Blockchains, sidechains, mining – terminologies in the secret world of cryptocurrencies are piling up by the minute. Although it sounds 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 relevant 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 suggests just that!
In its most rudimentary form, cryptocurrency is a proof-of-concept alternative virtual currency that promises secure, anonymous transactions via peer-to-peer online networking. The misnomer is more of a property than an 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 approved by a collective network of community peers – whose continuous activity is known as mining on the peer’s machine. Successful miners also receive coins as a token of appreciation for their time and resources used. 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. The coins are secured behind a digital wallet protected by a password that represents the user.
The supply of coins in the world of digital currency is pre-decided, 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 reinforces the idea of anonymity and eliminates any further chance of the money being traced back to the 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 inflates. 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 by trading at $19,783.21 per coin, before facing a sharp decline in 2018. The decline was partly caused by 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 principles of economics as gold – the price is determined by limited supply and fluctuations in demand. With constant fluctuations in exchange rates, their sustainability remains to be seen. Consequently, investing in virtual currencies is more of a speculation at this point than a day-to-day money market.
In light of the industrial revolution, this digital currency is an indispensable part of technological disruption. From the point of view of the 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, 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 turn its attention to other cryptocurrencies. But that doesn’t signal any decline in the cryptocurrency itself. While some financial advisers emphasize the role of governments in suppressing the secret world to regulate the central mechanism of governance, others insist on continuing the current free flow. The more popular cryptocurrencies are, the more scrutiny and regulation they attract – a common paradox that encroaches on the digital note and undermines 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 daily 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 cryptocurrency supply chain that will offer less friction and greater economic value between technologically capable buyers and sellers.
If cryptocurrency aspires 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 well-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 internet fraud. Since these are necessary things for the digital system, it will take a few more years to understand whether cryptocurrency will be able to compete with real world currency in full swing. While this is likely to happen, cryptocurrency’s success (or lack thereof) in meeting the challenge will determine the fortunes of the monetary system in the coming days.