Lesson 4: Background - Concept of owning a digital
currency
Although digital currency is still in its infancy, it has the potential to play a central role
in the future of financial services. As bitcoin and other related technologies grow in
adoption, our financial system is poised to evolve from one that relies on a handful of
large centralized institutions, to one that instead relies on millions of peers within a
globally distributed network. We’ve witnessed this evolution before – when entire
industries such as media, software and communications were transformed and
invigorated by the proliferation of the internet. We could soon experience a similar
revolution in financial services, where digital currency replaces our antiquated,
costly, and time-consuming systems and gives rise to an entirely new structure that
facilitates payments, streamlines accounting processes, and enforces contracts with
ease and scalability. In this rapidly evolving landscape, digital currency could emerge
as the valuable commodity that powers the “internet of money.”
The benefits:
Cheaper transactions, cheaper prices: Digital currency transaction fees are usually a
lot cheaper compared to things like credit cards or Paypal, and sometimes there is
no transaction fee at all. This may save you money, or it may save money for the
merchants you use allowing them to offer you cheaper prices on your shopping.
Zero International Transfer Fees: Because digital currency exists on the internet,
which itself is global, borders mean nothing to it. Usually sending money abroad
carries substantial fees, in addition to currency conversion costs. But on the other
hand, sending digital money to the other side of the planet costs exactly the same as
sending it to somebody sitting right next to you.
It can also be used for shopping in any country, so you may also be able to avoid the
cost of currency conversion too.
International payments also go through just as quickly as local payments, so there’s
no waiting around for days to send money through the banking system.
Zero Account Fees: Many bank accounts today charge their users a monthly fee.
Many of them also catch you out with hidden fees and charges for using your
account. Anybody can create a free bitcoin wallet, to give one example, and nobody
can ever charge any fees.
Easy account creation: Because digital currency is so new, so different, and so
‘high-tech’, some people wrongly get the impression that it must be difficult to use. In
actual fact, it is much easier to use than traditional banking.
Opening a new bank account is a long laborious process, because they require you
to provide so many personal details, proof of identity and address, and often also
conduct all kinds of background checks.
Anybody can create a new digital currency ‘account’ in seconds, without providing
personal details unless they want to use a service which requires it.
Bitcoin, the first of this new wave of digital currencies to gain popularity, was created
as a reaction to the global economic crisis of 2008, and the negative economic
impact of modern banking which it highlighted.
Commercial banks have a privileged role in our modern economies, and this creates
a number of problems which are solved by digital currency:
Trust: When you put your money into a bank, they do not just store it in a vault for
you until you need it. They use it to trade on financial markets and make a profit for
themselves. You just have to trust that they will have enough left to give you back
your money when you need it. This doesn’t always happen. During the 2008 global
financial crisis and its aftermath many, many banks simply did not have enough
money to make good on all the balances that their customers supposedly held with
them. Governments had to step in to provide them with the cash they had lost, but
still in places like Cyprus many account holders lost part of the money they had
trusted to the banks, whilst many other countries were forced to undergo ‘austerity’
to pay for what the banks had lost, and some countries like Greece are now
economically crippled as a result. When you hold money in a digital currency wallet
only you can spend it, and you will never risk loosing your savings due to somebody
else’s reckless and greedy behaviour.
Unlike traditional forms of money, which tend to gradually lose their value over time
due to inflation, simply owning digital currency is an investment:
Most digital currencies have a fixed period when new coins are created, and a fixed
maximum number of coins after which no new currency units can be minted.
Because they are still in their early days, currencies like Bitcoin are still going
through their inflationary period of coin creation. In the future, however, this period
will end. Because some coins will still end up being lost in abandoned or forgotten
accounts, this will create the conditions for ‘deflation’, in which your money will
gradually become worth more over time as you hold it.
If more people use a digital currency this also creates more demand for it, which
tends to drive up the value. This is similar to the way that the money of rich countries
tends to be able to buy more than the money of poorer countries. But with digital
currency you don’t need to emigrate to a country with a growing economy to take
advantage of this and see the value of your money going up over time – you just
need to switch to a digital currency with a growing number of users. Digital currency
in general is going through its early growth period right now, meaning that the
number of users is going up all the time.