Why cryptocurrencies at all

Before we get to exchanges and charts, it pays to answer a simple question: why would anyone invent new money? The old one works, after all. Mostly.

Money is an agreement#

People used to pay with goods – chickens, grain, salt. It worked, but chickens are hard to break into small change and even harder to carry in a wallet. So coins came along, then banknotes and finally numbers in a bank account.

All of these have one thing in common: we trust that others will accept them too. A banknote on its own is just printed paper. It has value because we agree on it – and because a state and a central bank look after it.

The problem with digital money: it can be copied#

With a paper banknote it is simple: once you hand it over, you no longer have it. Digital things behave differently. You can copy a photo or a document a thousand times and still keep the original.

If digital money worked the same way, you could send one banknote to two people at once. This is called double spending – and it is the main reason digital money could not work without someone in the middle for so long.

The solution was a bank. It keeps the one official record of who owns how much. When you pay by card, the bank checks that you really have the money, takes it from your account and adds it to the receiver's. There is nothing to copy.

Banks work – but at a price#

The bank system is convenient and mostly reliable. It has its downsides, though:

• You have to trust it. It keeps the records, decides about payments and, in the worst case, can freeze your account.
• Borders and fees. A payment abroad can take days and cost a fair amount.
• Not everyone has an account. A large part of the world's population cannot get to a bank at all.
• Banks fail too. In the 2008 financial crisis, governments had to rescue big banks with taxpayers' money.

How Bitcoin was born#

Right in the middle of that crisis, on 31 October 2008, someone using the name Satoshi Nakamoto published a short paper called Bitcoin: A Peer-to-Peer Electronic Cash System. It described digital money that needs no bank – and still cannot be spent twice.

The idea: instead of one record at a bank, every participant of the network keeps the same record of payments. We will look at how exactly that works in the next lesson.

On 3 January 2009 the first Bitcoin block was created. Satoshi put a newspaper headline of that day into it:

The Times 03/Jan/2009 Chancellor on brink of second bailout for banks

The headline proves the block could not have been made earlier – and to this day it is read as a quiet comment on why Bitcoin was created. Nobody knows for sure who Satoshi Nakamoto is.

Common myths#

• "Cryptocurrencies are only for criminals." On a blockchain every payment is publicly visible, which is rather a disadvantage for criminals.
• "Bitcoin was invented by a bank or a government." No – it was created as an alternative to them, and nobody owns it.
• "They have no value" vs. "their value is guaranteed." Both are wrong. They are worth exactly as much as the people using them agree – and that can change fast.