Humanity has long relied on physical currency as a means of representing and transferring value.
Some of the earliest examples of coinage date back many thousands of years. The Mesopotamian shekel is believed to be the oldest currency. West Asian tribes first coined the shekel, which means “weight,” 5,000 years ago. This example of ancient coinage predates the construction of the Egyptian pyramids and even the extinction of the woolly mammoths.
Digital currency, by comparison, has a significantly shorter history and represents the first time that humanity has introduced a purely non-physical currency. Because of this, a variety of misunderstandings have been able to spread regarding the legitimacy of digital currency.
Let’s explore some of the myths surrounding this new coin.
What is a digital currency?
In the early 1980s, the American computer scientist David Chaum published an article outlining the concept of a purely non-physical currency secured by cryptography. By 1990, he had launched the coin through his company, DigiCash.
Known as eCash, it became the world’s first pseudonymous form of digital currency, protected by cryptography and not issued by the government.
And it did not exist physically.
Some of eCash’s best features, such as anonymity and cryptographically secure payments, appeared in other projects. These offshoots include Adam Back’s Hashcash, Wei Dai’s B-Money, and Nick Szabo’s Bit Gold.
Then, in 2008, a programmer using the alias Satoshi Nakamato published the Bitcoin White Paper. It was a nine-page document illustrating a new type of cryptographically protected electronic money that built on the foundations of its predecessors.
A year later, Nakamoto launched the Bitcoin protocol, bringing to life the world’s first practical digital currency.
What is a digital currency?
Generally speaking, a digital currency is any type of money that is exclusively non-physical. There are several components that separate it from traditional currencies:
There are no paper bills or metal coins to represent its value.
All digital currency units exist as entries in a digital ledger.
Users exchange electronic currency over the Internet using computers and online systems.
Some forms of decentralized digital currencies, such as Bitcoin, take advantage of cryptography to secure, partially anonymize, and verify transactions. This decentralization eliminates the need for an intermediary institution.
Digital currencies should not be confused with fiat currencies and online banking. While these legacy currencies also use online systems, digital balances of fiat currencies can be exchanged for their physical counterparts. For actual virtual currencies like bitcoin, individual “money notes” cannot be withdrawn for any physical unit. The currency exists as a purely electronic monetary system.
Is cryptocurrency real?
Let’s do a quick thought experiment. This thought experiment raises two different questions: Can something intangible be real? And how can something intangible have value?
First, let’s understand if something can be intangible and real. We can easily address this question. Yes, like many digital things, cryptocurrency can be intangible. and real. To understand how, let’s take a look at the Internet.
The Internet has been around since 1983 and represents a vast computer network that allows people from all over the world to communicate and share information. statist reported more than 5 billion people use the Internet as of April 2022, more than 60% of the world’s population. Data of Live Internet Statistics claims that there are more than 1.5 billion websites online, 200 million of which are considered active.
No one would question whether the Internet is real or not. In fact, we consider it one of the greatest inventions of all time. However, it is not a place that you can visit, nor can you have the Internet in hand. It exists as an intangible digital resource.
Cryptocurrencies share many of the same qualities as the Internet. Like the Internet, they operate on interconnected computer networks. A wide range of applications are built on top of cryptocurrencies and millions of people around the world use them to do amazing things. Like the Internet, cryptocurrencies have no physical representation. There is no box that holds the internet just like there is no wallet that holds your bitcoin. Even hardware wallets store digital representations of your assets and do not act as offerings.
Next, let us consider the principles of the theory of value. This theory seeks to interpret the subjective way in which humans attribute value to things. There are two main ways that something can have value: intrinsically or instrumentally.
If something is intrinsically valuable, then it refers to something that has value simply because it is. Gold and silver, for example, are intrinsically valuable items, at least in our current context. By contrast, instrumental value refers to something that gains value through its utility.
Gold, for example, is intrinsically valuable for its aesthetic appeal and earthly scarcity. It is also instrumentally valuable due to its physical properties: malleability, chemical inertness, heat and electrical conductivity, etc.
It can also be said that many cryptocurrencies have both intrinsic and instrumental value. Bitcoin, as a prime example, has a truly meager maximum supply of 21 million and requires a certain amount of effort to produce. Intrinsically, these factors make it desirable. We show this value by the fact that it is bought and sold by millions of investors around the world.
From an instrumental point of view, cryptocurrencies like bitcoin have many inherent characteristics that drive their value. As a store of value, it is significantly more portable, resistant to counterfeiting, and divisible than gold. As a means of cross-border payment, it is a much faster and cheaper way to transfer value abroad than using traditional banking methods.
Other features of cryptocurrency include partial anonymity, full network transparency, immunity to single points of failure, global inclusion, and financial self-sovereignty.
Ultimately, the problem facing cryptocurrency is not the fact that you can’t hold onto it. Instead, the problem is that the technology is seen by many as immature and complex.
Cryptocurrency is the first money humanity has used that is not like what we have used for 5000 years. It is an exciting new frontier that is both powerful and purely digital. The beginning of a new financial frontier, like any momentous change in the way people do things, will take time.
Keep learning about crypto
Are you interested in learning more about different types of cryptocurrencies, blockchain technology, and non-fungible tokens? The Kraken Learn Center is here to help!
Check out our latest articles to continue learning about the biggest topics shaping the crypto ecosystem.
These materials are for general information purposes only and are not investment advice or a recommendation or solicitation to buy, sell or hold any digital asset or to engage in any specific trading strategy. Some cryptographic markets and products are not regulated and you may not be protected by government compensation schemes and/or regulatory protection. The unpredictable nature of crypto asset markets can lead to loss of funds. Taxes may be payable on any returns and/or on any increase in the value of your crypto assets and you should seek independent advice on your tax position.
This post Busting the cryptocurrency myths: “Cryptocurrencies aren’t real because you can’t physically hold them”
was published first on https://blog.kraken.com/post/17664/busting-crypto-myths-crypto-is-not-real-because-you-cannot-physically-hold-it/