1. Crypto is the Data Money, Blockchain is the Accounting System

It is wrong to think that Cryptocurrencies such as Bitcoin and Ethereum are mere digital monies. US dollars can be digitally represented, too. In fact, most of the fiat monies are experienced and exchanged digitally. What exactly, then, makes a cryptocurrency? In history there have been three forms of material money used as fiat. Metal money, invented by the Lydians in Anatolia (today’s Turkey) in 550 BC, was the first. The second was paper money, printed by Kublai Khan in 1260 in today’s China. The final version of fiat money emerged in the United States, this time as a non-sovereign fiat currency, offered by Satoshi Nakamoto in 2008. This new money is data money. In metal and paper monies, we monetize metal alloys or paper and imagine value in them. In data money, we monetize the right to send data privately in a public sphere. We imagine value in such a right to send data. But because replicating data is basically free, by cutting and pasting, and categorically easier than making counterfeit money, data monies could appear only after the right technology had emerged.

Blockchains make it possible to attach a unique quality to infinitely replicable digital things. They do so in two ways. Using time as a mark of identity, they shape things for a unique moment. What a cup is for water, time is for cryptocurrency. Second, blockchains allow people to keep a book of data transactions, which can serve as a register of all data transactions. Every new transaction is added to all others and inserted in a digital box that we call blocks. Depending on the technology of accounting (Proof of Work, Proof of Stake, and so on), blockchains need a certain number of individuals who can account for these transactions. But who would do this time-consuming and costly job if they were not paid? Miners, or accountants, do this for a cryptocurrency. The Bitcoin blockchain gives Bitcoin and the Ethereum blockchain gives Ethereum to those who help account for transactions. Thus, every data transaction is unique, cannot be replicated, and is registered somewhere for good, without needing banks or states to ensure authenticity.

2. Cryptocurrency Presents a Material Service

The conditions that made these data monies and their new accounting possible necessitated decades of work in computing, material science, and cryptography. It was not just the “idea” of an extremely smart person. People find data monies valuable, not because of a drive for gambling (in fact, gambling is done more often with sovereign fiat money, such as US dollars), not because of a motivation to trade illicit things (which also is carried out more often with fiat), but because blockchains provide them with an intangible yet material service without the need for a bank and a state. For the first time in history, one can put, for example, one trillion dollars in a pocket, or send it to the other side of the world within a second. Such a service turned a new page in economic history. Crypto is not hoax; it is data money that draws on a material service provision.

3. Cryptocurrency Is a Community Money

There exists a limited number of materials used to make fiat currency in history. But communities have been inventing and monetizing a myriad different forms and types of monies. Data money is not an exception. When Satoshi Nakamoto proposed Bitcoin and its blockchain, he also worked on building a community around it. That is why he put together a forum and provided people with a device to use so that they could imagine a new money form and transact it. We learn, but we do so slowly. In the beginning, the first data money community grew faster than the value of Bitcoin. Then the money value picked up, exceeding 1 USD in April 2011. This was a revolution, for an obscure community’s money was suddenly more valuable than the dollar, the US Government’s money.

4. Prices Will Increase for a While

Communities around the world learned that they could make or use other communities’ data monies. Then came three big waves. Bitcoin’s first wave was superseded by Ethereum’s wave, which drew on a more developed blockchain. Creating a Big Bang of cryptocurrencies, the Ethereum blockchain served as infrastructure for 88 percent of all new crypto projects whose monies made it to top 100 most valuable crypto lists. The third wave is now emerging, with projects building interchains that connect separate blockchains, such as Avalanche (AVAX) and Polkadot (DOT). What Bitcoin was in 2008 is now AVAX. People will learn about it from publications such as this article and buy, for two historical/sociological reasons. First, it takes time for people to learn, trust, and buy new things, especially if it is a new financial instrument. It took more than two centuries for more than half of US citizens to buy a single stock. As more people learn about cryptocurrencies, they will buy; the more people buy, the more stable crypto values will be. Plus, crypto markets never close, but are open 168 hours a week (at least four times longer than conventional exchanges). For example, the New York Stock Exchange, opening at 9:30 am and closing at 4:00 pm, is open for retail 37.5 hours a week. Second, rising authoritarianism all over the world is incentivizing people to park their investments in the form of a secure and mobile asset that cannot be controlled by authoritarian governments. When you have an Ethereum wallet, you can keep your money away from rogue states.

5. Exchanges Undermine Blockchains

Yet, it would be misleading to think that cryptocurrencies are replacing dollars, and that blockchains are replacing states and banks. If one does not have any investment in computing, one cannot receive cryptos as gifts from blockchains. So, how do people get them? They buy these data monies from centralized exchanges. And they buy it with US Dollars (the most common fiat), thus contributing to the dollarization of world trade, rather than weakening it. And when they buy it from a centralized exchange such as Binance (the world’s largest) or Coinbase (the largest in the US), they keep it there. These cryptos then become custodian assets whose transactions are never registered in blockchains. According to my last calculation, more than 90 percent of all Bitcoin transactions are kept as custodian assets in centralized exchanges and are never actually and technically owned by their buyers. Thus, they are like enormous piles of money kept in a wooden box in a small building made from paper, if the exchange does not have the resources or motivation to ensure security. If you break into an exchange, you can take all the money. Since June 2011, all over the world, there has been one hack every seven weeks. And this figure does not include fraud, as we saw in the case of the Thodex and Vebitcoin exchanges in Turkey. However, such bad apples are not the norm in the cryptocurrency boom. The world’s largest centralized exchanges recruit from government compliance agencies and banks, investing heavily in security. For an everyday trader, a well-working exchange and a well-working bank are the same in terms of securing their assets. Still, a new development may replace the dominance of these centralized markets that now number more than 25,000, organized under more than 342 exchanges. The emergence of decentralized exchanges such as Uniswap, with its coin UNI, provide users with the opportunity to trade without a centralized exchange and with very very small transaction fees. If you get your crypto from them, you do not keep it there, so there is no possibility for hacking or asset-based fraud.

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