Blockchains, sidechains, mining – terminologies in the secret world of cryptocurrency pile up by the minute. While it may sound counterintuitive to introduce new financial terms into the already convoluted world of finance, cryptocurrencies offer a much-needed solution to one of the biggest distractions 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. In a time when business is all about digits and numbers, cryptocurrency proposes to do just that!
In its most rudimentary form, cryptocurrency is a proof of concept for an alternative virtual currency that promises secure, anonymous transactions via peer-to-peer online networking. The misnomer is more of a feature than an actual currency. Unlike everyday money, cryptocurrency models function without a central authority, as a decentralized digital mechanism. In the distributed mechanism of cryptocurrency, money is issued, managed and approved by a collective network of peer community members – 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 network under a public key, preventing each coin from being spent twice by the same user. Blockchain can be thought of as a cash register. Coins are secured behind a digital wallet protected by a password that represents the user.
The supply of coins in the world of digital currencies is predetermined, without manipulation, by any individual, organization, government body and financial institution. The cryptocurrency system is known for its speed, as transaction activities through digital wallets can materialize funds in minutes, compared to the traditional banking system. It is also largely irreversible by design, which further supports the idea of anonymity and eliminates any further chance of the money being traced back to its original owner. Unfortunately, the prominent features – speed, security and anonymity – have also made crypto-coins a means of transaction for numerous illegal trades.
Just like the real world money market, currency rates fluctuate in the digital coin ecosystem. Due to the limited supply 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 capitalization 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 facing a sharp decline in 2018. The decline was 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 economic principles as gold – the price is determined by limited supply and fluctuations in demand. With constant exchange rate fluctuations, their sustainability remains to be seen. Therefore, investing in virtual currencies is currently more of a speculation than a daily money market.
After the industrial revolution, this digital currency is an indispensable part of technological disruption. From the perspective of a casual observer, this ascent can seem simultaneously exciting, threatening and mysterious. While some economists remain skeptical, others see it as a lightning revolution in the monetary industry. Conservatively speaking, digital coins will displace roughly 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 pool of investment funds will come from crypto-finance in the coming years. Recently, Bitcoin may have fallen to put other cryptocurrencies in the spotlight. But this does not signal any decline in the cryptocurrency itself. While some financial advisers emphasize the role of governments in cracking down on the secret world to regulate the central governance mechanism, others insist on continuing the current free flow. The more popular cryptocurrencies are, the more attention and regulation they attract – a common paradox that plagues the digital currency and erodes the primary purpose of its existence. In any case, the lack of intermediaries and supervision makes it extremely attractive to investors and causes drastic changes in 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 a crypto supply chain that will offer less friction and greater economic value between tech-savvy buyers and sellers.
If cryptocurrency is to become an essential part of the existing financial system, it will have to meet very different financial, regulatory and social criteria. It will need to be hacker-proof, consumer-friendly, and tightly secured to offer its core benefit to the mainstream monetary system. It should preserve the anonymity of users without being a channel for money laundering, tax evasion and online fraud. Since these are must-haves for the digital system, it will take a few more years to see if cryptocurrency can compete with real-world currency in full swing. While this is likely to happen, the cryptocurrency’s success (or lack thereof) in meeting the challenges will determine the fate of the monetary system in the days to come.