Unless you never watch the news, you likely have heard of a new technology called cryptocurrency. Most likely you will recognize the term Bitcoin even if you don’t truly understand what it is. There are many many resources out there from which to learn about cryptocurrencies, what they are, and the purpose they serve. However, I would like to tell you why they matter and why you should care.
The purpose of a market is to connect a buyer with a seller. As you can imagine, the demands of millions upon millions of people are quite diverse. It is literally impossible for any person or group of persons to determine with any degree of accuracy what to produce, in what quantities, and at what price. Therefore, the true commodity in a market economy is not necessarily the goods but the information. The reason why a capitalist economy will necessarily always be more efficient and productive than any other type of economy is because of the manner in which information is shared.
In a market economy prices reveal vital information regarding not only what goods should be produced, but also what goods should be purchased. One of the fundamental flaws of modern economies is the degree of manipulation effected by the government. When a government (or any entity) has sole power over the monetary system they have the ability to not only manipulate all prices more or less simultaneously, but individual prices in specific sectors. This allows motivated individuals to utilize government in order to enrich themselves at the detriment of the rest of society.
This is where cryptocurrencies come into play.
Cryptocurrencies such as Bitcoin utilize a technology called a distributed ledger system. Essentially this is a record book which is open to the public and is kept on thousands or even millions of different computers around the globe. This distributed ledger, known as the blockchain, keeps a record of every transaction which takes place within the system.
In a typical market transaction today, two people go through at least one intermediary in order to facilitate a trade. For example, person A uses a credit card to purchase a good from person B. Funds in person A’s account are only sent to person B’s account after their individual banks agree that funds are available and they transfer the funds between them. Utilizing a distributed ledger system such as Bitcoin allows the market to eliminate the middlemen. When person A buys a product from person B, the funds go directly from one account to the other without the need for external authorization. In theory, this increases efficiency of market transactions. When an exchange such as this occurs, the trade is written to the blockchain and is sent and verified by thousands of separate computers known as nodes. By distributing the verification process it becomes virtually impossible to manipulate or defraud a person’s account.
Contrary to popular belief, cryptocurrencies are not limited solely to a medium of exchange. (Thus my hesitation to call them “cryptocurrencies.”) Cryptocurrencies, for lack of a better term, are also able to be utilized as smart contracts. These smart contracts, among countless other things, enable funds to be held in escrow until certain contractual obligations are met. Next generation cryptocurrencies are allowing even computing power to be shared and distributed widely.
What this all boils down to is that centralization of many aspects of society is about to end. As stated previously, the purpose of a market is to distribute information in an efficient manner. Cryptocurrencies are able to distribute information more securely and effectively then any single entity is capable of doing today. They will dramatically change the way the economy functions as we know it. In effect, they will usher in a revolution of change akin to the Industrial Revolution.
When the internet was first adopted it was looked upon as a mere curiosity and something for which only geeks had any interest. Today, the internet is vital to almost every aspect of human life. Similarly, we are now in the early adoption phase for cryptocurrencies. The vast majority of people see them solely as a curiosity and perhaps of no economic consequence whatsoever. However, make no mistake about it: they will dramatically affect life as we know it.