By MoneyMorning.com.au

There’s a little known fact about crypto-currencies. Most people don’t realise they’re part of an entirely new global financial system, the ‘Cryptoconomy‘.

What If I were to tell you that there are 102 different crypto-currencies? And that around two weeks ago there were only 86? Their market caps range from $7.6 billion (Bitcoin) to $21,161 (RapidCoin). And then, just to make things even more interesting, 24 hour price fluctuations range from +253.19% to -26.74%.

On the 5th of February a new crypto-currency launched. Within the week MaxCoin had a market cap of $6.7 million. I’ve actually watched its market cap rise by $1 million in the last few hours…

Let me run you through a few of the crypto-currencies that are now available and exchangeable with ‘traditional money’. Of course there’s Bitcoin. Then there’s Ripples, the only other crypto-currency to exceed a $1 billion market cap. Then there’s Dogecoin, Quark, Vertcoin, SexCoin (I’m not joking) and…Unobtanium. These are just a few of the growing list.

With this many crypto-currencies, the billion dollar question is what does it all mean?

I’m going to set out three factors that answer that question, and explain why the new cryptoconomy is here to stay.

Factor #1 Bitcoin – the Big Bang of Crypto-currencies

You can attribute this explosion in crypto-currencies to Bitcoin. Bitcoin is the first crypto-currency; it’s the ‘Big Bang’. Bitcoin’s success has led to an entire universe of crypto-currency.

Bitcoin started because of the GFC. It’s an alternative medium of exchange based solely over the internet. Some call it a currency, some call it a digital commodity, some call it an investment. In reality it is – and isn’t – all of those at once.

It’s like nothing else the world has ever seen. And regulators and governments across the globe are struggling to make heads or tails of it.

Russia says Bitcoin is illegal, the US is looking to regulate it, and Norway has said it’s not real ‘money’. Meanwhile Bitcoin exchanges are being frozen and hacked while the price bounces around from $1,000 to $200 and everywhere in between. This morning it’s US$253, a long way from the peak of US$1,203 late last year.

No wonder people are confused.

Bitcoin gets a lot of media attention. Every major rise or fall is on the homepages of the Wall Street Journal, Bloomberg and the BBC. And both the positive and negative news make the price go up and down. It’s a bit of a self-fulfilling prophecy from time to time.

Regardless of the day to day insanity of Bitcoin, there’s a bigger picture in play. And that’s where the 101 other sizable crypto-currencies come into play. With any new kind of system, there has to be a pioneer. And in the case of the cryptoconomy, Bitcoin is that pioneer.

Factor #2 – The Rise of The Crowd

A reasonably important invention called the internet has completely changed everything. Its ability to connect everyone around the world is possibly the most influential technology ever.

And because of this connectivity, communities – ‘crowds’ – have grown all over the world. These crowds now place greater trust in each other than they do in any bank or government.

The evidence of this is in the success of companies like Zopa, SocietyOne and Lending Club. These are companies built on networks of people. The term used online is ‘peers’. And in this particular case people use the crowd to source loans from each other. Instead of going to banks, people are now getting loans from the crowd.

Then there’s CurrencyFair, MidPoint and TransferWise. These are all currency exchanges. You use them to exchange money. Except rather than getting stung by banks with margins and fees, they’re low cost, based online and also use peer-to-peer networks.

This explosion of peer-to-peer networks is possibly the most influential trend of the current decade.

It’s a concept of technology driven networks destabilising old, outdated bureaucratic systems.

You also see it with companies like AirBnb, Uber and AirTasker. They all use expanded, technology driven, social networks to connect online to get things done.

I personally use many of them. If I want a taxi, Uber is faster, safer and easier than most cabs (certainly the case in Melbourne). If I want accommodation anywhere in the world I turn to AirBnb. It offers simple, easy and affordable accommodation. And if I want to exchange AUD for GBP then I can do so with CurrencyFair. It’s cheaper, faster and easier than any of the Aussie banks.

In effect the internet has allowed people to regain power. Now more than ever we all have the ability to use the digital world to get things done. But that’s not all…

Factor #3 – The Financial Identity Crisis

The world has lost faith in banking systems around the world. In fact the entire global financial system looks and feels defunct. People don’t trust central banks, let alone the banks they have their hard earned savings sitting in day to day.

The whole financial system is suffering from an enormous identity crisis. Banks want to be tech companies. Why? Because that’s who we trust these days. Banks lost our trust about six years ago, and they never got it back.

The GFC crippled the world. It also crippled confidence in banks, central banks and governments. The effect is still rippling around the world. Global economies are in a perilous state and have been for a number of years.

People simply don’t trust that their money is secure…anywhere.

The banks don’t help themselves either. In September last year I attended one of the world’s biggest banking and finance conferences in the world, SIBOS. Held in Dubai, the likes of Barclays, CommBank, Wells Fargo and JP Morgan were there.

One of the clear takeaways from the conference was major banks don’t seriously appreciate the state they’re in. Financially some of them may have plenty of capital to be secure. But over the next 10 to 20 years they’re going to suffer from a bigger problem; having no customers.

I’m from generation Y, the beginning of a completely tech-dominated demographic. And each subsequent generation after Y is going to be more tech-savvy than the last.

Gen Y and subsequent generations are an enormous and growing consumer base. Banks need us as customers in the coming years, or they’ll die.

The interesting part is the lack of trust in banks, government and central banks.

The bank down the street is a necessity for now, but soon enough it won’t be. I have greater confidence in Amazon and PayPal than I do Lloyd’s or CommBank. And I can confidently say almost anyone born in the 1990s, 2000s and 2010s will have a similar feeling.

As each generation engages more with the technology available they start to drift away from the ‘traditional’ methods of the previous century. As mentioned before, what’s the point of a bank if you can store cash in an encrypted wallet, get a loan from the crowd, pay for goods online or even automatically with an app on your phone. What need is there for cash, cards…banks?

The Sum of All Parts Equals The Cryptoconomy

And these three factors come to a head with the current explosion of crypto-currency. If anything it’s the final piece of the puzzle for a whole new global economic system.

If you take the creation of Bitcoin, the rise of peer-to-peer and the great financial identity crisis, you get a perfect storm.

Now anyone with an understanding of cryptography and computer programming can ‘create’ their own unit of currency. Not only are these new crypto-currencies popping up everywhere, people are placing value in them.

Think about paper money, gold, and crypto-currencies. On the surface they’re all very different. But as money, or a store of wealth they’re all effectively the same thing. By that I mean the only value in each of them is what people believe their value to be.

If I place greater value in Bitcoin than gold, then that’s worth more to me. And if an entire community places greater value in Bitcoin than gold, then the value is even larger. And if the whole world places more value in it…you get the picture.

And that’s what’s happening now. People, peers – the crowd is placing greater value in these crypto-currencies than the paper money that sits in your wallet. As the community grows, so does the value attributed to these currencies.

Now the big problem in the short term is the saturation of new crypto-currencies. Too many varieties dilute the importance of the whole cryptoconomy.

However, many of them will die a quick and painless death. Security and safety issues will be the end of many. Government intervention and regulation might slow down others.

But crypto-currencies and the bigger cryptoconomy is here to stay. More and more merchants are accepting them as payment every day. All it takes is for an Amazon, Apple or Google to accept a crypto-currency for it to really take off.

20 years ago Bitcoin wouldn’t have worked. None of these crypto-currencies would have. The connected network wasn’t particularly dominant. There was no great global crisis. But now the perfect storm has arrived and the world is ready and desperate for a new, better economy.

The Cryptoconomy has arrived. It’s early days, but as it flourishes and simply becomes a way of life you’ll look back and wonder why anyone ever doubted it.

Sam Volkering+

Editor, Revolutionary Tech Investor

Ed note: The above article was originally published in Sam Volkering’s Tech Insider, the free daily eletter in which Sam Volkering gives his readers the inside scoop on the new technology and tech companies that are changing the world.