Cryptocurrency:
Meaning
A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers. A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation.
Understanding cryptocurrency
Cryptocurrencies are systems that allow for the secure payments online which are denominated in terms of virtual “tokens,” which are represented by ledger entries internal to the system. “Crypto” refers to the various encryption algorithms and cryptographic techniques that safeguard these entries, such as elliptical curve encryption, public-private key pairs, and hashing functions.
History
- Businesses and merchants offered virtual currency to their customers for a long time, which was effectively a token representing the fiat currency. This redeemable virtual currency could be used for purchases, transfers to other people or just stored as credits. People began toying with the idea of digital cash and virtual currency as early as the 1980s when the earliest ideas were translated into experiments around money.
- As an extension to the popular encryption algorithm RSA, American cryptographer David Chaum invented the first form of internet money as DigiCash in the Netherlands. The amazing technology and its truly interesting product eCash garnered tremendous media attention. At one point, Microsoft offered $180 million to Chaum’s company to put DigiCash on every Windows PC in the world. However, Chaum’s company made some mistakes (including not choosing to make money from Microsoft) during its course and also caught hostile attention of the Netherlands’ central bank (De Nederlandsche Bank) which led to its eventual bankruptcy in 1998.
- The second wave of web-based money sprung from the previous failures in the space. Startups created payment solutions and virtual money systems with little tweaks here and there. But PayPal emerged a clear winner because it understood what the users wanted: money on the already familiar web browser. PayPal offered a seamless peer-to-peer transfer mechanism and a neat way of accepting payments for the merchants. We all know where PayPal is today.
- A significant attempt in parallel to PayPal was e-Gold, which accepted physical gold deposits from users and issued gold credits (or e-Gold) to their accounts. This facilitated a good volume of cross-border trades and payments. However, e-Gold was shut down after the emergence of Ponzi schemes, fraudulent high-yielding investment programs and scams.
How cryptocurrency operates
· Cryptocurrencies use decentralised technology to let users make secure payments and store money without the need to use their name or go through a bank. They run on a distributed public ledger called blockchain, which is a record of all transactions updated and held by currency holders.
· Units of cryptocurrency are created through a process called mining, which involves using computer power to solve complicated maths problems that generate coins. Users can also buy the currencies from brokers, then store and spend them using cryptographic wallets.
· blockchain technology are still nascent in financial terms and more uses should be expected. Transactions including bonds, stocks and other financial assets could eventually be traded using the technology.
Most common cryptocurrency
Bitcoin:
Bitcoin was the first and is the most commonly traded cryptocurrency to date. The currency was developed by Satoshi Nakamoto in 2009, a mysterious figure who developed its blockchain
Ethereum
Developed in 2015, ether is the currency token used in the ethereum blockchain, the second most popular and valuable cryptocurrency.
Ripple:
Ripple is another distributed ledger system that was founded in 2012. Ripple can be used to track more kinds of transactions, not just of the cryptocurrency. The company behind it has worked with banks and financial institutions, including Santander.
Litecoin
This currency is most similar inform to bitcoin but has moved more quickly to develop new innovations, including faster payments and processes to allow many more transactions. The total value of all Litecoin is around $6 billion.
Benefits of cryptocurrency:
When cryptocurrency was first introduced, there were several early adopters from within the dark web. As a result, many businesses may view platforms such as bitcoin as slightly unethical and have reservations about using any cryptocurrency.
Like all cryptocurrencies, bitcoin is currently unregulated. However, it is a secure payment method, and has some distinct advantages over more traditional forms of payment:
6.1 Lower fees – Transaction fees are lower with bitcoin than with credit cards, and when cryptocurrency is not exchanged, it also eliminates the need for bank charges.
6.2 Fraud reduction – A payment made with bitcoin cannot be reversed after the fact. This is different from credit card payments, which can be reversed using chargebacks, a feature often exploited by fraudsters.
6.3 Instant payments – Credit card payments can take days or even weeks to come through. Meanwhile, cryptocurrency offers instant transfers.
6.4 No barriers – Cryptocurrency makes international trade more accessible by removing barriers and restrictions to trade, ultimately making it easier to accept payments in different currencies.
6.5 Attract new customers – As bitcoin is still a fairly new method of payment, offering it as an option for your customers could help you bring in new business.
DISADVANTAGES of cryptocurrency:
- Can be used for illegal transactions –
Since the privacy and security of cryptocurrency transactions are high, it’s hard for the government to track down any user by their wallet address or keep tabs on their data. Bitcoin has been used as a mode of exchanging money in a lot of illegal deals in the past, such as buying drugs on the dark web. Cryptocurrencies are also used by some to convert their illicitly obtained money through a clean intermediary, to hide its source.
- Data losses can cause financial losses –
The developers wanted to create virtually untraceable source code, strong hacking defences, and impenetrable authentication protocols. This would make it safer to put money in cryptocurrencies than physical cash or bank vaults. But if any user loses the private key to their wallet, there’s no getting it back. The wallet will remain locked away along with the number of coins inside it. This will result in the financial loss of the user.
3.Decentralized but still operated by some organization –
The cryptocurrencies are known for its feature of being decentralized. But, the flow and amount of some currencies in the market are still controlled by their creators and some organizations. These holders can manipulate the coin for large swings in its price. Even hugely traded coins are susceptible to these manipulations like Bitcoin, whose value doubled several times in 2017.
4.Some coins are not available in other fiat currencies –
Some cryptocurrencies can only be traded in one or a few fiat currencies. This forces the user to convert these currencies into one of the major currencies, like Bitcoin or Ethereum first and then through other exchanges, to their desired currency. This applies to only a few cryptocurrencies. By doing this, the extra transaction fees are added in the process, costing unnecessary money.
- Adverse Effects of mining on the environment –
Mining cryptocurrencies require a lot of computational power and electricity input, making it highly energy-intensive. The biggest culprit in this is Bitcoin. Mining Bitcoin requires advanced computers and a lot of energy. It cannot be done on ordinary computers. Major Bitcoin miners are in countries like China that use coal to produce electricity. This has increased China’s carbon footprint tremendously.