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The rise of cryptocurrencies like Bitcoin and Ethereum is certainly an exciting but controversial idea. To debate what we should do about this emerging area of our economy and society, it's essential to start by understanding the fundamentals. Here are the basics:

  • Crytpocurrency is a form of money, just like dollar bills are a form of money, and whatever is in your checking account is a form of money. It can be saved and spent, transferred between people and can be even be lost.
  • Traditional forms of money are created by central governments, from the dollar to the euro to the peso. As long as the government that issued the money is considered legitimate and stable, the money tends to be legitimate and stable.
  • Crytpocurrencies are created through decentralized algorithms, that is computer programs running on lots of different computers all over the world [1]. This means that there is not a central authority setting any kind of policy, nor is it readily possible for governments to audit or subpoena crytpocurrency accounts or even track the flow of this money from person to person.
  • Today, the cryptocurrency economy is small but growing rapidly. It's very hard to say how much crypto is “worth” because most people are treating it as an investment vehicle rather than as currency. [2]

There's been a lot of discussion in the news about cryptocurrencies, and much of it is hype. But governments around the world are starting to think of crypto as money, and are talking about accepting it as a way to pay taxes [3] and also treating it as a taxable asset [4].

But I think we need to reevaluate our understanding of cryptocurrency, because it's more than just money. It's something profound that is happening in our world, and it's essential to understand it.

Cryptocurrency is a Political Movement for Decentralized Trust

Money has largely been a function of governments throughout the history of the world. The Romans minted coins. The kings of England minted coins. The emperors of China minted coins, and also printed the first paper money.

Even today, almost all of the money we use is created by a central government. It's done in the U.S. Mint (physical currency) or at the Federal Reserve (electronic currency). And then it's traded from person to person or institution to institution.

But cryptocurrencies don't work that way. Individuals invented the algorithms, and any individual can run them. The more computing power you have, the more you can create [5]. No central authority is in charge.

This is key to our understanding of this movement: that some centralization is necessary but that much of world can be decentralized and may even be more efficient this way. And even though there isn't a central bank that is legitimizing currencies like Bitcoin, it is still trusted by millions of investors. You can trust without having to put all your trust in one authority. Crypto proves it.

[1] All of the computing power used to create these currencies is significant, perhaps a quarter of a percent of our total carbon footprint, or maybe as much as the nation of Sweden.

[2] Here's a right-leaning source explaning why it's hard to value cryptocurrencies. But 2% is probably a reasonable estimate, since the world's financial markets are worth about $100 trillion and all of crypto is valued at about $2 trillion.

[3] In fits and starts. The state of Ohio accepted tax payments in Bitcoin for about a year, but only ten businesses ever paid and the site was shut down. A city in Florida accepts crypto payments but that's probably only because they use PayPal, and PayPal lets users pay in crypto. At present many countries have passed laws about the legality of cryptocurrency..


[5] This process is called mining although there are cryptocurrencies that use different approaches.

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