The World of Cryptocurrencies
Very frequently we are hearing information about bitcoin moving with a lot of volatility, that there is no regulation of them, some that say that it is a bubble and others that it will be the future of the financial business. All this seems something far away even for our reality far from the markets traded by the great powers. But since this world is at breakneck speed, I had the opportunity to meet one of the world’s largest crypto brokers and almost simultaneously a foreign provider asks us to pay him in bitcoin and not in the usual currency. This generated consultations with local regulations, opening the door to the world of cryptocurrencies.
What are cryptocurrencies and how do they work?
Cryptocurrencies are a new asset class designed to function as a medium of exchange. The first cryptocurrency was designed in 2008 and first entered into circulation in 2009; that first cryptocurrency is Bitcoin.
As of today, there are more than 8,400 cryptocurrencies in circulation and it is expected that the number of coins and their value will continue to increase in the near future.
The first cryptocurrencies were conceived as a means of transferring and preserving value like any sovereign currency and precious metals such as gold and silver. Subsequently, other uses have been developed, including content distribution platforms such as YouTube, social networks such as Facebook and storage sites such as Dropbox, just to mention a few.
Who invented cryptocurrencies?
In October 2008, an author or group of authors under the pseudonym Satoshi Nakamoto published a text called “Bitcoin: A Peer-to-Peer Electronic Cash System” in which the bases on which a decentralized digital currency is proposed, that is to say, that it does not depend on or is supported by a central authority (government) and that it does not require an intermediary to be carried out, but is entirely maintained by the network of users (nodes) that uses it.
In technical terms and trying to summarize.
How do cryptocurrencies work?
Cryptocurrencies are based on a technology known as “Blockchain” (chain of blocks) proposed by Nakamoto in his original text. The blockchain is in accounting terms a distributed ledger (book where accounting transactions are kept and recorded) (anyone can have a copy of the ledger) and is programmed to be updated every certain amount of time, in Bitcoin. These blocks concentrate all the transactions made in that space of time and are validated by the users in order to maintain the integrity of the network. If there is a block that is adulterated or different from the rest, it is automatically discarded and invalidated, so it is not part of the chain.
The participants (nodes) that act as validators and protectors of the network are known as miners. Miners use computer processing power (electricity) to solve a mathematical problem designed by the system. The first node to solve the problem is rewarded with coins for the service provided to the network as well as rewards for the expenses incurred in performing this task; in the case of Bitcoin, the reward is 12.5 BTC
In summary, mining has two objectives:
1) Ensure the integrity of the network and
2) Establish the mechanism by which new currencies are introduced into the system.
Are cryptocurrencies money?
The first reaction that many people have when reading or hearing that Bitcoin is a form of digital money is skepticism. Why does it have value if there is nothing to back it up? How can I trust a currency that is not regulated? Who and how determines the value? These are some of the most common questions. To better understand it is healthy to remember what parameters have what we accept today without problems as money.
Money is a tool that facilitates the exchange of goods and services in a society. By definition, for an asset to be considered money, it must fulfill the following three functions:
1. To be an instrument to transfer value
2. To be an instrument to store value
To be an instrument that can be used to measure and compare value.
A bit of history
In 1944 an agreement known as the Bretton Woods Agreement was reached in which 44 countries agreed to the creation of sovereign currencies pegged to the dollar while the dollar was pegged to gold. In 1971, the U.S. government cancelled the convertibility of the dollar to gold and thus most of the world’s currencies were left with no backing other than the issuing government’s promise to pay. This system is known as fiat money and is used by most countries today. This means that pesos, dollars and other sovereign currencies, unlike popular beliefs, are not backed by anything more than a promise to pay.
In short, a 1000 peso bill is worth that much because we trust that tomorrow someone else will accept it and take it as valid for a value equivalent to 1000 pesos without having an intrinsic value. Let’s remember that at the end of the day, a ticket is a piece of paper.
Digital currencies fulfill the functions of money and also share its properties. Let’s take Bitcoin as an example: Bitcoin can be used to make transfers of value almost instantaneously and at a very low cost to any part of the world. It also fulfills the function of preserving value, it is enough to have a “Wallet” to store them safely. Additionally, Bitcoin is highly portable, liquid, divisible (up to 8 units), that is, the smallest unit of Bitcoin is 0.00000001 BTC also known as “Satoshi” in honor of its creator and it is also highly secure and practically indestructible. This is how the world of cryptocurrencies works.
The world of cryptocurrencies
It is for these reasons that Bitcoin and other cryptocurrencies can be considered a form of money. Like the current monetary system based on a promise to pay and a collective agreement to be accepted as a means of payment, Bitcoin has value because its user network has determined it based on supply and demand. In addition, Bitcoin generates value for society today by being used as an additional tool for trade, it also offers a savings option to populations that do not have access to banking, and serves as a hedging tool for sovereign currencies in crisis. economic and political.
There are already a number of industrial and banking companies that have accepted this currency such as Tesla, PayPal and BBVA along with countries like the USA, Japan, China and others that have cryptocurrency assets circulating. Many countries are seriously analyzing the incorporation of this type of currency through their central banks.
This is mainly due to the ease and cost savings of transfers without intermediaries and at almost instantaneous speed.
Traditional banks are forced to mutate, since there are platforms that allow you to broker cryptos as local currency, transfer to any part of the world and even take placements with a crypto base, dollar, gold or other assets.
A lot of information to digest suddenly, but it is what is already in force and growing.