The 21st century arguably changed course with the advent of blockchain technology. One of its key features, of course, is cryptocurrency,  the digital money powered by blockchain’s peer-to-peer (P2P) mechanics.

Thirteen years after the introduction of Bitcoin, these digital assets reached a turning point in 2021 in terms of adoption. According to a survey by Gemini, 41% of new crypto owners bought their first coins in 2021. 

Will we see a future in which cryptocurrency replaces fiat money? To find unpack that question let’s discuss money. 

What Is Currency?

Modern currencies managed by central banks government officials. This is why money is called fiat (decree) currency. The central bank operates by decree from the state, and in tandem with policymakers, central bankers help set the value of money by using interest rates and regulating the printing of currency by national mints. 

In times of crisis such as the 2008 subprime mortgage crash or the Covid-19 pandemic in 2020, central banks may take emergency actions to support economic stability. 

In the second and third quarters of 2020, for example, the Federal Reserve increased its balance sheet by $4.5T to mitigate the economic contraction after the U.S. went into a series of lockdowns to stop the spread of Covid. (Lawmakers also flooded the economy with cash by distributing stimulus payments directly to companies and households, a policy that directly led to the boom in cryptocurrency valuations through 2021).

From one financial crisis to the next, the Fed skyrockets its total balance sheet, making it difficult to discern true value. Source: Board of Governors of the Federal Reserve System (US)

There are consequences to creating more money, though. The Fed made each banknote less valuable. This triggered the worst bout of consumer price inflation in 40 years and prompted the Fed to raise interest rates. As a result, investors shifted en masse from risk assets such as equities and cryptocurrencies into cash.  

Previous Digital Money Attempts

Satoshi Nakamoto, the mysterious creator of Bitcoin, designed his invention to circumvent the central bank system by using the internet. Yet there were earlier  attempts to create digital currencies. In 1990, DigiCash issued electronic money called eCash. It used cryptography to encrypt sending and receiving data, which allowed for private transactions.

Still, as a company DigiCash was centralized. In 1998, it  went bankrupt, and eCash perished with it.

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Another attempt was made in 1996 by Dr. Douglas Jackson and Barry Downey. They created e-gold, in which electronic money is pegged to the precious metal. Instead of trading physical gold, users could trade a synthetic version of gold online. These two attempts failed because they weren’t decentralized.

In 1998, computer scientist Nick Szabo developed the concept of cryptocurrency as we know it. His take was called Bit Gold and it used mining, cryptography, a public ledger, and a peer-to-peer network. Some argue this paved the way for the first true cryptocurrency — Bitcoin.

Cryptocurrency Explained

The “crypto” part in cryptocurrency means that all transactions are encrypted. While this entails financial privacy, it exists as long as one’s wallet address is not linked to a real identity. 

A digital wallet manages encryption, and is unlocked with a private key. As a result, digital wallets are called non-custodial, in contrast to custodial wallets which …….

Source: https://thedefiant.io/what-is-cryptocurrency

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