For most of the past century, we’ve been taught to view the world in terms of traditional economics. But this theory fails to explain the rise of Bitcoin and other cryptocurrencies, as well as their wildly fluctuating value. So how does Bitcoin work? And why does it have value? In this article, we’ll go over what makes Bitcoin special – and how Bitcoin proves that traditional economics is failing us.


The Great Recession

Between 2007 and 2009, global GDP fell by 4.1%—the largest and longest dip since World War II. The big question: Was that a reaction to declining consumer confidence or something more sinister? After all, banks had lost trillions of dollars in investments through subprime mortgages. Were they just looking for someone to blame? (You.) We may never know what happened in 2008, but what’s clear is that central economic planning didn’t work — and that our economy will never be 100% safe from financial collapse. So what now? Perhaps we need to rethink how we approach economics altogether; maybe we need a new system entirely.


The Rise of Cryptocurrency

As recently as 2016, bitcoin was more like a novelty than a serious contender for mainstream use. After all, it was launched in 2009 to help users avoid government regulation and oversight of their money. Yet as we begin 2017, it’s becoming increasingly clear that blockchain technology –- which powers digital currencies like bitcoin -– has established itself as an innovative force to be reckoned with in multiple industries. If you find yourself surprised at how quickly blockchain has moved from what’s that? to how can I get on board? read on for answers.


Why are we more interested in cryptocurrency than ever?

It’s been a rough year for traditional investment options. Stock market averages are down by about 8 percent; gold has been climbing up and up; and high-yield CDs aren’t offering much interest, at 0.60 percent (though they could be worse). But even in an uncertain economic climate, investors are giving cryptocurrency significant attention—and why not? If you invested $100 in bitcoin seven years ago, that money would now be worth more than $75 million. Cryptocurrency isn’t backed by physical currency or precious metals—it’s just code—but its value grows with time and its limited quantity means it will likely continue to hold value as long as people use it.


Just because you don’t understand it, doesn’t mean it won’t succeed.

The fact that you don’t understand something doesn’t mean it doesn’t work. One of most common misunderstandings about bitcoin is that it relies on economic speculation to succeed. The assumption being, if people do not perceive a valuable future for bitcoin, then why would they pay real-world dollars for it? This logic makes sense…in theory. But in practice, economic theory has failed to anticipate or predict any significant financial trends of our time — and these trends have been some of the biggest drivers of success for cryptocurrencies like bitcoin.


But…But…You Can’t Print Bitcoins! (Or can you?)

One of the criticisms that has been leveled at bitcoin for years is that it’s not backed by anything, and that because it’s created out of thin air, it has no true value. This claim presumes a belief in hard money—that if a currency can be printed or minted at will by a government, then its value should change based on how much of it there is. This makes some intuitive sense, but as we’ve learned with modern-day economies, things are rarely so simple. The value of fiat currency depends almost entirely on perception, and while you might think you know what a dollar will buy you next week or next year, ask yourself whether you can be certain about that.


You Can Own It If You Don’t Have It (HODL)

Crypto-currency is unique in that it does not react to economic conditions like other asset classes. The price of gold, for example, goes up when inflation increases and down when inflation decreases. Stocks do better if there’s a high rate of growth and worse if there’s a low rate of growth. But bitcoin is resilient, because it doesn’t respond to economic factors directly. This means you can still benefit from bitcoin’s rise—even if our government decides we should be in a recession or deflationary period.


What if Banks Get Into the Game? (They have.)

Digital currency has existed in some form since it was first outlined by Stuart Haber and W. Scott Stornetta in 1991, but even early digital currencies like e-gold, which briefly reached a circulation of more than $4 billion before shutting down in 2009, operated more like closed networks for communities with specific interests than like anonymous, general purpose currencies that anyone can use for any purpose. This made them vulnerable to fraud: a flaw recently exploited by hackers who stole millions from a major digital currency exchange. The anonymous bitcoin’s success suggests that Haber and Stornetta’s idea finally worked—or at least caught on—because it addressed two important shortcomings of earlier currencies: anonymity and durability.


Even Warren Buffett is Worried About Cryptocurrency.

Even Warren Buffett, widely regarded as one of the greatest investors of all time, is worried about bitcoin. The Berkshire Hathaway CEO has previously warned people to be wary of investing in stocks they don’t understand, and his stance on cryptocurrency was no different: I can say almost with certainty that they will come to a bad ending. When it happens or how or anything else I don’t know.


Global Economic Systems Will Fail Without Cryptocurrency.

Cryptocurrency has more staying power than conventional global economic systems, which are based on fiat currency. How can one system beat out another? Cryptocurrency has a far lower chance of failing because it isn’t tied to any nation-state or government. Instead, it’s a digital form of currency that operates independently of anyone’s influence except for that of its users. This independence means that cryptocurrency, unlike other currencies tied to nations, will still be viable and useful in times when countries suffer from economies that falter or suffer financial crises like Venezuela did recently. It will also be useful if hyperinflation hits other countries in need of help like Zimbabwe and Greece have faced lately.

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