work, was sent out pseudonymously to a small email list of cryptography enthusiasts. In early 2009, the first version of the technology became available. Anyone could download the Bitcoin program from the internet and run it on their laptop.
But what is Bitcoin?
Bitcoin is a decentralized digital currency, stored and exchanged over the internet. The total supply is fixed at 21 million coins, and the technology enables users to easily transfer the currency anywhere around the globe without requiring a middleman like a bank or payment processor. No single authority controls the system... which begs the question: who controls the current system?
Money is power, right?
Governments have a lot to gain by controlling the money supply (and they always have). In simple terms, “controlling the money supply” is the ability to create new money and determine interest rates. In the United States, this responsibility sits with our central bank, The Federal Reserve (which has a fascinating history that we’re not going to get into right now).
Responsible money management can be an economic boon — it’s a good thing when new money (usually in the form of credit —i.e. loans) can get into the hands of responsible business owners, or support infrastructure, healthcare, or education initiatives. This leads to innovation and improved quality of life.
However, when new money is created, but not allocated to channels that create economic value, the consequence is inflation (and sometimes even hyperinflation). Money supply mismanagement disproportionately hurts a certain group. I’m talking about anyone saving money in cash.
We feel the effects of inflation through increases in the prices of goods. If people are holding dollars in their savings account while this is happening, those dollars are slowly losing their purchasing power. You’ve probably noticed the impact of inflation at places like the gas pump and in the grocery store.
Net-net: we can think of money supply mismanagement as a regressive tax on savers. And that’s a bad thing! Most people are at the very beginning of their financial literacy journey and have no idea how to get around this issue. In other words, inflation is a tax on the poor.
Some governments around the world are especially bad at managing their money supply — combine that issue with a lack of access to basic financial services and corruption, and an alternative to the current system starts to look pretty attractive.
Who controls crypto?
This probably sounds a little funny, but crypto isn’t really “controlled” by anyone. That’s why we call cryptocurrencies “decentralized”. They operate on open, peer-to-peer networks of computers. The transactions and balances are secured and managed through a technology called the blockchain. We’re going to be diving deeper into the blockchain in a few emails, but here’s the high-level gist:
A blockchain is an unchangeable record of all the transactions ever made in a certain cryptocurrency. Another word f:or that function is a “ledger”. Transactions are sent and verified through a mechanism that allows a bunch of independent, distributed computers to validate that people have the money they want to send (no overspending, thank you very much), and updates those balances when transactions are complete.
Again, more on the blockchain (miners, nodes, blocks, etc.) to come.
The Crypto Contenders
In the 13 or so years since the creation of Bitcoin, other cryptocurrencies have entered and exited the mainstream. Altogether, thousands of Bitcoin replicants (colloquially termed “altcoins”) have been spun up. By market capitalization, transaction volume, and basically all other relevant measures, Bitcoin and Ethereum sit atop the rankings of popular cryptocurrencies at #1 and #2.
In the next post
We’ll be talking about Bitcoin and Ethereum’s wild and volatile rise from obscurity to frenzy to household names. After that, we’re diving into the technology itself and the major differences between these two assets.
Read Part 2 now...
This page contains general information and does not contain financial advice. All investments involve risk. Any hypothetical performance shown is for illustrative purposes only. Actual investment performance may be different for many reasons, including, but not limited to, market fluctuations, time horizon, taxes, and fees. Please consult a qualified financial advisor and/or tax professional for investment guidance.
