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What is “cryptographic assets (virtual currency)” such as Bitcoin [Financial basic knowledge]

Bitcoin and others were once called virtual currencies, but now they are called crypto assets. Cryptocurrency is defined as the property value that can be exchanged on the Internet.

This article will introduce you to the basic knowledge of crypto assets, so if you read it to the end, you will understand why Bitcoin is attracting worldwide attention.

Why is Bitcoin a crypto asset?

The Bank of Japan defines crypto assets as follows (* 1).

  • Has property value that can be exchanged on the Internet
  • Can be used when paying for an unspecified number of people
  • Can be exchanged for fiat currencies such as Japanese yen and US dollars
  • Can be electronically recorded and transferred
  • Not legal tender
  • Not a “fiat-denominated asset” like a prepaid card

Those that meet these 6 conditions are called crypto assets. And the Bank of Japan cites Bitcoin and Ethereum as typical crypto assets.

Let’s focus on the most famous Bitcoin here. Why is Bitcoin a crypto asset?

(※1)https://www.boj.or.jp/announcements/education/oshiete/money/c27.htm/

Bitcoin meets 6 conditions

Speaking of Bitcoin, coins with a vertical line on the “B” are famous, but that is just an image. Money in Bitcoin is data in your computer and does not use physical objects such as coins or banknotes.

Data can be used like money other than crypto assets. For example, the billing system for online games exchanges “game-enjoying experience” and “money,” and the data that goes through both is the “game-playing data.”

Therefore, “data played from the game” corresponds to one of the conditions for cryptographic assets, “● has a property value that can be exchanged on the Internet.”

However, “data played from the game” cannot be said to be a crypto asset because it does not mean that it can be used when paying a price to an unspecified number of people, which is another condition of crypto assets.

On the other hand, Bitcoin data can be exchanged for yen and dollars. And Bitcoin data can be exchanged on the Internet.

From the above, Bitcoin meets the following conditions for crypto assets.

  • Has property value that can be exchanged on the Internet
  • Can be used when paying for an unspecified number of people
  • Can be exchanged for fiat currencies such as Japanese yen and US dollars
  • Can be electronically recorded and transferred

Bitcoin also clears “● not fiat currency” and “● not” fiat currency-denominated assets “like prepaid cards.” Therefore, Bitcoin is a crypto asset.

Value fluctuates because there is no central manager or central bank

Bitcoin is characterized by the lack of a central administrator.

The Bank of Japan is the central administrator for the Japanese yen, and the Federal Reserve Board (FRB) is the central administrator for the US dollar. The Bank of Japan and the Fed are called central banks, which manage the value of their own currency and the financial system. Not only does Bitcoin have no central administrator, it also does not involve a central bank.

Cryptocurrency assets are distinguished from e-commerce because of the characteristic that the central bank is not involved. Electronic money has a one-to-one relationship with the yen. If you decide to use electronic money for 1 point and 1 yen, 1 point will always be worth 1 yen.

The reason why “1 point = 1 yen” does not fluctuate is that e-commerce only devises a payment method (payment method) and does not adjust the value of money.

However, in crypto assets, one unit of crypto assets can be worth 1 yen, 2 yen, or 0.5 yen. The value of a unit of crypto assets fluctuates because it can fluctuate without the intervention of a central bank.

The unit of Bitcoin is “BTC (read as Bitcoin)”, but the value of 1BTC has been 1,000 yen or 6 million yen.

How to exchange Bitcoin for Yen

To use Bitcoin, you need to exchange your yen for Bitcoin. Also, even if you are using Bitcoin, and no matter how much you say “Bitcoin is worth the money”, you will want to convert your Bitcoin into yen someday.

A company that provides a service for exchanging Bitcoin for yen is called a crypto asset exchange company. You will have to ask a crypto asset exchange company to get Bitcoin and to return Bitcoin to Yen.

In Japan, crypto asset exchange companies must register with the Financial Services Agency. Not everyone can do business in exchanging Bitcoin for Yen. In this regard, it can be said that the government is intervening.

Who created and manages Bitcoin?

Cryptocurrency exchange companies are only exchanging yen for Bitcoin, they are not producing Bitcoin or managing Bitcoin.

The person who can generate Bitcoin, that is, the person who can create the data of Bitcoin, is the person who processed the data in which Bitcoin was traded by a computer. In other words, a new Bitcoin is given to the person whose transaction data is processed by Bitcoin on a computer.

Since data is “life” for Bitcoin, accurate and quick computer processing of transaction data can be said to be the lifeline of Bitcoin. Therefore, a new Bitcoin will be given as a reward to the person who computer-processed the transaction data.

Computer processing of Bitcoin transaction data to obtain new Bitcoin is called “mining”.

Mining cannot be done forever, and the Bitcoin system stipulates that by 2140, only a total of 21 million BTC will be issued. By the way, if 1 BTC is 6 million yen, 21 million BTC will be 126 trillion yen.

Bitcoin transactions are managed by a network of computers connected to the Internet. All Bitcoin transaction information is recorded in the transaction ledger, and the transaction ledger data exists on the computer network.

Since the amount of data in the transaction ledger is enormous, it is divided into small units called blocks and saved. All blocks are connected like a chain, and if one block is tampered with illegally, it will be inconsistent with the data in other blocks, so it will be discovered.

This computer system is called “blockchain”. And the blockchain mechanism can be said to be the Bitcoin management system.

Benefits of using crypto assets

I think the following questions will arise from the explanation so far.

“Why are so many people actively using crypto assets that are not under the control of a central bank, have unstable value as money, and require complex computer systems?”

Why are you trying to do what you can do with yen or dollars using crypto assets? The advantages of using crypto assets can be summarized in the following three points.

Can be exchanged between individuals without going through a central bank or a general bank

Cryptocurrency assets can be exchanged between individuals. Not only central banks but also general banks do not intervene there. Cryptocurrency assets can be exchanged between individuals because it is data.

Free or cheap fees

There are fees for sending and withdrawing money through banks.

However, the exchange of crypto assets is free or cheap even if fees are charged. Since crypto assets are data, there is no hassle in exchanging them. In addition, the data of cryptographic assets is exchanged on the Internet, but the use of the Internet is free.

Compared to crypto assets, the current money that uses paper (banknotes) and metal (coins) is not easy to use.

Common to the world

Cryptocurrency assets are universal. Even if you use Bitcoin in Japan, the unit is BTC, and you use BTC in both the United States and Europe. And the value of 1 BTC in Japan is 1 BTC in both America and Europe.

On the other hand, existing currencies such as yen and dollar can only be used in your own country, and the units are also different from yen, dollar, pound, euro and yuan.

Central banks control currencies such as the yen and the dollar in order to protect their own currencies. The central bank is independent of the government but works closely with the government. As a result, central banks and governments seek to favor their currencies. As a result, the value of your own currency fluctuates when compared to the currencies of other countries.

Since crypto assets do not have the concept of a country, their value does not change depending on the circumstances of the country.

Disadvantages of using crypto assets

Cryptocurrency is a very reasonable amount of money, but it still has many disadvantages that it does not spread in earnest.

It becomes an investment target and is difficult to use as money

Until around 2012, Bitcoin was about 1,000 yen per BTC. It exceeded 10,000 yen in April 2013, and exceeded 100,000 yen in November of the same year. After that, it continued to fluctuate and reached about 1.5 million yen in 2019, and the value as of March 30, 2021 is about 6.5 million yen.

Bitcoin is an investment target and can either crash or skyrocket. The average person will feel that it is dangerous and cannot be held. As a result, Bitcoin was developed as money, but it became difficult to use it as money.

No central bank or government guarantee

While it is an advantage that crypto assets are not subject to central bank or government intervention, it is also a disadvantage. The disadvantage is that there is no institution that guarantees the value of crypto assets. It is no exaggeration to say that the value of Bitcoin fluctuates due to the lack of central bank and government guarantees.

One day, if everyone suddenly decides not to use Bitcoin, Bitcoin becomes just data. The value of the money that the data had is not zero, with the possibility that it will disappear in an instant. The value of Bitcoin is determined by people’s feelings of “is it worth it” and “is it not worth it?”

However, some crypto assets, including Bitcoin, will not disappear easily as many people around the world admit that they are “valued as money”. And given the rationality and potential of crypto assets, their value may be even higher.

This lack of central bank or government guarantees has its advantages, but uncertainty can be counted as a disadvantage for money.

Summary-Balance between future potential and investment

Cryptocurrency assets are a promising money system, both in terms of universal money and in terms of using the Internet and computers. Holding crypto assets also anticipates the future.

However, please note that crypto assets are investment targets.

Of course, for Japanese people, currencies of other countries such as dollars and euros are also investment targets, so investing in Bitcoin, which is money other than yen, is a normal investment style.

However, the value of Bitcoin and the like fluctuates sharply, and there is a risk of a big loss at the cost of the possibility of making a lot of money. When dealing with cryptocurrencies, it seems better to consider the balance between future potential and investment.