What is Cryptocurrency?
Cryptocurrency is a digital currency that uses cryptography to make the transactions secured. It works like a real-world currency, designed as another medium of exchange. However, cryptocurrency does not have any physical embodiment. Typically, it serves as a virtual token and allows secure online payments through blockchain technology.
The History of Currency
Before all currencies emerged, people used the barter system as a medium of exchange. It involves the trading of goods or services with terms and conditions agreed by the parties. However, the downside of the system brought inconvenience to many people. It includes:
- the parties should coincide with the requirements
- no common measure of value
- not all goods are divisible
- goods are inconvenient for transport
Due to these disadvantages, the barter system eventually evolved. A type of currency circulated across the globe. Accordingly, China was the first country to use coins as a medium of exchange. But the first minting of coins occurred in a region in Europe during 600 B.C. It also became the first official currency in the world.
Around 700 B.C., the Chinese used paper money in exchange for goods and services. They devised the system of currency to make it more practical to use in trading. Coins and paper money gained widespread popularity and it developed over time. Now, the concept of money is interchangeable with currency. Thus, when trading evolved, different currencies existed in the global financial system.
Currency now includes not only coins and paper money. It also involves credit cards and digital wallets. The government and banks control and regulate these modern currencies from one transaction to another. They serve as intermediaries to prevent illegal activities and counterfeit.
The Rise of Cryptocurrency
As technology continues to develop, the global financial system is also changing. Many people are using online banking for convenience and easy transactions. Payments and fund transfers can go through electronic devices such as mobile phones. However, flaws often arise in this system. Some of these are
- technical issues at the bank
- hacked user accounts
- limited amount for fund transfer
The disadvantages of the online banking system provoked the birth of cryptocurrency. It became popular across the world ever since Bitcoin emerged in 2009. Bitcoin is the first decentralized virtual currency. Accordingly, a developer with the pseudonym of Satoshi Nakamoto invented it.
Due to its popularity, several people claimed to be the founder of Bitcoin. Some suspected that it was Dorian Nakamoto. Craig Wright also claimed that he was the founder. But many had speculated that it was Nick Szabo. However, until this day, the real identity of Satoshi Nakamoto is still a mystery.
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Join our free mailing list below to receive real-time news alerts and our next featured stock!Why Cryptocurrency is Special?
Cryptocurrency is more efficient to use when it comes to online transactions than other systems. It may function like the real-world currency, but it still has features different from the latter. Such as:
- It has limited units that can exist.
Accordingly, there is only 21 million Bitcoins that can exist. Upon reaching that amount, the production of Bitcoin will stop. But with fiat money, it has unlimited units.
- The verification of the fund transfer is easier.
The fund transfer process is easier because cryptocurrency uses hashing algorithm to verify the validity of a transaction.
- It operates without any intermediaries like banks and the government.
Cryptocurrency does not need any middle-man to keep the security of the transactions and the users. Thus, it is independent and decentralized.
- It has little to no transaction charges.
Banks and other digital wallets often charge the users transaction costs for every financial activity made.
- Money is accessible anytime.
Banks and other financial institutions are not open 24/7.
- It has unlimited purchases and withdrawals.
Typically, online transactions through banks have limits.
- Anyone can use it.
Anyone has the freedom to use cryptocurrency. Setting up an account is easier as users no longer need documentation or paper works.
- International transactions are easier and faster.
Unlike wire transfers that take days before the recipient can get the money, transfer with cryptocurrency is faster. It only takes few minutes or even seconds.
How Does Cryptocurrency Work?
The purpose of cryptocurrency is to remove the problems that arise in modern money. Modern money includes physical cash and digital currency, such as credit cards, digital wallets, and others. Nowadays, the number of physical currencies gradually decreases over time. It is because most people use digital money.
With banks, their account holders own ledgers. These ledgers are virtual files, and each contains the owner’s name and balances. Banks keep these ledgers in their computers to monitor and avoid double-spending. Hence, they regulate all financial activities by verifying the transactions. This is the reason why banks became a centralized authority.
The problem with double-spending without having intermediaries like banks had solved by Satoshi Nakamoto with his Bitcoin. Bitcoin and other cryptocurrencies use cryptography. It has encryption and decryption to secure the transaction between one party to another. Additionally, each cryptocurrency transaction is different from another due to the peer-to-peer network. And since cryptocurrency provides the security needed during the process of transfer, intermediaries are no longer necessary.
The computational algorithm in cryptography is the algorithm that uniquely identifies the user of cryptocurrency. After this, it passes through a signature algorithm with the user’s private key. Then the digitally signed output distributes across the network to verify with the sender’s public key. The ones who provide verification are the miners.
The transaction using cryptocurrency made it easier and convenient for everyone. Its features offer promising benefits. However, it still has an effect to the economy.
The Future of Cryptocurrency
Since the emergence of Bitcoin, numerous virtual currencies have existed in the market. Many people accepted it, particularly the young generation. However, not everyone believes in the abilities of cryptocurrency. Famous economists like Paul Krugman and Richard Shiller are skeptical and against it.
However, after a decade since the birth of Bitcoin, cryptocurrency continues to expand. It even affects the global banking system because these digital currencies are not fiat-backed currency. It can result in the disruption of the dynamics of various international and economic measures.
Nonetheless, the innovation is pushing our traditional trading practice to develop and improve. It already started in several parts of the globe, especially in Asia. Blockchain technology has helped various platforms to increase transparency and accountability yet more cost-efficient than any other mode of transaction.
This move has opened a lot of opportunities to evolve, particularly in the banking system. In fact, the Bank of America has applied for a blockchain-related patent associated with the development of a new cryptocurrency wallet.
We can all agree that 2020 is a year of drastic and unpredictable changes. However, all these changes, whether good or bad, lead our civilization to new development. Change is constant. And we cannot deny that it significantly affects the way how our world functions.
Sarah Bansil – the founder of Pera Diaries, a blog that focuses on personal finance, business, and investment.
