Regardless of the daily upheavels in the crypto market, the entire World has realized the utility of a distributed ledger system and the benefits it has over a traditional centralized system. As for we know, we associate cryptocurrencies with blockchain, the technology which lies underneath majority of the cryptocurrencies in the market.

Preface

Before we delve into Cryptocurrencies, first we try to understand the reason why they came into existence.

The 2008–09 recession not only shook the real estate world, but pointed out the problems with the current monetary system. For those who well understood the financial markets and knew how the monetary cycle worked, could had it predicted long back. After the great recession of 1920’s, in order to boost the economy, the UK government removed the Gold standard in 1931 and the US, under the leadership of Roosevelt followed suite in 1933. In 1971, Nixon completely removed the remnants of this standard thereby converting the US dollar to a completely fiat (not backed by any tangible asset) currency. In a way, this allowed the Government to control the economic activity in the market by controlling the influx of money into the economy.

What was the Gold standard and why was it removed?

The Gold standard limited any country to print and put into circulation only the amount of money as corresponding to its actual Gold reserves. This helped placing a control on inflation or deflation, since the amount of money which could be printed was always tied to a tangible asset like gold. So, why was it removed?

The economic recession of late 1920’s and the huge spending of US government during the 60’s in order to combat the Cold war, showed that the necessity of money for keeping the standard far exceeded than the amount of Gold mined every year. Then the rise in population which did not grew proportionally to the gold reserves of a country, made the amount of money, per individual less. With the price of goods already high along with its demand, it made people to spend less in turn leading to economic instability. All this lead the governments around the World to remove the Gold standard in 1930’s. During the 60’s the US owed huge debts to its European counterparts and with its Gold supplies limited, they were left with the only option to print money for trading in the form of Government bonds without really worrying about the Gold reserves in the country. So, the standard associated with trade policies was removed as well.

Why are we talking about the removal of Gold standard?

Why are we talking about the removal of Gold standard?- Well, this decision, in future went far ahead to cause economic turmoils, fake price bubbles and pushed the US Government in a debt of more than 10 trillion dollars leading to a recession in 2008–09 (the debt in 2021 stand at 28 trillion dollar). The graph shows how the US Federal Reserves debt have grown over the years and everyone turns a blind eye towards it. It practically means that we are living in a World where some people hold the power to create money, distribute it, while nearly 99% of the rest dont have a idea where it is going or coming from.

The risks of having the power of controlling the influx of money in the hands of a few was identified by some people, who bought in an alternate medium to trade goods and services. This medium was called the Bitcoin, which was based on an algorithm or logic and used the SHA-256 cryptography function at its core. Since it used cryptography at its heart, the curreny was called cryptocurrency. To add to it, Bitcoin allowed anonymous transactions as the person holding bitcoins in his wallet did not needed to reveal his identity.

This medium of exchange, initially taken as a joke, caught the eye of Government when Bitcoin started finding some popularity and in turn gaining some value in the eyes of common people. Anticipating the disapproval from the Government for challenging their authority, the creator of Bitcoin has never revealed his true identity (till until now), and kept himself masked under the name of ‘Satoshi Nakamoto’. The idea of a currency created by an anonymous is enough to intrigue people into knowing more about it. Bitcoin gained enormous value over the years as it could be seen from the table below-

Rise of Bitcoin — History

As it can be seen in the table, Bitcoin rose from a value of 0.09 in 2010 to 770 USD in 2014, an unbelievable rise for any investment. In May 2021 it reached a peak of around 61000 USD per bitcoin, standardizing itself back at 29000 USD in around July -August and soaring back to 64000 in November 21 . Which means anyone who would had bought bitcoins worth 10 USD in 2010 would have BTC worth around 6 million USD in May 2021.

The graph also shows the extreme volatility of this market specifying the enormous money some people make out of it.

The popularity of Bitcoin cannot be however accredited to only its founder. The idea of a parallel monetary system gained huge popularity among some who well understood the power which came by holding something like Bitcoin which had a high probablity of gaining popularity.

Jed Mccaleb launched Mt Gox website which was later acquired by Mark Karpeles. The site became the first crypto exchange launched in 2010 and handled over 70 percent of all Bitcoin transactions at that time. Mark Karpeles, the CEO of Mt Gox crypto exchange was just in his 20’s when he founded Bitcoin foundation in order to promote the use of Bitcoin. However, the idea of anonymity and no regulations also attracted a lot of people who found it as a loophole in the monetary system to earn some quick money. Ross Ulbricht, who tried selling drugs on darkweb using Bitcoin as a way of exchange and many more like him who were apprehended set an example in front of us all of how this non regulated currency could be misused. Mt Gox, the first crypto exchange later ran into cyber security problems claiming that bitcoins on their sites were stolen. They filed for bankruptcy in 2014, when they declared of loosing around 850,000 bitcoins due to a breach in their website security. This was not a problem with the cryptocurrency algorithm, but rather a problem on how Mt Gox website stored bitcoins in wallets. Eventually this led to the arrest of Mark Karpeles as well. Bitcoin price fell sharply during this time of 2014–15. It was during this same time that a 19 year old skinny guy called Vitalik Buterin, who had been a founding member of Bitcoin magazine since 2011, founded Ethereum and the concept of Smart contracts.

Inspite of its shady past, cryptocurrencies gained momentum as some intelligenct investors started understanding its potential. The tech savvy people quickly understood the implications of smart contracts and by 2021 nearly 8000 different cryptocurrencies or tokens came into existence.

What is the difference between a cryptocurrency and a token?

Simply put, the main difference between the two is that a cryptocurrency has its own blockchain with its own set of rules, while a token uses an already existing blockchain and conform to its rules.

Finding huge Support

In 2019/20 many people like Mark Cuban, Robert Kiyosaki and Elon Musk came forward and supported the idea of decentralized financial systems. Bitcoin gained huge value in 2020/21 where it rose from 10k per bitcoin in July 2020 to around 29K in Jan 2021. It went at its peak to 64k in May 2021 before stabilizing at 40k at the time of writing this.

Altcoins

Any cryptocurrency apart from Bitcoin came to be referred as Altcoin (Alternate Coin). Now, as we can see there are around 8k altcoins. While Ethereum(ETH), Binance(BNB),Cardano (ADA), XRP have found some popularity on account of the unique technology their blockchain offer, some meme coins like Dogecoin,Shiba Inu saw a huge growth making many people millionaires in a few days.

Problems

Many cryptocurrencies operate in a way such that their transactions need to be validated by a lot of servers running on high power. This usage of huge electric energy if often considered a big hindrance to the functioning of cryptocurrencies and is often challenged by environmentalists. However, as per data, most of the servers which mine (validate transactions) those cryptocurrencies are found to be pumped by renewable sources of energy.

As some coins have gained popularity, there are some huge institutins or individuals who try to manipulate the price of these coins. They pump huge amount of money into the crypto market to fluctuate the price of some coins and make profits. These people are refered to as “Whales” in the crypto trading world owing to the huge size of investment they hold. They have the potential to fluctuate the prices of some cryptocurrencies massively to cause heavy profits or losses to people and they hold the advantage to use this power to get more rich. On account of this, many Governments around the World have started to plan on implementing regulations on cryptocurrency trading.

Conclusion

It is an established fact that value of anything depends on how majority of people percieve it. For instance, wood or iron has far more utility as compared to Gold, yet Gold has always been far more precious than either of them. A whole carton box of printed money could be more valuable than an entire house.

A cryptocurrency is a non tangible asset just like the paper money we deal with everyday. Its many abilities like providing secure non reversible transactions and digitally accessible records provides it the value it has. Moreover it is also about what people think about it.

A decentralized system which is governed by predefined rules which are not easily modifiable serves as a strong alternative to a centralized system governed by a few people often influenced by policies made by some individuals who hold power. But how comfortable are we to trust the unknown “Whales” or the market influencers in Crypto world against the known conservative stealers like banks, central banks or federal reserves is still for us to decide.