Money works like this: You get something rare and in limited supply, such as cowry shells, gold coins or special printed paper and you create a legal system that declares that item as something that may be used to represent value when exchanging goods and services. The thing itself doesn’t need to have intrinsic value (currency notes and cheques are just printed paper), but as long as it is hard to fake and people agree to use it as a representation of value, all the check-boxes that make it become “money” are ticked. Okay? Good. Let’s proceed.
Remember “prime numbers” from primary school maths? 2, 3, 5, 7, 11, 13, 17, 19, 23, 29, 31, 37, 41, 43, 47, 53, 59, 61, 67, 71, 73, 79, 83, 89, 97, etc.? As you go up that series into the millions and billions and beyond, they become harder and harder to find, and you eventually get to a point where it would take very powerful computers very many years to calculate them. If you then calculate one of these numbers (this is called “mining”) and you secure it with special passwords (called “cyphering”) and you have some way of storing the history of all transactions performed using that number (this is called “block-chain”), then you have something very rare and very difficult to fake. The first “money” checkbox has been ticked. If you then get people to agree to accept this “packaged prime number” in exchange for goods and services, you have something that can function as money.
That, basically, is what crypto-currency is. “Bit-coin” is just one “flavour” of crypto-currency, just the same way “dollar” is just one “flavour” of paper-money.
Currencies, just like any other tradable thing, are subject to market forces including the forces of supply and demand, which is why the values of various currencies fluctuate in relation to each other, leading to “exchange rates”, e.g. 1 dollar = 103 Kenyan shillings.
The fluctuations between currencies can be used to make profit through what is called “currency trading”. For example, when 1 dollar is going for 90 bob, you can buy 1000 dollars for 90,000 bob. When the value of the dollar goes up to 110 bob, you can then sell your 1000 dollars for 110,000 bob and make a profit of 20,000 bob.
The values of crypto-currencies fluctuate in the same way, both against each other and against traditional currencies. This therefore means that trading in bit-coin is just good old currency trading, the only difference here being that the currency you’re trading in is new and highly technical in nature, but it’s basically the same old game.
Author: John Paul Chacha