Everyone nowadays is talking about Cryptocurrency. It is, literally, the talk of every town. Around 90% of all conversations I have had in the past year, someone has brought up the topic, at least once. It wasn’t something I had read much into but decided to learn more about it when I realised that it is a topic that will very well determine the future of fintech.
Once I started understanding more about the concept of cryptocurrency, it became evident to me that most people who had previously talked to me about it, only had half information, which was passed onto them from elsewhere.
In this article, we shall take a look at the concept of cryptocurrency, its emergence, process, pioneers, the pros and cons, and its future.
If you are completely new to the concept of cryptocurrency, this article is for you.
Let’s dive in!
Emergence of Cryptocurrency
When the financial crisis of 2007-08 took down the major financial institutions around the world, investors started looking at alternative methods to secure investments, which could be accessed from anywhere in the world.
Safety and security became major concerns for everyone since most had lost their faith in traditional banking methods. The concept of “virtual money” seemed quite appealing at a time when major banking institutions had failed.
A technology called Blockchain, which was in development for a while, was introduced for the first time. The backbone of this technology was its decentralised, multiple-copy ledger, where each transaction was represented with a block. Bitcoin was the first to introduce us to the Blockchain Technology in 2008.
Bitcoin was developed on a method of cryptography (wherein transactional details are encrypted at source and decrypted at destination), providing it security from any breach of data. It included an algorithm (which was the functional base of the currency), a public key (for the user to share with others) and a private key (which acts as a digital signature, for identification).
Let us look at the process of transaction in cryptocurrency.
Process
Pioneer
Bitcoin was the first digital currency to be launched in 2008. This was a period when the recovery from the financial crisis had just begun, and thus, investors showed a lot of faith in alternative options to physical money. Bitcoin worked on a peer-to-peer network, with the blockchain technology as its backbone. This digital asset functioned just like a normal currency, wherein it could be transferred from one person to another, it could be sent to recipients internationally, and could be traded for regular government-issued money.
One of the most attractive features for investors was that it was decentralised.
This means, there was no regulatory board to manipulate the rate of the currency, and it was independent of the value of the government-issued money. Quite simply put, fluctuations in any regular currency, changes in the government’s economic and fiscal policies, or the events in global politics, would have no effect on the value of Bitcoin.
Bitcoin held manual transactions, such that it had the details of the sender (encrypted), recipient (encrypted) and the transaction identity of the previous transaction block.
Now, imagine this to be a ledger. Every miner had a copy of this ledger when they used the power of their computer to mine bitcoins (basically add to the ledger). When a transaction is made, the ledgers are automatically updated, for all users. If someone tried to tamper with the transactional details (which wouldn’t be possible since it is encrypted), they would have to do so on every computer that holds a copy of the ledger, anywhere in the world. Quite impossible, isn’t it? This proved to be the major security feature of Bitcoin.
Next, came Ether, another cryptocurrency, which worked on an open-source platform. Ether had its own network, called Ethereum (another safety feature). Though Ether worked on blockchain technology too, it went a step further and allowed users to build and release decentralised apps to manage its records. As opposed to popular thought, Ethereum network also allowed normal transactions to take place on its network. Over a period of time, it allowed an option of automated transactions and boasted of a 20-second transaction speed, where Bitcoin had an average time of 10-minutes per transaction.
Pros and Cons
| Pros | Cons |
| Very low (almost none) transactional costs {no exchange rates or interest rates} | Has a limit; only after a block has been added to the blockchain, miner gets cryptocurrency |
| 24*7 access to money | Volatile nature of the market, with new entrants every year |
| Limitless withdrawals | Not yet widely accepted |
| Quicker international transactions | Large electricity needs to mine and maintain ledgers |
| Multiple copies of the ledger; enhanced security | |
| Independent of any central regulatory board or government; unaffected by changes in global political or fiscal policies | |
| Can be managed from anywhere in the world – only a smartphone/computer and internet needed to access it |
Future of Cryptocurrency
Cryptocurrency can very well be described as the currency of the future. With its ease of access and secure ways of transfer, it is a definite alternative to physical money. Furthermore, we may also use it as an investment option, by buying and holding onto it. But with the volatile nature of its market, one can only hope that its value rises the way it had from a few cents in 2008 to a few thousand dollars today. Hence, it would be wiser to look at cryptocurrencies as a longer form of investments, unless you are a major player who wishes to deal in larger quantities on a daily basis.
With many developed and developing countries looking at means to regulate cryptocurrency, it is a task easier said than done. Regulating as per current norms and policies will mean that the currency will need to be centralised, which goes against its very core of inception.
Yet, as the number of nations and traders accepting this form of currency increases, the use of cryptocurrencies is sure to only rise in the coming years, with many more competitive entrants in the making.
Do you deal in cryptocurrencies? What is your take on the future of physical money?
Let us know in the comments below.
In the meanwhile, you may wish to understand the future of the fintech industry.