A Digital System of Currency

Chapter 9 – “Will Cryptocurrency be the Money of the Future?”

There are problems with our current system of using receipts. People lose receipts and others forge receipts for stolen goods so they can return them for cash. But what if the receipt was impossible to forge or lose? What if every transaction that happened across the entire economy had a receipt and everyone in the economy got a copy of every receipt? 

Then it wouldn’t matter if you lost the receipt, or if someone tried to forge one, because there are thousands or millions of copies you could use to prove the transaction occurred. In reality it would be impossible to print a paper receipt for every transaction and distribute it to everyone. Digital information makes what was impossible, possible.

This is what Nakamoto did. He invented a digital system of money called where all information about every exchange that happened was recorded forever and distributed to everyone using the coin. This digital system of money is called bitcoin. To understand if this is a viable system of money, we must accept the fact that fiat currency is acceptable. 

Money doesn’t need anything backing it for people to have faith in it and we have seen many examples of this in history. Once we understand that, we can see that ideally bitcoin meets the criteria for a good currency: 

  1. It is super easy to use, it’s just transferring information on computers.
  2. People have faith in the currency precisely because of the transparency and it is difficult to forge. There is essentially a large digital billboard with every receipt posted on it so anyone can go online and check to make sure they got the exact amount of money they were supposed to when they were supposed to.
  3. In Nakamoto’s head, this currency would hold its value because, like gold, there would only be a limited amount of this coin online.

There is one essential part of the system left out of the description above. It is easy to move a lot of information from computer to computer but as more and more bitcoin transactions take place over time, more and more information gets added to this huge collection of receipts. Over time, distributing this huge amount of information takes a lot of computer power.

Who would devote all this power to bitcoin? When it comes to digital transactions through established banks, the banks have incentives to hold information and transfer it because they make money off of those services (remember the ATM fees we talked about earlier). With bitcoin, there is no government or company in charge, nobody to profit off moving and storing the information. 

Nakamoto designed the system to give users incentives to use their own personal computer power to manage the data. Those who put computer power towards the block chain, another term for the collection of digital receipts, are rewarded with the privilege of adding new information to the chain and distributing it. People who do this are called miners and they get 6.25 bitcoin for every new block, or collection of digital receipts, that is added to the chain. A new block is added every 10 minutes.

Over time, it takes more computer power to create the block chain and there is only a limited amount of this bitcoin to be mined. This means that more computer power has to be used to maintain bitcoin, but as the value of bitcoin rises the reward given to process this information is greater. 

Because it takes a lot of time and computer power to process the blockchain, few hackers would put forth the effort in order to steal money or otherwise mess with the blockchain. If they wanted to make money off the system they would just become miners instead. This computer power intensity is what makes the system secure. 

Right now, one bitcoin can be traded for $21,208.03, wait no $21,200.20, now $21,196.79, hang on $20,217.02. The value moves a lot, but right now 6.25 bitcoin is still a lot of money. Today, there are many different types of coins and many different types of blockchains but they all rely on these basic concepts.

“Will Cryptocurrency be the Money of the Future?”

A Journey to Personal Financial Success

At Morgan Franklin Fellowship (MFF), we support the concept of financial freedom – by teaching participants how to save by paying themselves first, invest for their future and grow their net worth.

Learning how money works and how to talk about money with others are the first steps towards recognizing an individual’s lifelong financial goals. Our online programs, podcasts, blogs, and book reviews and resources are designed to help you learn the concepts, rules and vocabulary of money, finance and investing.

Becoming an MFF Fellow

Our Standards of Financial LiteracyLearning about money series is engaging, full of interesting information, and easy to navigate. Adapted from the National Standards for Personal Financial Education developed by the Council for Economic Education (CEE), this robust curriculum features six short lessons on such important topics as earning income, understanding the value of saving and using credit. When completed, this program lays the foundation for becoming an MFF Fellow.

Becoming an MFF Fellow is the ticket to access additional MFF programs and opportunities for mentoring, networking, internships and real-world opportunities. Hear from the MFF Fellow themselves on how these opportunities encourage them to continue their journey to personal financial success.

Learn More about Money

Begin the journey towards personal financial independence today. START LEARNING TODAY

Like this article?

Share on Facebook
Share on Twitter
Share on Linkdin
Share on Pinterest