Money solves a problem where people want to exchange goods, but have a hard time finding a partner with whom they can trade. It lets people trade in something common, and later exchange for the goods that they are interested in, rather than requiring the effort to go through multiple trades to get what you really want. Money has taken many shapes and sizes- from the giant Rai stones that changed ownership to our modern day cash. Recently, we’ve seen a transition to a system that primarily holds our currencies digitally. Particularly true in the United States, most people don’t use cash to pay for things anymore. We simply slide a plastic card that gives access to our account, which is really just a number representing how much “money” we have. The numbers go down, and someone else’s numbers go up, and we agree that someone has paid. Likewise, many of us don’t even receive a check from our workplace- “direct deposit” means that the numbers just go up every month, and we have accepted that this change means that we have more money.
Cryptocurrency builds on the concept of digital money. Money can be a digital resource, with rules surrounding how it gets created, how much gets created, and how it gets stored. Cryptocurrency introduces several important ideas into digital money that make it safer to use and gives it advantages over other digital currency. One of these is the introduction of the “blockchain”. This is a data structure allows for accounting that can’t be tampered with; once an entry has been incorporated into the blockchain, it’s permanent. This data is public, and distributed over a large network rather than stored by one central location. A second innovation of cryptocurrency is the use of encryption to protect transactions and give anonymity. While the details of your transactions from a bank are encrypted, they are tied to your account and all of your personal information. Crytpocurrencies, on the other hand, use an encryption process to determine who actually sent or received a transaction. So instead of having an account that the bank knows is tied to your name, or sending money to your IP address, money is transferred anonymously to and from codes. On an intuitive level, everyone has a public code (that people may or may not tie to your identity) and a secret code. Money can be sent to your public code, but it can only be unlocked with your secret code. It works inversely as well, as you can prove that something originated from your secret code because your public code is able to unlock it.
So cryptocurrency allows us to have an unchangeable ledger, called a blockchain. It also can grant anonymity, and provide a high level of security. This is important and gets people excited for many reasons, which may be the subject for another post. But suffice it to say, that we find this technology very excited and believe it’s going to bring about some big changes. There are lots of very smart people working on new applications for this, and the companies formed around these ideas are going to grow. To this end, we’ve established our incubator fund to invest in cryptocurrencies. If you want to know more about our investment philosophy and how we value cryptocurrencies, please check out the “about us” section of our website. If you’re interested in investing, please contact us.