Just as the internet was a paradigm shift for communications, cryptocurrency is a paradigm shift for money. I make this claim with 100 percent confidence. The coming years will see government-backed currency displaced by cryptocurrencies.
Which cryptocurrencies will emerge on top? I have no idea. I'm only certain of one thing: cryptocurrency is a technological breakthrough big enough to make all other forms of money obsolete.
The reason we have currencies in the first place is because we need some medium of exchange to replace the barter system. Currency allows participants in a marketplace to exchange the fruits of their labor for a medium that somehow holds value.
A little background on currency. Before we had currency, or money, it is believed that people engaged in either bartering, or in extending credit. In the credit model of ancient humanity, a fisherman would give away some of his catch with the understanding that those who got the fish would pay him back at some later time. This became difficult to enforce and was largely based on subjective feeling and whim.
Then came gold. For thousands of years, gold was the standard currency in the world for measuring and recording value. Here are the characteristics that make a currency good for holding and recording value:
Scarcity. The currency must be sufficiently scarce, and have a relatively unchanging, or slowly-growing supply, in order to be a good carrier of value. Gold, for example, has about 170,000 tons circulating worldwide with some 2,000 tons being mined per year.
Durability. It must be hard to destroy and it must not degrade easily over time. Gold is remarkably resilient in this way, being resistant to corrosion over many thousands of years.
Portability. Gold is heavy in large amounts, but since a small amount of gold holds a great deal of value (due to its scarcity), it's very good on portability.
Divisibility. We must be able to divide our currency into small portions so as to be able to reflect small transactions. Gold's material properties are excellent for this, being exceptionally malleable.
Verifiability. The currency must be hard to counterfeit, and it must be easy to spot counterfeits. Gold is easily tested for authenticity and difficult to couterfeit.
Storability. An offshoot of portability. Gold is eminently storable, though it is expensive to store due to its weight and mass.
Fungibility. The currency must be of equal value for equal amounts - one ounce of gold is worth just as much as any other ounce of gold.
Now that we see gold has a pretty good profile for being a medium of exchange, but does it have any key weaknesses? I see its weaknesses being in portability/storability.
Gold is portable in small amounts. If we suppose the price of gold is $1,000 an ounce (for simplicity), and we wish to achieve a million dollars in wealth, we need merely store a thousand ounces of it. That's about 83 pounds. Not bad! But not great if you end up with many millions. A billion dollars would be 83,000 pounds. Getting cumbersome. And now you have so much money that keeping it in one place is dangerous. Now you need to pay a bank to hang onto it for you. Getting complicated.
After gold's portability and storability problems became apparent to humanity, we started with the next paradigm in currency: fiat money.
"Fiat" means "by command." Simply put, if I issue a fiat, it means simply "because I say so."
About 40 years ago, most of the governments of the world began adopting currency with zero intrinsic value. Paper money, printed by governments, that held value merely on the basis of faith in that government. Should faith in that government collapse, so does the currency. If that government should print that money with reckless abandon, it devalues that currency. Faith in that government is EVERYTHING where that currency is concerned.
But other than that, how does paper money stack up in the major qualities of currency?
Scarcity: determined by the issuing government. Let's just hope they don't decide to print too much. Gold wins here.
Durability: It's paper money. If it's lost or destroyed, it's gone. Gold is almost impossible to destroy. Gold wins here too.
Portability/storability: paper is easier to carry than money. With large denominations being available, portability skyrockets. Fiat money wins here.
Divisibility: though gold is easy to divide compared to other physical goods due to its malleability, but paper money comes in a large assortment of denominations, so it's pretty much a wash here.
Difficulty of counterfeiting and ease of verification: it's hard to counterfeit paper money, but it can be done and has been done millions of times. Gold wins here.
Fungibility: both are completely fungible. This is a tie.
The big advantages fiat money has over gold is portability and storability. But gold wins or ties in every other category.
A word on storability: it implies having a place to store your currency so that it is not lost or stolen. Preventing theft requires security. Security takes money. Banks came to be because of this problem. This is a big problem that no currency has ever really grappled with in a meaningful way.
This takes us to why I'm calling cryptocurrency a paradigm shift that will, in time, replace both gold and fiat money ENTIRELY as the medium of exchange of goods and services.
I'm going to use Bitcoin as an example of why there's simply no way for older currencies to compete.
Scarcity: Bitcoin is perfectly scarce. By mathematical proof, we know that the upper limit for the number of bitcoins is 21 million. There will never be more than that. In a scarcity contest, it defeats gold and absolutely destroys fiat currencies.
Durability. Each bitcoin is a mathematical construct, eternal, impossible to destroy. There is nothing more indestructable than that. Completely defeats fiat money and gold in this category.
Portability/storability. Having zero mass and weight, bitcoins are infinitely portable. You can carry a billion dollars' worth of bitcoin in your back pocket.
Divisibility. Each bitcoin can be divided into a million pieces, so it's very divisible. Other cryptocurrencies can be discovered with even greater divisibility than that. Cryptocurrency is potentially infinitely divisible and will outclass fiat currency and gold once the need arises.
Difficult to counterfeit/easy to verify: Bitcoins rely on cryptologic algorithms so complex that they're simultaneously impossible to counterfeit and instantly verifiable as authentic. Beats fiat money by a million miles and still beats gold handily.
Fungibility: no bitcoin is different from any other bitcoin in any way that would ever matter to a transactant, so it passes the fungibility test.
Cryptocurrency is superior to gold or fiat money in almost every category. It's not a scam, it's not a curiosity, and it's not a fad. It's here to stay, and it's going to displace gold and fiat just as the automobile displaced the horse and carriage, just as the internet displaced the postal service.
The currencies of the world, measured in dollars, can be estimated: http://www.investopedia.com/tech/how-much-worlds-money-bitcoin/
According to that article, the current value of all money on earth is about $84 trillion dollars. That's a lot of money. How much of it is in bitcoin? That's a much smaller number. $41 billion. How tiny of a percentage is that? Let's look at the numbers:
World money supply: $84,000,000,000,000
World bitcoin supply: $41,000,000,000
That's approximately $1 worth of bitcoin in the world for every $2,000 worth of other money. One two-thousandth. One-half of one-tenth of a percent. For a type of currency that is objectively superior to the one it will replace.
Suppose that bitcoin were to jump to a more logical percentage of the world's money supply. Suppose it was merely 5 percent. Then suddenly bitcoin has a worldwide value of $4.1 trillion. A bitcoin holder who spent $100 today in bitcoins would suddenly have $10,000.
And the larger cryptocurrency market is going to go to 90 percent, faster than you can possibly imagine. It's not a matter of whether cryptocurrency is a good investment. It's a matter of how staggeringly rich the early adopters will become in the next decade. Invest. Now.