Introduction to Digital Tokens - The Bitcoin Experience - Mine Digital
October 7, 2019

Introduction to Digital Tokens – The Bitcoin Experience

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Thomas Kuhn, CFA

Operations and Trading Manager

Since the emergence of Bitcoin and other digital assets there has been a scramble to define what these new financial instruments and digital representations are - with surprisingly varied results. At the highest level they can be labelled with broad consensus as 'digital tokens'.


SEC Chairman Jay Clayton on legally defining ‘digital tokens

‘A digital asset may be offered and sold initially as a security because it meets the definition of an investment contract, but that designation may change over time if the digital asset later is offered and sold in such a way that it will no longer meet that definition.’

Well, that clears that up, right?

Since the emergence of Bitcoin and other digital assets there has been a scramble to define what these new financial instruments and digital representations are – with surprisingly varied results.  At the highest level they can be labelled with broad consensus as ‘digital tokens‘. We may also generalise that each digital token is a cryptographically secured representation of something, whether that something is a protocol, a physical asset, a process, a resource, or another representation.

bitcoin logo - mine digital

Bitcoin as a digital token was originally intended to act as a ‘cryptocurrency’ (essentially a ‘payment mechanism’), although its role in the space is also as an idealised ‘gold-standard’ for the ideals and concepts used to create digital tokens. A Bitcoin today is a digital token whose value is representative of the history of the token. Embedded in the history is ‘work’ performed by computers, or ‘miners’ who solve complex algorithmic challenges to validate transactions and secure the network that the token exists in.  This value, secured through the protocol using blockchain and hashpower (the computing power behind the global transaction validation network) represents Bitcoins inherent value.

Bitcoin is a multi-dimensional concept, so far untethered to the traditional financial system.  It is part of the financial world, but created in the digital world and traded in the physical world, Bitcoin operates as an open system that does not attempt to directly control itself except through game theory.  Its open structure depends on the good faith of participants but the Bitcoin protocol provides incentive for participants to act in good faith.

Unlike other payment mechanisms, Bitcoin is not politically aligned. Where the US dollar relies on the US Government and economy, Bitcoin is outside of that as well as any other ‘fiat’ system (‘fiat’ doubling as a generic name for government-issued currency as well as the non-capitalised brand name of a dodgy Italian car company gone downhill since it’s original Fiat 500, mostly good in the riviera and for dropping in for cappuccino in Rome).

As an apolitical thing, Bitcoin is for everybody, anytime and anywhere. It represents the most available form of monetary value that has ever existed, deriving value from within its protocol and its existence via the digital world.

So although Bitcoin is probably the least contentious of digital tokens, Bitcoin has struggled to achieve recognition of its nature and attributes or use case. Luminaries of the global financial system would go on to argue against it being currency, against it being valuable and sometimes against it being anything more than an elaborate scam, a tulip-bubble waiting on inevitable failure.

But Bitcoin has not failed. In spite of this misunderstanding, Bitcoin has grown from strength to strength, doing the unimaginable, and then doing it again. Bitcoin has established itself as a legitimate ‘thing’ from the technological perspective and from the financial worlds perspective through broad international acceptance and penetration.

What emerges is that Bitcoin is 3 things, 1. A cryptocurrency, 2. A digital ‘store of value’ (not unlike the view of gold as a store of value), and 3. A philosophical representation of the ideals of cryptographic digital tokens – that is, an asset class outside both traditional banking and national-based regulation and controls – a system that is easy and low cost-to-use throughout the world.

It is not a fault of Bitcoin that ‘old-dog new trick’ minds have a hard time conceptualising it. Even if we could broadly agree on what it is, in how it is used, what it is used for, how to treat it legally and regulate it, Bitcoin is still a complex and challenging proposition for many – and itself, is probably the simplest, best understood and clearest representation of all the digital tokens.

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