For us to understand why cryptocurrency exists, we first need to understand how money works.
Each country has their own currency, issued by the government or its central bank. Mexico has the peso, US has the Dollar, Thailand has Baht, and so on.
In general, this currency is called fiat.
Up until the early 1930s, every country in the world uses the gold standard to determine the value of their money.
What is the Gold Standard
The gold standard is a monetary system where a country’s currency has a value directly linked to gold. They set a fixed price for gold and buy and sell gold at that price. That fixed price is used to determine the value of the currency.
For example, if the U.S. sets the price of gold at $500 an ounce, the value of the dollar would be 1/500th of an ounce of gold.
Britain stopped using the gold standard in 1931 and the U.S. followed suit in 1933 and abandoned the remnants of the system in 1973.
The gold standard was completely replaced by fiat money.
Problems with the Fiat Money
Without the gold standard, countries were able to print money to their heart’s content. That resulted in inflation. With the gold standard, money was backed by actual physical gold. In essence, we spent what we have. Inflation was avoided.
Without being held down to an actual gold reserve, the U.S. Federal Reserve is able to print however much money as they want,
The float approach printing to fiat money has enabled governments to financially engineer their monetary policy. For example, bond markets have no yield as a result of the increased money supply.
The uninhibited ability and exclusive rights of the government to print money is where the problem lies.
Number one, a lot of money and nothing to buy results in inflation.
Number two, money can be directed to specific institutions or people.
Number three, it makes it easier to manipulate the economy.
That’s what happens when the power over money rests on one entity. This is the consequence of centralization.
This leads us to cryptocurrency.
Cryptocurrency’s goal is to decentralize the power over money. This will, in turn, avoid manipulation of the economy by making all transactions transparent.
Instead of one institution deciding what happens to money, it will be all of us who will decide what happens to money. Cryptocurrency wants to decentralize money.
I know what you’re thinking, ‘how does Cryptocurrency decentralized money?’
If every transaction is transparent, won’t it violate people’s privacy?
Where does it come from? Is it created from thin air?
Don’t worry, we got you.
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