Blockchains, sidechains, mining – terminologies in the underground world of cryptocurrencies continue to accumulate by the minute. While it sounds counterintuitive to impose new financial conditions on the already complex world of finance, cryptocurrencies offer a much-needed solution to one of the biggest problems 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 response to the need for a secure medium of exchange in the days of virtual transactions. At a time when transactions are all about numbers and numbers, cryptocurrency offers to do just that!
In the most basic form of the term, cryptocurrency is a proof-of-concept alternative virtual currency that promises secure, anonymous transactions over a peer-to-peer Internet mesh network. The misnomer is more of a property than an actual currency. Unlike everyday money, cryptocurrency models work without a central authority, like a decentralized digital mechanism. In a distributed cryptocurrency mechanism, money is issued, managed and approved by a collective network of community whose continuous activity is known as mining on a peer machine. Successful miners also receive coins as a token of appreciation for their time and resources. Once used, the transaction information is broadcast to the blockchain in the public key network, preventing the same user from spending each coin twice. Blockchain can be thought of as a cash register. Coins are stored behind a password-protected digital wallet that represents the user.
The supply of coins in the world of digital currencies is predetermined, without manipulation, by any individual, organization, government agency, or financial institution. The cryptocurrency system is known for its speed, as transactions through digital wallets can materialize funds in minutes compared to the traditional banking system. It is also largely irreversible by design, which further reinforces the idea of anonymity and eliminates any further chance of tracing the money back to the original owner. Unfortunately, the main characteristics – speed, security and anonymity – have also made cryptocurrencies a method of transaction for many illegal transactions.
Just like the money market in the real world, currency rates fluctuate in the digital coin ecosystem. Due to the limited number of coins, as the demand for the currency increases, the value of the coins increases. Bitcoin is the largest and most successful cryptocurrency to date, with a market cap of $15.3 billion, a 37.6% market share, and currently trading at $8,997.31. Bitcoin entered the currency market in December 2017 at a price of $19,783.21 per coin before experiencing a sudden drop in 2018. The drop is partly due to the rise of alternative digital coins such as Ethereum, NPCcoin, Ripple, EOS, Litecoin and MintChip.
Because of the tight limits on their supply, cryptocurrencies are believed to follow the same economic principles as gold – the price is determined by limited supply and fluctuations in demand. With exchange rates constantly fluctuating, their sustainability remains to be seen. Therefore, investing in virtual currencies is more of a speculation than a daily money market at the moment.
In the wake of the industrial revolution, this digital currency is an indispensable part of the technological divide. From the perspective of a casual observer, this growth can look exciting, threatening and mysterious at the same time. While some economists remain skeptical, others see it as a lightning revolution in the money industry. Digital coins are set to replace roughly a quarter of national currencies in developed countries by 2030. It has already created a new asset class alongside the traditional global economy, and in the years to come, crypto finance will see a new set of investment vehicles emerge. Recently, Bitcoin may have dropped to draw attention to other cryptocurrencies. But this does not signal the collapse of the cryptocurrency itself. While some financial advisers emphasize the role of governments in suppressing the underground world to regulate the mechanism of central control, others insist on continuing the current free flow. The more popular cryptocurrencies are, the more scrutiny and regulation they attract – a common paradox that plagues digital banknotes and erodes their primary purpose for existence. In any case, the lack of intermediaries and supervision makes it extremely attractive to investors and makes daily trading change dramatically. Even the International Monetary Fund (IMF) fears that in the near future cryptocurrencies will supplant central banks and international banks. After 2030, conventional trade will be dominated by the crypto supply chain, which will offer less friction and greater economic value between tech-savvy buyers and sellers.
If a cryptocurrency aspires to become an important part of the existing financial system, it will have to meet very different financial, regulatory and societal criteria. It needs to be hacker-proof, consumer-friendly, and heavily secured to offer its fundamental benefit to the mainstream monetary system. It should preserve the anonymity of users without being a conduit for money laundering, tax evasion and online fraud. Since they are mandatory for the digital system, it will take a few more years to see if cryptocurrency can compete with real currency in full swing. While this is likely to happen, the cryptocurrency’s success (or lack thereof) in dealing with the challenges will determine the success of the monetary system in the coming days.