Overview

Money used to be gold. Then it was paper backed by gold. Now it is paper backed by nothing (Fiat). Cryptocurrency asks: “What if money was math?” It is an experiment in creating a new financial system without governments or banks.

Core Idea

The core idea is Scarcity without Authority.

  • Gold: Scarce because physics. (Hard to mine).
  • Fiat: Not scarce. (Government can print more).
  • Bitcoin: Scarce because code. (Only 21 million will ever exist).

Formal Definition

The study of the economic incentives and protocols that secure a decentralized network. Tokenomics: The supply and demand logic of a specific coin.

Intuition

  • The Ledger: Who keeps the score?
    • Bank: A private spreadsheet. You trust the bank.
    • Crypto: A public whiteboard. Everyone watches everyone. You trust the crowd.

Examples

  • Bitcoin: Digital Gold. A store of value. Slow, expensive, but very secure.
  • Ethereum: Digital Oil. Fuel for running programs (Smart Contracts).
  • Stablecoins (USDT): Crypto that is pegged to the Dollar. It tries to be boring.

Common Misconceptions

  • It has no intrinsic value: Neither does a $100 bill. It’s just paper. Value comes from belief. If people believe Bitcoin is worth $50k, then it is.
  • It’s a Ponzi Scheme: A Ponzi scheme requires a central operator. Crypto is a bubble (maybe), but not a Ponzi.
  • Deflationary Currency: Since the supply of Bitcoin is fixed, if the economy grows, the price must go up. This encourages hoarding (HODLing) instead of spending.
  • Gresham’s Law: “Bad money drives out good.” If you have a Dollar (bad/inflating) and a Bitcoin (good/deflating), you spend the Dollar and save the Bitcoin.

Applications

  • Remittances: Sending money to family in another country. Western Union takes 10%. Crypto takes $1.

Criticism / Limitations

  • Volatility: You can’t buy coffee with Bitcoin if the price drops 20% while you are standing in line.
  • Energy: Mining Bitcoin uses as much electricity as Sweden.

Further Reading

  • Ammous, Saifedean. The Bitcoin Standard.
  • Vigna, Paul. The Age of Cryptocurrency.