In an age of digitalization, where everything we do is digitalized and virtual, it is really not surprising that the money we use to trade will sooner or later be digitalized too. One of the latest and most hyped digital assets is Cryptocurrency.
“Cryptocurrency is a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank.’’
But in simpler words, Cryptocurrencies are the virtual or digital currencies, which is based on the technology of cryptography, that is, data encryption. They can be traded globally against authorization. These cryptocurrencies can be generated with computing power.
So, let’s see why Cryptocurrencies are in so much demand:
History of digital money.
Bitcoin, the first decentralized cryptocurrency was introduced in 2009 in America. According to the last year’s report, if you invest in a gold coin and Bitcoin (The first cryptocurrency), Bitcoin gives you 3 times more returns. If that’s not enough, Bitcoin is also considered as a safe haven for investors because it is not controlled by any governing body or authority. So, nobody controls the movement of cryptocurrency. Bitcoin is referred to as digital gold.
Gold has a market cap of roughly $7.7 trillion. The total market cap of all cryptocurrencies was $7.13 billion on January 1, 2016.
Now it’s about $300 billion.
Architecture of cryptocurrencies
- All the information related to the transaction of cryptocurrency is handled by blockchain. A blockchain is a digital ledger in which transactions made in bitcoin or another cryptocurrency are recorded chronologically and publicly. It is a continuously growing list of records which has the time stamps and transaction data.
- Now, to maintain the blockchain or the list of records you need a network. A network of people who ensure the transactions are securely taking place and there is no disparity.
- These people are the miners, who use their processing power to maintain the security of block chains and to ensure that they keep working properly.
Miners are rewarded as well when they help maintain the blockchain system.
So, why is it that many countries are not sure about them?
Consider a story, a lady has 2 sons. She gave her elder son Rs.100 and told her to divide it with his brother equally. But the elder brother gave only 20% of his money to his brother. When the younger one came to know about this, he complained to her mother of the unfair treatment from his brother.
See here, the little kid had a mother who will take his responsibility. But where will the kid go to if there was no governing body like his mother?
That’s the case with Bitcoins and other decentralized cryptocurrencies. If you are a buyer or miner and tomorrow if all the bitcoins were to disappear, you will have no one to complain to or ask what just happened? That is a huge risk of creditability.
There have been several cases of theft, loss, and fraud.
Big companies have had to shut down in China, France, and the USA because of the cyber-attack due to which subscribers lost more than $50 Million.
This is not the end of the negative sides of Cryptocurrencies. They are also used in the Online black market for all sorts of illegal transactions.
Since the creation of Bitcoin in 2009, more than 1800 cryptocurrencies have been created.
Why do we have so many cryptocurrencies?
Last year, Bitcoin has shown a growth rate of over 2000% which is unheard of, that too in just a single year, not 10 years or even 5 years, just 1 year. Suppose it goes up by 2000% again. So, suppose if 1 bitcoin today is Rs. 2,000, within a year it will be Rs. 40,000. A breaking point will come sooner or later, a point where there will be no room for growth and bitcoin will drop considerably. That is where the other cryptocurrencies come into play.
With the unrealistic growth rate of Bitcoins, investors know how important cryptocurrencies can be for the investment market. Miners to have started to create different types of cryptocurrencies which will focus on reducing the weaknesses of Bitcoin, in particular, the speed of transaction and the blockchain file size.
This has resulted in the creation of some better, advanced and safe cryptocurrencies.
Bitcoins are like the global high-velocity bubble, which sooner or later will fade away. But will surely make some people crazy rich.
One more difficulty is people now use Bitcoins mostly for investment rather than as money. There are only a few online shopping markets that trade bitcoins. So currency wise, it’s still behind.
So, if you plan to invest in cryptocurrencies, look at other more potential cryptocurrencies than Bitcoin.
Bitcoin may fade away with time but the cryptocurrencies won’t. Since they received a global audience recently and the number of cryptocurrencies is increasing exponentially. Most people believe that using cryptocurrency for daily work is not happening yet. But the Former head of J.P. Morgan‘s blockchain has a different opinion about it.
“I think it’s coming sooner than people probably think, but even where the will is, the legal and regulatory framework is challenging.”
– former head of J. P Morgan’s blockchain
In a world where everything is evolving so fast, how can we not expect the medium through which trade to evolve too? It’s true that we are too used to the conventional methods of using the money. Initially, we were hesitant in trying out most of the new products until we realized how impressive they are. Soon, they end up becoming a part of our life.
There is no doubt that Cryptocurrencies have a lot of potentials. But we still need some time to welcome them in our daily life.