The start of crypto
The start of cryptocurrencies
dates back to the 1980s. During this period, it was cryptographer David Chaum who created a private, cryptographic, and electronic form of money. This new form of currency was called ecash and was later applied through the Digicash framework. The Digicash framework allowed the digital currency to be untraceable by any other 3rd party. Although further research, they did not reach a point of prominence until the early 2000s.
In 2008, the world saw a financial crisis: banks weakened, businesses collapsed, and many people were in financial difficulties, not capable of paying off houses, loans and other forms of liabilities. Around this time, cryptocurrencies stepped up.
How did the financial crash start?
Based on a method known as fractional reserve banking, banks are legally allowed to use up to 90% of their client's money. Put otherwise; banks are supposed to keep 10% of their clients' money on hand as a financial reserve. The additional 90% is spent on other investments, such as loans to other clients and mortgages.
In the years before 2008, banks all over the world used their capital to invest in "high-risk subprime mortgages." These can be perceived as real estate mortgages that were taken out by debtors who were from the beginning, not likely being capable of paying them off. As it was so easy to get a mortgage, the housing prices had become inflated. The inflated housing prices meant that the previously 'weak' borrowers had even less chance of being able to repay the mortgages.
Understanding the financial crash
Eventually, the unsustainable cycle of mortgages crashed. The mortgages couldn't be paid back/off, and the inflated price of the real estate started to collapse. Therefore, banks were left holding on to the property that valued far less than what had initially been lent out.
Remember the 10% capital mentioned at the start? Usually, banks can continue with such a small cash percentage. However, due to the fact they had nothing near the value of money that customers agreed to, they experienced what is called a 'liquidity crisis.' A 'liquidity crisis' can quite easily be understood as a lack of available, on-hand capital. This cycle began to start and increase throughout other banks, investment companies, and insurance businesses, causing bankruptcy, and eventually the crash in 2008.
Where does cryptocurrency come into the picture?
Throughout the financial crash
, banks and financial organizations worldwide had to be "bailed out" by their authorities, and thus ultimately by the taxpayers. It started to become more apparent that the current financial system was not only unreliable and fragile but possibly even fundamentally imperfect.
So, the need for a new currency came from the dissatisfaction of the current traditional banks and financial organizations.