Bundle of Money

A cryptocurrency is simply currency/money that is based on strong cryptography to secure its use for transactions, to control the creation of additional units and to verify any operations done with it. Most definitions like to add that cryptocurrencies operate independently of a central bank, but there is no intrinsic reason for it to be so.

In part one, we defined cryptography as a way of encoding or hiding information so that only the person with the correct key can have access to it. No one else can access your encrypted information without the key. Now, this single way of accessing your information is very important to keep in mind. In a traditional banking system, you can access and recover your account even if you lose your bank account details, as far as you can satisfactorily show proof of identity. But the very nature of cryptocurrency means that proof of identity is not required. The only way to show you own your cryptocurrency is to have the digital key!

With currently available technology, the present cryptographic systems are for all intent and purposes immune to hacking and other methods of compromises. This makes cryptocurrencies a very secure way of keeping your valuables safe and secured!

What is the link between cryptocurrency and the blockchain? The validity of the cryptocurrency coin is provided by the blockchain. Currency creation, management, issuance and control is all done on the blockchain. Since there is no central bank managing the cryptocurrency coins (for now), the blockchain provides the security and database that any form of currency needs to satisfy the users that it is actually worth using as a means of exchange and store of value.

If you are nodding along and feel you understand the basics, good for you. But, let us move a step backwards, how much do we really understand basic issues around money and financial transactions that we take for granted on a day to day basis. Let us even take a stab at the key term here. Money.

Money Bundle

Bundles of paper money at a burial event

What is money?

Take a look at those crumpled banknotes in your pocket, is that money or is that all there is to money? Everyone knows what money can do, but what exactly is it? Like air, it is so common and all around us that we feel its absence keenly (in the case of air, terminally) but never give it much thought.

Money is any item that is used for payment of goods and services – including debt- and can be any verifiable record – like your bank balance- that is linked to you.

We did not always have to use a form of money to pay for things and services. Barter was the main medium of exchange pre the rise of money, but with severe limitations (forget that Nigeria tried battering oil for other items as recently as the 1980s), how many bunches of bananas is worth one goat for instance?

Money started out as a commodity money, which were items that people agreed to exchange for other goods but had some worth of their own-like cowries, Manila,  gold, silver- and progressed to fiat money. Fiat money is money that is issued by a government and has the value placed by the issuing authority.

Biafra One Pound Note 1968 – 1969

Look at a 500 naira note and a 1,000 naira note, or a 5 cedi and 10 cedi note, there is no difference in intrinsic value between the two notes except the issuing government gave them different values. To demonstrate the concept of fiat or authority backed money even more graphically, think of the Biafran pound, when the Republic of Biafra collapsed, the value of the Biafran pound trended to near zero, there was no government to back it or give it a value – incidentally, the currency is worth quite a bit on the collectors market now. To summarise, money is a mean of exchange with a value determined by the users. Money can be in coins, paper, electronic or other records. Armed with this knowledge, let us head back to cryptocurrency.

For an object to be considered as a means of exchange, or be the universal equivalent – quote H. Rap Brown- it must have the attributes of;

  1. General Acceptability
  2. Portability
  3. Divisibility
  4. Durability
  5. and limited supply

There are additional attributes but these are the key ones. Current cryptocurrencies meet 3,4 and 5. Blink, to answer your question, no, you cannot pay for items at most places with cryptocurrencies, no 1 is still not in place.

So, are cryptocurrencies money or assets? Or both?

In the next part of the series, I will focus on how cryptocurrencies are created, kept secured, current usage and then we will return to other uses of the blockchain and further address the current state of the cryptocurrency market/space.

Stay tuned and keep your comments coming in.

Sylvester, Roland and Frank, the next part shall cover your questions, it is important to first get a handle on what money is before we dive too deeply into crypto-money.

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