What a cryptocurrency is, if it isn’t money

Where does the idea come from?

There was one idea, and it deserves saying in full. Make money that depends on no bank and no government. Not a smoother payments app, not an account without branches. A system where the thing that says “this money is yours, and you spent it once” is not an institution but a piece of math anyone can check.

In computer science that problem had stood open for twenty years. The document invents neither cryptography nor peer-to-peer networks. It puts together things that already existed and solves the piece that was missing: how to get thousands of strangers to agree on who is right, with no referee. Everything else — the thousands of coins, onchain finance, the disasters — comes afterwards, and comes from there.

Why does almost nobody use it to pay?

There are exceptions, and they are worth knowing because they say something. El Salvador adopted it as legal tender alongside the dollar, with the stated aim of depending less on American monetary policy. That is a political use, not a commercial one, and even there the results on everyday payments are modest.

As money bitcoin works badly. The price moves too much for prices to be marked in it, and the places that made it legal tender did so for political reasons. As a store of value it works like gold: it travels without a vault, it divides down to the eighth decimal, it sells at any hour, and it swings far more than gold.

The place bitcoin has actually taken is a different one, and it looks like gold — something you hold because it keeps its value over time, not something you spend. With three practical differences in its favor: it travels without a vault, it divides down to the eighth decimal, it sells at any hour. And one against: it swings far more than gold.

What are the other thousands for?

The four uses of a token: paying the network’s fees, which you check by trying to operate without it; receiving a share of the revenue, which you check by following the onchain fees; getting better terms in a service, which you check by comparing the costs with and without; voting, which you check by looking at whether a vote ever changed anything.

The second is taking a cut of what the protocol collects, like a dividend. The third is getting better terms inside a service — lower fees, access to reserved features — which is the loyalty card, translated. The fourth is voting on decisions, from risk parameters to what the treasury spends.

A token can have one of these, or several at once. What it cannot have is none. Take all four away and only the price is left, and what you are buying is the bet that somebody will buy after you at a higher one. Which is a legitimate trade, but it is a different trade.

Is the stated use always real?

Put bluntly: a token that exists only to use the site of whoever issued it is Netflix making you buy NetflixCoin to watch the shows.

The way to spot it is trivial and takes two minutes. Picture the service without its token. If it still works — better, even — the token is a toll, and whoever buys it is paying for the right to use something they could use anyway.

The same test works on voting, which in the enthusiastic telling gets called democracy. On paper it is. In practice whoever holds the most tokens wins, and a handful of very large addresses makes the decisions. A voting right on its own has never brought value to a token. What brings it is a mechanism written into the code, as our guide on value shows with the case of Uniswap.

Put bluntly: token voting is democratic in theory and proportional to how many tokens you hold in practice.

Why does a token’s price tell you nothing?

The figure that counts is the whole one — what the entire set is worth — and it always reads alongside two others: how many tokens already exist, and how many are still to come. A set that looks small because little of it circulates, with eighty percent still to be handed out, is not small. It is waiting.

This is where the commonest beginner’s mistake comes from — buying what is “cheap” because it looks like it has more room to rise. Room to rise doesn’t depend on the price of one piece. It depends on what the whole set is worth against what the protocol produces, and that is the only question you can actually check.

What to ask when a new coin turns up?

Then: who already holds it, and when they are allowed to sell. The unlock calendar is public nearly always, and a date on which a large amount becomes sellable is worth more than any promise about the future. Last: where the money the project hands out comes from, if it hands out any — from the fees of the people using it, or from new issuance.

These are the same three questions our two guides on value and on liquidity ask at length, with the arithmetic. Here they are enough to avoid most of the damage — not because they are sophisticated, but because almost nobody asks them before buying.