In 2010, a computer programmer called Laszlo Hanyecz traded a new digital form of money, called Bitcoin, for pizza. Hanyecz paid 10,000 Bitcoins for two pizzas, so at the time, one Bitcoin was worth about a third of a cent. This was more a trade than a purchase, but still, a big moment — the first known exchange of this digital currency for a physical good.
Today, 10,000 Bitcoins would buy quite a lot more pizza. That’s more than €400 million at current prices (although the price of Bitcoin is volatile). This story shows how far Bitcoin, the original cryptocurrency, has come. According to the data research company Morning Consult, 20 per cent of adults in the US (and 36 per cent of millennials) already own some cryptocurrency.
Bitcoin’s unknown creator or creators (using the name Satoshi Nakamoto) proposed this new kind of digital money in 2008. Since then, it’s been increasingly adopted by people, companies and even a few countries. US investment bank Goldman Sachs estimated that Bitcoin could soon beat gold’s market share as digital assets are more widely adopted.
The name “crypto” comes from the technology used to create encrypted communications. For cryptocurrencies, that means money. It also describes the world of all crypto assets, which at one time was worth about €2.7 trillion. The movements of cryptocurrency are verified by a network of computers using encrypted communication, so there’s no need for a bank or other institution.
Dream meets reality
Saifedean Ammous, author of The Bitcoin Standard, described Bitcoin as “…a form of software that is peer-to-peer ... it’s distributed over the internet, and anybody can download it and use it.” This statement reflects the original dream of crypto fans — digital currencies would be borderless, independent and available to all.
Cryptocurrencies are not immune to global problems, however. The war in Ukraine is a big test. There are worries, for example, that Russia could use them to get around economic sanctions. Some call this unrealistic. Changpeng Zhao, the founder of the cryptocurrency trading platform Binance, told The Guardian: “The truth is crypto is too small [to help] Russia.” However, if the value of the rouble falls and the risk of high inflation in Russia rises, ordinary citizens might try to move their money to crypto if they can.
There’s a high-stakes game of financial cat and mouse happening, and time will tell who the winner is. Some exchanges have blocked thousands of wallets from Russian users. The global crypto community, already a mixed group, will be deeply divided over this action. The situation raises questions about how practical and durable crypto is and how independent it should be. As the war started, the price of crypto fell sharply while the price of gold went up. A clear sign that crypto is not yet considered a safe place for investors.
Despite the doubts, some big events in the crypto market have been happening. In September 2021, El Salvador began a controversial experiment, allowing people to use Bitcoin in all transactions (alongside the US dollar). It is a useful way to send remittances home from overseas, which El Salvador’s economy relies on, but businesses worry about Bitcoin’s volatile price. And in March, US President Joe Biden ordered his government to begin looking at ways to regulate crypto and potentially create their own coin.
Digital gold?
A general argument against investing in crypto is that a virtual currency is not real, it’s just an idea. It’s valuable only because people think it’s valuable. Supporters say it is more than that. Yes, the technology is young and still maturing, but it is inherently valuable.
The question of what crypto is good for, in a practical way, is not easy to answer. Some describe it as digital gold. Like gold, Bitcoin has scarcity — its software ensures that only 21 million Bitcoins will ever exist, for example. But the price of crypto doesn’t behave like the price of gold from an investor’s point of view.
As money for ordinary people, cryptocurrencies still have a long way to go — they’re still too slow and costly for everyday payments. True believers see it as the revolution, but for most investors, crypto is still an exotic asset class. They buy when they feel excited about the future but quickly run away as soon as the future turns dark.
What about the other cryptocurrencies?
By market capitalization, Bitcoin is easily the biggest cryptocurrency, but there are others that show how crypto is changing. The serious alternatives include Ether, Binance Coin, Tether and USD Coin.
Some of these are quite different to Bitcoin. Ether, for example, is based on Ethereum, a newer and more sophisticated blockchain with the potential to offer completely new kinds of decentralized financial services. These could allow new ways to trade and invest without the costs and rules of traditional financial institutions.
Then there are “stablecoins”, such as Tether or USD Coin. These are tokens issued on a faster blockchain, like Ethereum, with enough US dollars in cash or assets to back every token that’s issued, and their value is pegged to a real currency. Stablecoins are much more promising for everyday use and could really be a rival for the traditional financial system.
The future of crypto
“I do think Bitcoin is the first [encrypted money] that has the potential to do something like change the world,” said PayPal co-founder Peter Thiel. Bitcoin might have already done that. One day, it may be the basis of a new global financial architecture that includes other cryptocurrency services, as well as central banks and big financial players. This may already be developing. The Lightning Network, built on the Bitcoin blockchain, is designed to do many things that Bitcoin isn’t good at, such as allowing more and faster transactions.
Cryptocurrencies will continue to develop in surprising ways. It’s a long way from the utopian crypto dream, but the most promise may lie in getting more automation into financial markets and making them more efficient. This could help economies grow, store value safely and help people trade with greater freedom at lower cost. And if the future is digital, cryptocurrencies, in one form or another, will surely be the backbone of our global financial system. In short, if cryptocurrencies didn’t already exist, someone would have to invent them.