The word’s first cryptocurrency came about in January of 2009 to address a common problem considered to be one of the underlying causes of the Great Recession: the lack of restraint in money creation. The economic crisis of 2007-2009, brought the reliability of financial institutions into question, and had people asking why and how it all happened.
Most often, the answers to these questions will have one common denominator – money, or more specifically, fiat currency. Did the unknown person who first created cryptocurrency in 2009 did so to replace fiat currency altogether? Or only as means to curb the effects of inflation and provide an alternative means of exchange?
Why We Use Money
Money is very much a part of our everyday lives that we often take for granted why we have to use money in the first place. Obviously, we’re using it to pay for goods, services, and debts. But have you ever asked yourself how much it’s really worth? For instance, is a dollar bill really worth a hundred dollars just because it says it is?
The straightforward answer is ‘no’, it doesn’t have intrinsic value. It’s only a piece of paper, much like your paycheck, sanctioned by the government to pay for goods, services, and debts within the country. Governments use fiat currency as a store of value. This value changes over time due to inflation and deflation. Although it doesn’t have a fixed or real value like gold and silver, it makes up for its shortcomings by making transactions a lot easier for us.
Hence, fiat currency has value only because it is backed by a central authority and because it serves its purpose – to establish a financial system that allows people to transact and conduct their businesses using a standard currency. In other words, we use money because we trust the government who issued it that it’s worth something, and because it makes buying, selling, pricing, and storing wealth more convenient.
Who Makes Our Money?
Strictly speaking, governments don’t make our money; only central banks do. However, governments can make certain things like small pieces of printed bills to have value with the words, ‘let it be done’, which translates into Latin as ‘fiat.’ This is how we get the term ‘fiat currency.’
Governments cannot sanction the indiscriminate creation of money without adversely affecting the economy. The hyperinflation of Zimbabwe perfectly illustrates how a government can ruin the entire economy by permitting the creation of untold stacks of money. This resulted in prices of goods and services going astronomical. For instance, 100 trillion Zimbabwean dollars could only buy you a candy bar. Eventually, the Zimbabwean dollar went out of circulation and the country started using foreign currencies.
If creating too much money causes prices to catch up resulting in inflation, why do countries still increase their money supply? The answer to this question is complicated. But suffice to say, our governments and financial institutions have a hand in all of this, and we, as users of fiat currency, have no control over it – until a new kind of currency came along.
Bitcoin, and the Birth of Cryptocurrency Mining
The appearance of the world’s first cryptocurrency sparked very little interest. Nobody understood why people should even spend time and money on something which doesn’t exist in physical form. But as more people started using cashless transactions without having the physical form of money, it dawned on them that fiat and cryptocurrencies share a common feature: they now exist and are being used electronically, and they are both used as a store of value.
However, there’s one BIG difference: the first one is backed by a central authority, while the other is not. In the world of cryptocurrency, everyone can create more currency by way of mining rewards in which they will have to solve, or to more precisely, find the right hash required by the network to confirm blocks of transactions which are added on top of the blockchain. To avert inflation, only a specific number of blocks could be mined at a given time and it will have a fixed supply. In the case of Bitcoin, the code was set to 21 million BTC.
Another key difference, which is also a byproduct of not having a central authority, is decentralization. In a decentralized banking system, everyone can have a copy of a distributed ledger, known as a blockchain ledger. In Bitcoin, such ledgers are stored partially or in full on nodes, i.e, computers linked to the network which miners have access to. These nodes also need consensus before transactions can get through. As a result, fraudulent or invalid transactions are easily caught and rejected by the network.
Bitcoin introduced a Utopian view of how an idealized banking system would look like. But is it going to deliver on that promise, or are we headed for the worst bubble ever seen in the history of mankind? To answer this question, we need to turn on how things are going in the cryptocurrency mining business.
Mining Profitability and the Current Price Bubble
Profitability for cryptocurrency mining is very promising indeed. Recent data from https://bitinfocharts.com/ shows how much you’ll earn at 1 TH/s mining crytpocurrencies. At this rate, you’ll earn 3.5887 USD/day for Bitcoin, 1.9947 USD/day for Bitcoin Cash, 0.108 USD/day (1 MH/s) for Ethereum, and a staggering 3.4973 USD/day (1 KH/s) for Monero.
Profitability calculators such as https://www.coinwarz.com/ is a lot more conservative when it comes to the calculations, weighing in several factors in addition to the hash rate such as power consumption (watts per hour), power cost, pool fees, bitcoin difficulty, block reward, Bitcoin to USD exchange rate, and hardware cost.
For instance, you just bought an AntMiner S9 that comes with a PSU for 3000 USD. Using the the Bitcoin mining calculator, we can see that 14 TH/s, using 1.375 kWh at 10 cents per kW, and a pool fee of 1%, yields 1134.61 USD per month. Scale it down to 1 TH/s and you’ll get 81.0436 USD per month. In 30-days of mining, you’ll get 2.70 USD per day, which is slightly lower to the estimated daily profit from https://bitinfocharts.com/ at 3.5887 USD/day.
Genesis Mining offers a mining package of 1TH/s for 2 years at 830 USD. Assuming that Bitcoin to USD rate stays the same for 2 years straight (which is very unlikely), using bitinfochart’s estimated daily profit would yield 2583.864 USD by the time the contract expires. Subtracting the cloud mining fee gives you a net profit of 1,753.864 or 2.4025 USD per day.
You might consider this profit too small; but that’s the reality of mining as far as the number goes. Compare this to how much you’d earn in two years, putting that same amount of money in the bank and you’ll quickly notice just how great the differences are. This brings us to the all-important question of how our financial system will turn out given the numbers and the current situation our banks are now facing.
Cryptocurrency as a Store of Value
There’s no question when it comes to mining profitability nowadays with the current uptrend of Bitcoin and other major currencies. However, as of date, we don’t see a lot of countries using cryptocurrencies to pay for goods and services. But this will probably change as more people turn from mere speculators to users, miners, and investors. Countries like Zimbabwe will probably use cryptocurrencies to curb their inflation, stabilization the economy, taking the power away from the government and the central banks and putting it where it belongs – in the hands of the people.
We might not have exact numbers as to how many people are now into cryptocurrencies, but their presence can be felt with the unprecedented rise in their prices. What we’re seeing right now could be the first signs of mass adoption where every people in the world will have cryptocurrency wallets in their mobile phones and laptops. Consequently, this would mean a more stable currency like fiat, and hence be able to function much like it.
There’s much to be seen as to the long-term effects of replacing fiat with cryptocurrency in the global economy. Some speculate this shift could result in mass disruption as fiat currencies lose their value over cryptocurrencies. But as we can see, banks are now looking into the possibility of adapting to this new wave of digital banking to avoid being wiped out by the tides of change. More likely we’ll see a slow transition as cryptocurrencies become increasingly common.