Blockchain, sidechain, mining – the terms keep piling up by the minute in the secret world of cryptocurrency. While introducing new financial terms into the complex world of money seems absurd, cryptocurrencies provide a much-needed solution to one of the biggest annoyances in today’s money markets – the security of transactions in a digital world. Cryptocurrency is a defining and disruptive innovation in the fast-paced world of fin-tech, a relevant response to the need for a secure medium of exchange in the days of virtual transactions. At a time when deals are just numbers and numbers, cryptocurrency offers to do just that!
In the most basic form of the term, cryptocurrency is a proof-of-concept for alternative virtual currencies that promise secure, anonymous transactions through peer-to-peer online mesh networking. Misnomer is more of a property rather than an actual currency. Unlike everyday money, cryptocurrency models operate without a central authority as a decentralized digital process. In a distributed cryptocurrency mechanism, money is issued, managed and approved by a collective community of peer networks – known as continuous activity. mining Successful miners on peer machines also receive coins in appreciation of their time and resource usage. Once used, transaction information is broadcast to the network’s blockchain under a public-key, preventing each coin from being spent twice by the same user. Blockchain can be thought of as a cashier’s register. Coins are secured behind a password-protected digital wallet representing the user.
In the world of digital currencies the supply of coins is pre-determined, free from manipulation by any individual, organization, government agency and financial institution. The cryptocurrency system is known for its speed, as transactions through digital wallets can generate funds within minutes compared to traditional banking systems. It is also largely immutable by design, reinforcing the concept of anonymity and eliminating the possibility of money being traced back to its original owner. Unfortunately, the main features – speed, security, and anonymity – have also made crypto-coins the mode of transaction for numerous illegal businesses.
Just like real world money markets, currency rates fluctuate in the digital currency ecosystem. Due to the limited supply of coins, the value of the coin increases as the demand for the coin increases. Bitcoin is by far the largest and most successful cryptocurrency, with a market cap of $15.3 billion, occupying 37.6% of the market and currently priced at $8,997.31. Bitcoin hit the currency market in December 2017, trading at $19,783.21 per coin before taking a sudden plunge in 2018. The decline is partly due to the rise of alternative digital coins such as Ethereum, NPCcoin, Ripple, EOS, Litecoin and MintChip.
Due to hard-coded limits on their supply, cryptocurrencies are considered to follow the same principles of economics as gold – prices are determined by limited supply and fluctuations in demand. With constant fluctuations in exchange rates, their stability is still to be seen. As a result, investing in virtual currencies is more speculative than a daily currency market at this point.
In the wake of the Industrial Revolution, this digital currency is an essential part of technological disruption. From the perspective of a casual observer, this growth can appear at once exciting, terrifying, and mysterious. While some economists remain skeptical, others see it as a power revolution in the financial industry. Conservatively, digital coins are set to displace about a quarter of developed countries’ national currencies by 2030. It has already created a new asset class alongside the traditional global economy, and a new set of investments will emerge from cryptofinance in the coming years. Recently, Bitcoin has taken a dive to give the spotlight to other cryptocurrencies. But this does not indicate a crash for cryptocurrencies. While some financial advisors emphasize the government’s role in cracking down on the secretive world to regulate central governance mechanisms, others insist on continuing the current free-flow. The more popular cryptocurrencies are, the more scrutiny and regulation they attract – a common paradox that distorts the digital note and erodes its primary purpose for existence. Either way, the lack of middleman and supervision is making it significantly attractive to investors and has led to massive changes in day-to-day trading. Even the International Monetary Fund (IMF) fears that cryptocurrencies will displace central banks and international banking in the near future. After 2030, regular trade will be dominated by crypto supply chains that offer less friction and more economic value between technologically adept buyers and sellers.
If cryptocurrency aspires to become an essential part of the existing financial system, it will have to meet very different financial, regulatory and social criteria. It needs to be hacker-proof, consumer-friendly and comprehensively secured to deliver its fundamental benefits to the mainstream financial system. It should not be a channel for money laundering, tax evasion and internet fraud but should keep the user anonymous. Because they are essential to digital systems, it will take a few more years to see if cryptocurrencies will be able to fully compete with real-world currencies. While this may happen, the success (or lack thereof) of cryptocurrencies in meeting the challenge will determine the fate of the currency system in the days ahead.