I am firmly of the opinion that the best way to understand something is to teach it to someone else. As such, you're doing me a favor. And, for the sake of flavor, know that I am started this from a cafe table five feet west of the fountain at the courtyard of the Montage Beverly Hills, having just spent $9 for an iced coffee and a croissant, and am finishing it in an utter shithole near downtown LA (with four inches of fancy watch catalogs on the coffee table).
In my mind, I think it gives the currency some mainstream legitimacy and makes it less underground.
In everyone's mind, you mean.
There's no way to really have this discussion without a fundamental (and rudimentary) discussion of what money actually is. Fundamentally, money is a shorthand for the exchange of value; the whole point is not what it represents, but what it accomplishes.
"Fiat" money simply means money that isn't backed by anything. If you think your dollar coin should be backed by an ounce of gold, this concept makes you upset. If you had your way, however, you could only ever have as many dollars in the game as you have ounces of gold. It means that the act of buying, selling or doing means the act of moving gold around. Pretty quickly, the gold becomes figurative and it doesn't take long to recognize that the gold is an impediment. It's like a catalyst in chemistry: you need the gold there in order to initiate the reaction, but you have just as much gold when you're done as you did when you started.
So really, a marketplace is a conceptual framework where your value and my value can interact, no gold necessary. Your 40 hours a week of accounting has an agreed-upon value within society; my fifteen widgets an hour's worth of cobbling has an agreed-upon value within that same society and money allows me to exchange thirty widgets for you doing my quarterly tax returns without you needing my widgets.
The best thing that marketplace can be is transparent. It should allow our society to freely exchange value without any disruption, as fast as humanly possible. Right now, this is done by a large system of interconnected computers. Each country has their own system. In the US, it's FedWire, FedACH and EPN, which collectively handle about 120 trillion dollars a year in transactions. BUT these transactions take up to three days to clear because it's a bunch of computers, it's antiquated and on and on and on. Not always and not often - there are a bunch of crediting systems that because the players know it'll happen quicker than that, advance the money. But fundamentally, three days.
The second best thing that a marketplace can be is stabilizing. This is what the Federal Reserve does - it basically moderates the flow of money, buying some up and taking it out of circulation, then releasing it to increase how much is available for commerce. NOTE THAT THIS IS A GROSS OVERSIMPLIFICATION but the fact of the matter is, central banks control how much money there is, which controls how much money is worth, which if done right, means that you don't need to worry about burning Deutsche Marks to keep warm in the winter of 1937 and shit.
Simply put: the money in your pocket is worth society agrees it's worth, with some added tinkering from central banks to make sure that number benefits society. Sometimes they screw up. That's world banking in a nutshell.
Fundamentally, cryptocurrency replaces that large system of interconnected computers. If banks control it (Ripple, Hyperledger), the whole system moves the same only more efficiently. But if nobody controls it (Bitcoin, Ethereum) the whole system moves differently only more efficiently. It's still an exchange for moving value around; it's still just markers.
The one thing about cryptocurrency that confuses me is that I literally don't see its value nor why it's rising (in fact, I thought there was less than $100 in cryptocurrency).
Above, I discussed how the marketplace basically sets a societally-agreed-upon structure for the exchange of value. What that marker is, again, doesn't fundamentally matter…SO LONG AS THINGS ARE STABLE. But things are never truly stable; the Pound is down something like 20% since Brexit, for example. When a country is unstable, the value of its currency falls compared to other currencies - apparently Warcraft money is currently worth more than Venezuelan money right now. When a country is robust, its currency rises.
Bitcoin rises because people are buying it on the assumption that it will be worth more in comparison to other currencies. That's it. It falls because people think it won't be worth as much as they thought. When Bitcoin was introduced, it was worthless because almost nobody knew about it, nobody would take it, and nobody knew what to do with it. Now? Now half the world has heard of Bitcoin even if a tiny percentage understand what it is or what it does… and everybody knows you can use it to buy ransom payments, drugs and murders.
But that's Bitcoin. Ethereum is different because fundamentally, Ethereum is required to buy time on the Ethereum Virtual Machine, a worldwide distributed computer capable of running applications, smart contracts and other simple (and less-simple) peerless, unmanaged financial transactions. Ethereum actually has intrinsic value of its own, unlike Bitcoin. Not only that but if Ethereum successfully switches from proof-of-work to proof-of-stake (more in a minute), simply having ether will permit the collection of interest on loaning out that ether to stakers. This is one reason why Ether has gone 30 cents to $227 in eighteen months.
The way I understand it is, mining bitcoin involves your computer doing math, you're sharing math with other people, then you get bitcoins. What the hell is that math for? Why is it worth anything to begin with?
That's "mining." Mining is the act of doing the cryptographic work necessary to solve the puzzle that awards new, never-existed-before bitcoins. If you solve the problem right, there are no longer (for example) one million bitcoins, there are now one million and one bitcoins and one of those bitcoins is awarded to you.
The math is necessary to have all the different nodes of the network online, and all verifying that all transactions are accurate and true. You can't fake a bitcoin transaction; you would need more than half of all the bitcoin nodes in the world to agree with your faking. In order to verify that everybody has the same transactions cryptographic problems must be solved. The problems are harder than they need to be for the sake of proving the transaction; they are designed so that a new coin is created on a schedule that works for the currency. Bitcoin aims for ten minutes. They increase the difficulty of the math so that the target generation rate stays relatively constant. If they didn't there'd be runaway inflation as the number of solvers went up.
On the other hand I see something like bitcoin or ethereum or something, and I have no baseline to compare it to other than what someone else says it's worth.
Yes. Exactly. And the Efficient Market Hypothesis says you don't have to know, because since it's being bought and sold by everybody, everybody will figure out what it's worth by buying and selling it. As the applications for bitcoin or ethereum go up, the price goes up. As its applicability to live goes down, the prices go down. The fact that it's such a disruptive technology lends credo to the instability of prices; nobody really knows what cryptocurrency is worth, so everyone's sentiment is subject to flux.
If someone says 1 Bitcoin is worth $2,000 I'd think that's weird, because as best as I understand it, it doesn't do anything. It just sits there.
Dollars don't do shit either. Again, markers. What are the markers worth? Well, you can do a lot more with US dollars than you can with Zimbabwean ones.