This chapter and Chapter 9 deal with crypto assets: first cryptocurrencies specifically (this chapter) and then stablecoins (Chapter 9). We look at the structures underpinning cryptocurrencies to see whether they can fulfil the classical attributes of money, that is, as a means of transactions, store of value, and unit of account, plus the other more complex functions discussed earlier. This chapter offers a complete overview of how cryptocurrencies work: blockchains, miners, distributed ledgers, and so on. It recaps the history of Bitcoin and details the structure of the transactions and its informational characteristics. Then we rate the performance of Bitcoin: transaction speed, user costs, mining rewards, privacy, environmental cost. We also consider variants of the Bitcoin scheme, such as Ethereum, with the potential advantages of “proof of stake” as opposed to “proof of work,” from the point of view of private users and social costs. Finally, we deal with security aspects: fraud, technical failures, scalability, and so on. The real-world case of El Salvador, the only country that attempted an official use of Bitcoin, with disastrous results, is mentioned. The conclusion is that Bitcoin and its peers are unlikely to be used broadly either as means of payment or as stores of value. However, they may eventually establish an interesting niche as part of diversified portfolios.
