The past 5 years yielded seismic changes across multiple industries. Technology tends do that. And fast. Today, we consume things en masse that used to be standalone products by themselves.

Like print media. The years have not been kind to print. People are reading more on their phones and tablets, forcing printed versions of many magazines and newspapers out of circulation.

Music? While the flexibility of music has dramatically improved, the event of buying music has become largely homogenized. Consumers now receive digital files. There’s no media delivery (i.e. CD, vinyl album, etc.) associated with it.

Television? In some ways (especially TV advertising), television has been affected most of all. When was the last time viewers actually watched a commercial instead of skipping through it? For the savvy, it’s been years. Many people never even watch shows when they are broadcasted, opting to store it all on a DVR for convenient viewing later.

These enormous industries have experienced immense changes to their operations and how their customers consume their products. It’s dizzying, really. But the change around the rise of digital currency might be the biggest change of all.

Going Digital

To be clear, technically the Euro was the first digital currency (semi-digital, more accurately). The Euro isn’t the model we are talking about…most of the heat in the digital currency arena is on what is commonly referred to as “cryptocurrency”.

Cryptocurrency – (n.) – a type of digital token that relies on cryptography for chaining together digital signatures of token transfers, resolved via peer-to-peer networking & decentralization.

Let’s cover the highlights:

  • Cryptocurrency is produced by the entire cryptocurrency system collectively, at a rate, which is prior defined and publicly known. In centralized banking systems, like the Federal Reserve Bank, governments control the supply of currency by printing units of money or demanding additions to digital banking ledgers.
  • Governments cannot produce units of cryptocurrency and as such, governments cannot provide backing (think FDIC) for firms, banks or the corporate entities that hold asset value measured in a decentralized cryptocurrency. This is like the Wild West compared to traditional commerce…and very difficult to regulate.
  • In cryptocurrency systems, the safety, integrity and balance of ledgers is maintained by a community of mutually distrustful parties referred to as miners. These “miners” are members of the general public using their computers to help validate and timestamp transactions; adding them to the ledger in accordance with a particular time-stamping scheme.
  • The security of cryptocurrency ledgers is based on the assumption that the majority of miners are honestly trying to maintain the ledger.
  • Most cryptocurrencies are designed to gradually decrease production of currency, placing an ultimate cap on the total amount of currency that will ever be in circulation. This mimics the scarcity (and value) of precious metals and is aimed to avoid hyperinflation.
  • Compared with ordinary currencies held by financial institutions or kept as cash on hand, cryptocurrencies are FAR less susceptible to seizure by law enforcement.
  • Existing cryptocurrencies are all pseudo-anonymous, though additions such as Zerocoin and its distributed laundry feature have been suggested, which would allow for anonymity.

There are literally HUNDREDS of cryptocurrencies right now, but none are bigger than Bitcoin. In fact, almost all the other existing cryptocurrencies out there like Litecoin, PPCoin or Freicoin, are mostly derived from Bitcoin. Many of these cryptocurrencies fail because they offer little to no technical innovation over Bitcoin.

Bitcoin: From Out of Nowhere…or at Least Nowhere Specific

Bitcoin is the godfather of cryptocurrency…it was the first, created in 2008 and then hitting the scene as open source software in 2009. Payments are recorded in a public ledger (the block chain) using its own unit of account (bitcoins, duh!). That’s where it gets a little crazy…the payments are processed peer-to-peer, via a network of communicating nodes running bitcoin software that anyone can join, without a single admin or central repository.

Sample transaction: “payer X sends Y bitcoins to payee Z”

This takes a lot of processing power, so bitcoins are created as a reward for processing work, where users exchange their computing power to verify & record payments into the public ledger. This activity is called mining, and miners are compensated in transaction fees and newly minted bitcoins. Beyond mining, bitcoins can be obtained in exchange for goods & services. Users can send and receive bitcoins electronically for a transaction fee using wallet software on a PC, mobile device or web application.

Bitcoin (LTC)
Site: http://bitcoin.org/
Launch date: January 3, 2009
Number of Bitcoins in circulation: >13,000,000
Eventual Litecoin total: 21,000,000
Market cap: $4.6 billion
Current value: $341.66

Pros

  • A legitimate game-changing option to cash & CC vehicles
  • Merchants incentivized to accept bitcoins because fees are lower than CC
  • Similar anonymity for spending as cash
  • Easy to use for illegal activities (Silk Road)

Cons

  • Currently still difficult to use as a real alternative to CC or cash
  • Can be stolen like cash (untraceable)
  • Chargebacks are impossible
  • Due to the speculative nature, bitcoin prices have been extremely volatile
  • Easy to use for illegal activities (Silk Road)

Notable Also-Rans

Litecoin (LTC)
Site: http://litecoin.org/
Launch date: October 13, 2011
Number of Litecoins in circulation: >33,000,000
Eventual Litecoin total: 84,000,000
Market cap: $122.2 million
Current Value: $3.64

  • First cryptocurrency to use scrypt (a password-based key derivation function) instead on SHA-256
  • § 4 times the planned size of Bitcoin, as miners are currently rewarded w/ 50 new Litecoins per block, an amount which gets halved roughly every 4 years (every 840,000 blocks)

PPCoin (PPC)
Site: http://www.ppcoin.org/
Launch date: August 12, 2012
Number of PPCoins circulation: Unknown
Eventual PPCoin total: No cap
Market cap: Unknown
Current Value: $0.79

  • First proof-of-stake coin, which means it doesn’t take massive computing power to secure the network.
  • After Peercoins are held for 30 days, they are eligible to earn a 1% annualized reward

Freicoin (FRC)
Site: http://freico.in/
Launch date: December 17, 2012
Number of Freicoins in circulation: Unknown
Eventual Freicoins total: 100 million
Market cap: Unknown

  • Has a demurrage fee in order to prevent hoarding and encourage circulation
  • Not as directly competitive w/ Bitcoin as some of the other cryptocurrencies

Are we going to wake up tomorrow and be paying for everything with Bitcoins or some other digital currency? Not likely. Just like we aren’t wearing jetpacks and engaging in time travel…yet. The promise of digital currency is still a likely 7-10 years or more away. That said, we should all educate ourselves on the technology advancements in this field, as they will affect all of our lives sooner than later.