Crypto currencies have become a global phenomenon known to many people across the globe. Although, talked about by many but it is still not fully understood by most people, banks, governments and companies are not fully aware of its importance.
Beyond the press release and hypes created in social media by a handful of cryptocurrencytraders even bankers, scientists and many other financial consultants have very limited knowledge and thus the confusion.
What is Cryptocurrency and How it all began?
A cryptocurrency is a digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of this security feature. A defining feature of a cryptocurrency, and arguably its most endearing allure, is its organic nature; it is not issued by any central authority, rendering it theoretically immune to government interference or manipulation.
Very few people know that cryptocurrencies emerged as the side product to another invention. Satoshi Nakamoto, the unknown inventor of bitcoin the first and the most important crypto currency, never intended to invent a currency. In late 2008, Satotshi said he developed “A peer to peer Electronic cash system”.
The most important part of the invention was that he found a way to build a decentralized digital cash system. Many before tried but failed.
How it works?
Basically speaking Bitcoins or cryptocurrencies in general is virtual money you can use to buy and sell things online and it mimics real world limited resource like gold for instance. It is also a crypto currency which means that it’s encrypted in such a way that prevents it from being copied. Now every bitcoin transaction is recorded using something called a Blockchain. It acts like a ledger that is encoded onto bitcoin itself. This prevents people from spending same bitcoin more than once since everyone else on the currency’s peer to peer network knows that it was just spent.
How to acquire bitcoins?
You can acquire bitcoins or cryptocurrency as a method of payment for goods and sercives, exchange them for a more traditional form of currency, or you can mine(like coal and gold minning) them. YES, MINE!. That’s right like golds,bitcoins and other form of cryptocurrencies are mined by highly powerful computers. Like other commodities that are mined, the more the people that mine the less commodities there are to be found so they become harder to find. As such you can earn bitcoins by solving Cryptologic puzzle(SHA-256 hash or high end mathematical problems) or also known as Hash. As it is cryptocurrency you can earn more by solving the hash. The first machine to solve hash is rewarded by bitcoins. Incase multiple machine solve the hash at the same time, then the network picks one to keep building upon which becomes the longest and the most trusted chain. This is how a blockchain is created and you are hence rewarded with bitcoins or other form of cryptocurrency.
Why it became popular?
One of the characteristics of cryptocurrency that makes it different to conventional money is that it is decentralized. Which means there is no governing body to control the flow of the currency. This means there is no governing body like with the conventional currency.
Reasons for the popularity of cryptocurrency:
- Decentralized: The bitcoin network isn’t controlled by one central authority. Every machine that mines bitcoin and processes transactions makes up a part of the network, and the machines work together. That means that, in theory, one central authority can’t tinker with monetary policy and cause a meltdown – or simply decide to take people’s bitcoins away from them.
- It’s easy to set up: Compared to traditional Bank account Bitcoin account can be set up in minutes or even seconds! No questions are asked or no fees are taken.
- Anonymity: Users can hold multiple bitcoin addresses, and they aren’t linked to names, addresses, or other personally identifying information.
- Transperancy: Bitcoin stores details of every single transaction that ever happened in the network in a huge version of a general ledger, called the blockchain. Still there are ways people can make it more opaque on Bitcoin network not using the same bitcoin addresses consistently, and not transferring lots of bitcoin to a single address.
- Transaction fees are miniscule: May be themost important part. International transfers cost decent sum of money, but Bitcoin doesn’t.
- Fast: We can send money anywhere and it will arrive minutes later, as soon as the bitcoin network processes the payment.
- Broad applications: The more days passing by, people are getting educated about bitcoins. Now different governments US, Australia, Uk and even Un is thinking of using bitcoin and implement it in many government works. Many top companies like Delitte, Accenture, Wipro, HSBC have already either set up their lab or started extensive research on this.
- Hedge against risk: As the currency value is constantly degrading and people are facing challenges to keep up with this volatile economy, more often they are finding it as a hedge / security against the currency devaluation.Most experts have pointed towards fears in China and Asia that the yuan could depreciate as reasons for increased investment in bitcoin.
Benefits and Drawbacks
The advantages of digital currency is a plethora. Not only is it good for the business or the business owner but the buyer themselves. Of course if you purchased a specific crypto and it has shot up in price, you’re buying using pennies on the dollar. In the long term, it definitely pays off. That is definitely one of the benefits of bitcoin.
- Easy access – Cryptocurrency is readily available to the general public. Almost anyone can make use of it. It is a decentralized operation and investors from all over the world have easy access to them. You can find various projects trying to raise funds through cryptocurrency. Almost anyone that can make online fund transfers can become part of such projects.
- Quick and easy payments – Making payments using cryptocurrency is very easy. You can do it in just a matter of a few seconds. It is very fast because you don’t require to feed many details, you don’t even need to enter your credit/debit card details. All you need is the address of the wallet of the person or enterprise to whom you wish to make the payment too. The amount shall credit to the receiver within few seconds to a few minutes depending on the crypto. The ease of transfer and the low transaction fees makes it very desirable.
- Costs less – Transferring money by using any other online forum or bank gateway is expensive as they levy considerable fees for the transaction. Credit card processing companies charge hefty fees. But it is not the case with cryptocurrency as the costs are nil or negligible. With credit cards or debit cards, the seller is the one paying a fee but for crypto’s, it is the buyer paying the small fee.
- Private – You don’t need to share your identity or whereabouts or the details of the transactions made between you and the beneficiary. No information required to share with the government and the bank regarding the deal. It is truly decentralized.
- Highly secured – All your transactions will be secure as it is using NSA created cryptography. It is next to impossible for any person other than the owner of the wallet to make any payment from the wallet, unless they were hacked which there are many ways to protect yourself from.
- Remain anonymous – Some coins can help you stay anonymous but contrary to popular belief, not all of them can. Bitcoin is pseudonymous which means people won’t know exactly who you are on the blockchain but they can get some information from it.
- Your detailsare safe – Nobody can steal your personal information from merchants, which ensures the privacy of your sensitive data. By creating a proxy ID, you can make sure that no one knows anything about you.
- No chargebacks – Once you made the payment, you cannot chargeback. This considerably depletes the chances of a fraud. Once the transfer has completed, it cannot reverse. Nobody can file chargeback like you can on credit cards. It has it’s cons but can be an advantage also.
- No third party – You are the master of your money. You can keep it in your wallet and use it as per your wishes. There is no third party involved like a bank on whom you need to trust.
- No boundaries – When you talk about transactions using cryptocurrencies then there are no limits. You may be in a different part of the world and the receiver might be some other hemisphere, you can still transfer the amount without any hassle. The inter-country transaction is extremely easy with cryptocurrency because its function is not under the control of any central bank.
All the advantages do not mean that there are no risks involved in investing in cryptocurrencies. Just like anything else financially, they are not perfect and there are drawbacks of Bitcoin. Here we will discuss the disadvantages of cryptocurrencies:
- Difficult to understand – Cryptocurrencies are relatively new and come with a learning curve. People end up investing without proper knowledge and lose money to something they did not learn about.
- Lack of knowledge – People are not aware of how to use cryptocurrency and hence open themselves to hacker. The technology is somewhat complex and therefore one needs to be mindful of it before investing.
- Not accepted widely – Not many websites and companies accept digital currencies yet. Very few countries have legalized the use of cryptocurrencies. It makes it impractical for everyday use. Due to lack of acceptance, before buying or investing online or offline, you need to make sure that it’s accepted at that place where you want to use it. Although it is slowly getting the acceptance around the world, it will take time to take the idea entirely out of the shadows.
- Can lose your wallet – There is a possibility of losing your wallet. If you have stored the money in the form of digital currency on your phone or computer, you better remember your password and not lose those devices. Losing your coins means you won’t be able to retrieve it, even with the help of legal assistance so that is just one of Bitcoins flaws.
- No way to reverse the payment – If you mistakenly pay someone by using cryptocurrency, then there is no way to get a refund of the amount paid. All you can do is to ask the person for a refund and if your request is turned down, then just forget about the money.
- Uncertainty – Since cryptocurrencies are so new, they are also very volatile. This is one of the main reasons mass adoption is taking longer than it should. Many corporations don’t want to deal with a form of money that is going to go through huge swings in volatility.
Why Governments hate it?
In traditional payment system a middleman, an intermediary is necessary to settle transaction. This is someone trusted and it is usually the banks. More often than not we rely on banks to in monopolistic environment to create innovations in financial sectors since they have access within the system to clear money. These trusts are necessary to ensure transactions successfully go through. Unfortunately in the Fiat Currency world this privilege also carries exorbitant transaction fees.
When you deposit money at a traditional bank you are no longer own the money, the bank does. There are lot of transactions happening in the background where banks are essentially spending your money to earn more for themselves, and charge you for that “privilege”. There’s layers upon layers of complexity where people do not realize there is being spent to benefit those financial institutions alone.
Digital currencies had always been open to risk of being spent twice because it consist of a digital file that can be duplicated or falsified. This is known as double spending problem.
Where all else failed bitcoin’s whitepaper was the first to provide an extra ordinary solution to this double spending problem by outlining a clever method so all transactions, without exception is included in a publicly verifiable transaction log called the blockchain. The result was a decentralized system where you could control your funds and know what was going on. If I transfer bitcoins from my phone to yours there is no middleman in the process which means no exuberant transaction fees.
Now a days banks no longer worry about other banks being their competitor. What they do worry about is the “Bank of One” – the next gen banking system that is decentralized and resident on a smart phone. A digital asset that is not issued by the banks or the government. As such, banks underlying fear of bitcoins boils down to this irrefutable truth: They fear they can be replaced. Cryptocurrencies can potentially make central banks obsolete.
When Bitcoins/Cryptocurrency was first introduced governments and banks ignored it. In the following years they laughed and derided it: “A fool and its money are soon parted”. We are now at that stage where they are fighting it. In this world where big banks run the show governments will soon be pressurized into banning the usage of cryptocurrencies overall. Countries with authoritarian governments like China, India, Korea and many other south Asian counties have already begun the process of banning the overall usage of bitcoins. Soon the US and other small European countries will also ban the usage of the bitcoins under pretext that it is easier to fund terrorism, drug trafficking, human trafficking and other taboos of society.