Bitcoin’s value hit $18,180.80 on December 8 and is currently at $16,452.20 as of this writing on December 14. This was after it was officially added in futures trading. Futures trading allows buyers and sellers to agree to a price of an asset in the future. This future valuation is now introduced into the asset or commodity, such as crude oil, livestock and even financial assets, such as stocks and bonds. Apparently, this has helped “tame” the behavior of Bitcoin valuation. Nonetheless, our purpose in this column is to understand the basis of why Bitcoin or cryptocurrency emerged and not its valuation. We will have valuation as a future topic.

Recall that cryptocurrencies aim to be the currency of the future—facilitating transactions and removing intermediation costs. The role of central banks around the world is to regulate the supply of fiat money by printing what is estimated to be the need of the economy. If the businesses are producing better output, they will lead to lower prices of goods and services and thereby lower inflation, but businesses will need more money to produce more goods and services. Consider what happens in the kitchen when frying a chicken. If chicken is the economic output and oil is money, you need the right amount of oil to fry the chicken. Too much oil is like inflation and less oil will not cook the chicken. Central banks are basically balancing the oil or money requirements. However, beyond central banks are hundreds of banks—private and government owned—also functioning like small central banks directly to their clients. Banks make money through intermediation or as the middle system between borrowers and lenders, either through adding interest rates or charging certain fees for transactions they do. Quite recently, we have been moving toward cashless economy by going electronic. But note that there is still intermediation in the system. What cryptocurrencies attempt to accomplish is to allow direct financial transactions between two people—effectively doing away with banks.

Unlike fiat money that needs to be printed by central banks, cryptocurrencies are created by using complicated computer-system generation. Very much akin to its metal predecessors, cryptocurrencies need to be “mined” and its supply is limited. This cryptocurrency mining allows anyone with a high processing computer to “mint” his or her own coin. This system within the technology called blockchain is the security and verification process that is complex and is unlikely to fail if it becomes acceptable. The process is expensive and is not worth counterfeiting unlike paper money or gold coins. In short, cryptocurrencies have given the power to create money to people away from the banking system.

Just like fiat money, cryptocurrencies can be used to purchase goods and services or saved for future use. But unlike fiat money, it is completely unregulated and completely decentralized. It will depend a lot on its acceptability and ease of access for everybody for it to become the currency of acceptance. Each cryptocurrency is stored in what is known as blockchain and is unique to each individual user. If one remember the peer-to-peer file sharing of recent past (e.g., Bittorrent, Kazaa), cryptocurrencies work in similar fashion but with incredible technological security. It is digitally confirmable but without need for a personal name attached to it, making it purely anonymous. Nonetheless, the use of each blockchain or digital wallet is historically traceable so one would know how it was used even if you do not know who owns it. This makes it susceptible for use by blackmarketers and other illegal activities.

At the moment, people are not concerned with these points that are being discussed because most are attracted to the valuation and not its use. However, these are the more important points. Consider these other challenges of cryptocurrencies at the moment. First, confirmation process of coins—since anyone can mine a coin, it must be verified first if one’s coin really exists. The process to verify, however, takes a lot of take at present, making multiple transactions on a single coin possible. This makes currently electronic banking faster and convenient. Second, lack of protection, even if the system itself is secured, it is not completely protected from theft and hacking yet. As the cryptocurrencies reach more accessibility and acceptance, it will be like normal money subject to evil desires to covet and steal. Finally, it’s decentralized and completely free from regulation system, which makes it incompatible for insurance.

For everyone wanting to join the Bitcoin bandwagon, one must be ready to go beyond its valuation but look into its original purpose and intent. As of the moment, it is far from accomplishing its objective of eventually becoming the currency of the future. It seems that its technological requirements will make it highly imbalanced toward the rich as of yet. When it becomes acceptable and accessible to people of all walks of life, then we could say that, indeed, cryptocurrency has arrived.