Blockchains, sidechains, mining – terminologies keep piling up by the minute in the arcane world of cryptocurrency. While it may sound reasonable to introduce new financial terms in an already complex financial world, cryptocurrencies offer a much-needed solution to one of the biggest concerns in today’s money market – the security of transactions in the digital world. Cryptocurrency is a defining and disruptive innovation in the fast-paced world of fin-tech, a fitting answer to the need for a secure medium of exchange in the days of virtual transactions. In an age where deals are just numbers and numbers, cryptocurrency offers to do just that!
In the most rudimentary form of the term, cryptocurrency is a proof of concept for an alternative virtual currency that promises secure, anonymous transactions through a peer-to-peer online network. The misstatement is more about ownership than actual currency. Unlike everyday money, cryptocurrency models work without a central authority as a decentralized digital mechanism. In a distributed cryptocurrency mechanism, money is issued, managed, and verified by a collective community peer network—known as its persistence. mining in a peer’s car. Successful miners also receive coins by evaluating the time and resources they use. Once spent, the transaction information is transferred to the blockchain on the network under public key, preventing each coin from being spent twice by the same user. Blockchain can also be thought of as a cash register. Coins are stored behind a password-protected digital wallet representing the user.
In the world of digital currency, the supply of coins is predetermined without manipulation by any individual, organization, government agency or financial institution. The cryptocurrency system is known for its speed, as transactions on digital wallets can materialize funds within minutes compared to a traditional banking system. It is also irreversible by design, reinforcing the idea of anonymity and eliminating the chance of money being returned to the original owner. Unfortunately, the salient features – speed, security and anonymity – have made cryptocurrencies a mode of operation for many illegal trades.
Just like the real-world money market, exchange rates fluctuate in the digital coin ecosystem. Due to the limited supply of coins, as demand for the currency increases, coins increase in value. Bitcoin is the largest and most successful cryptocurrency ever, with a market cap of $15.3 billion, a 37.6% market share, and a current price of $8,997.31. Bitcoin hit the currency market in December 2017, trading at $19,783.21 per coin, before experiencing a sudden decline in 2018. This drop 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 its supply, cryptocurrencies are considered to follow the same economic principles as gold – price is determined by limited supply and demand fluctuations. With constant fluctuations in exchange rates, their sustainability remains to be seen. Consequently, investing in virtual currencies is more of a speculation than a daily money market.
After the industrial revolution, this digital currency is an indispensable part of technological disruption. To a casual observer, this rise can seem exciting, threatening, and mysterious all at once. While some economists are skeptical, others see it as a lightning revolution in the money industry. Conservatively, digital coins are on track to supplant about a quarter of national currencies in developed countries by 2030. This has already created a new asset class alongside the traditional global economy, and a new set of investment vehicles will be created from crypto-finance in the coming years. Recently, Bitcoin may have dropped to focus on other cryptocurrencies. However, this does not signal any crash of the cryptocurrency itself. While some financial advisors emphasize the role of governments in cracking down on the underworld to regulate the central government mechanism, others insist on continuing the existing free flow. The more popular cryptocurrencies are, the more scrutiny and regulation they attract—a common paradox that plagues the digital record and defeats the very purpose of its existence. In both cases, the lack of intermediaries and controls makes it extremely attractive to investors and causes daily trading to fluctuate dramatically. 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 the cryptocurrency supply chain, which will offer less friction and more economic value between technologically savvy buyers and sellers.
If cryptocurrency aspires to become an essential part of the existing financial system, it must meet very different financial, regulatory and societal criteria. To offer its main benefit to a mainstream money system, it needs to be hacker-resistant, consumer-friendly and heavily protected. It should protect the user’s anonymity without being a channel for money laundering, tax evasion and internet fraud. These are must-haves for a digital system, so it will take a few more years to figure out if cryptocurrency can fully compete with real-world currency. While this is likely to happen, the cryptocurrency’s success (or lack thereof) in overcoming the challenges will determine the fate of the monetary system in the coming days.