Blockchains, sidechains, mining – the terminologies in the arcane world of cryptocurrencies keep piling up by the minute. While it sounds counterintuitive to introduce new financial terms into an already complex world of finance, cryptocurrencies offer a much-needed solution to one of the biggest annoyances 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 financial technology, a timely response to the need for a secure medium of exchange in the days of virtual transactions. In a time when transactions are all numbers and numbers, cryptocurrency offers to do just that!
In the most basic form of the term, cryptocurrency is a proof of concept for an alternative virtual currency that promises secure, anonymous transactions via a peer-to-peer online network. The misnomer is more of a property than an actual currency. Unlike everyday money, cryptocurrency models operate without a central authority, as a decentralized digital mechanism. In a distributed cryptocurrency mechanism, money is issued, managed and approved by the community’s collective peer network – the continuous activity of which is known as mine on a partner’s machine. Successful miners also receive coins as a thank you for their time and resources used. Once used, the transaction information is broadcast to a blockchain network under a public key, preventing any coin from being spent twice by the same user. Blockchain can be seen as the cash register. Coins are secured behind a password-protected digital wallet representing the user.
The supply of coins in the world of digital currency is pre-decided, without manipulation, by any person, organization, government body and financial institution. The cryptocurrency system is known for its speed, as transactional activities through digital wallets can materialize funds within minutes compared to the traditional banking system. It is also largely irreversible by design, further strengthening the idea of anonymity and eliminating any further chance of tracing the money back to its original owner. Unfortunately, the main features – speed, security and anonymity – have also made crypto coins a mode of transaction for many illegal transactions.
Just like the money market in the real world, exchange 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 cap of $15.3 billion, capturing 37.6% of the market and currently priced at $8,997.31. Bitcoin hit the forex market in December 2017, trading at $19,783.21 per coin, before facing a sudden 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 exchange rates constantly fluctuating, their sustainability remains to be seen. Therefore, investing in virtual currencies is currently more of a speculation than a daily money market.
At the beginning of the industrial revolution, this digital currency was an invariable part of the technological collapse. From the perspective of a casual observer, this rise can seem simultaneously exciting, threatening and mysterious. While some economists remain skeptical, others see this as a lightning revolution for the money industry. Conservatively, 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 set of investment vehicles will come from crypto-finance in the coming years. Recently, Bitcoin may have declined to draw attention to other cryptocurrencies. But this is not a signal for the collapse of the cryptocurrency itself. While some financial advisors emphasize the role of governments in cracking down on the illegal world to regulate the machinery of central government, 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 the digital banknote and undermines the very purpose of its existence. Either way, the lack of intermediaries and oversight makes it extremely attractive to investors and makes day trading change dramatically. Even the International Monetary Fund (IMF) fears that cryptocurrencies will displace central banks and international banking in the near future. After 2030, regular trading will be dominated by a cryptocurrency chain that will offer less friction and greater economic value between tech-savvy buyers and sellers.
If cryptocurrency seeks to become an essential part of the existing financial system, it will need to satisfy many different financial, regulatory and societal criteria. It will need to be hacker-proof, user-friendly and highly secure to offer its primary benefit to the mainstream monetary system. It should preserve the anonymity of users without being a conduit for money laundering, tax evasion and internet fraud. Since they are mandatory for the digital system, it will take a few more years to know if the cryptocurrency will be able to compete with the real world currency in its prime. While it 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 coming days.