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What is Cryptocurrency?

Since its launch in 2009, cryptocurrency has taken the financial sector by storm. Big businesses and financial institutions are keen to get onboard with the latest developments in technology and incorporate them in our day to day life.

As the name suggests, cryptocurrency is an entirely digital currency, meaning that there are no paper notes or metal coins that you can use at the corner shop. The technology is secured by cryptography, which makes it impossible to spend the currency twice or recall a payment. The defining feature of cryptocurrency is that it is not issued by a central authority which means that they are also protected from government influence.

How does Cryptocurrency work and is it safe?

Exchanging funds is about a verified entry of a currency medium in a database of transactions. In our standardised financial model, we can use physical medium of exchange in the form of bank notes and coins, or digital medium which is essentially entries in a database each time a transaction is carried out. If we examine the physical money model closer, we can see that it still obliges to the same rules – exchanging money, or making an entry, in the physical database is only possible if you match the condition that you physically own the notes and coins.

So, what makes cryptocurrency such a big deal? Cryptocurrency is an entirely digital currency, based on blockchain technology and is secured by cryptography. Blockchain is a technology invented in 1991 in order to ensure the security of digital documentation by making a digital timestamp which would make it almost impossible to backdate or tamper with the documents. It was later adapted into cryptocurrency technology.

A blockchain is a ledger which is easily accessible by anyone in the network, in comparison to centralised systems where access to data is restricted. The data contained in the blockchain differs depending on the purpose of the database. For example, a cryptocurrency blockchain includes transactional data on the sender, the receiver and the amount of coins.

The data in each block is secured by the unique identifier hash key of the previous block and its own hash key. If the data within the block is changed, its hash key is also changed, and it can no longer be linked and verified in the blockchain. As a result, changing a single block will make all following blocks invalid.

The blockchain is further protected by a proof of work mechanism and its peer-to-peer network. The proof of work mechanism ensures that if one block is tampered with the proof of work will need to be recalculated for the entire chain from there on, significantly slowing down the process and increasing the chance of fraud detection.

Using a decentralised peer-to-peer network means all users have a full copy of the blockchain in its entirety. When someone creates a new block, the information is sent to everyone in the network and each user separately verifies the new block to make sure that it hasn’t been tampered with before adding it to the chain.

These security measures make tampering with cryptocurrency almost impossible. To successfully change a single block in the chain you will need to redo the proof of work for each subsequent block and take control of over 50% of the peer-to-peer network accounts.

Types of Cryptocurrencies

The first blockchain-based cryptocurrency to emerge was Bitcoin, and it remains one of the most popular and valuable cryptocurrencies to date. Bitcoin was invented in 2009 by an anonymous individual or group using the pseudonym Satoshi Nakamoto and its market value in 2019 was $146 billion.

The immense success of Bitcoin was followed by the emergence of thousands of competing cryptocurrencies like Litecoin, Peercoin, Ethereum, Cardano and EOS. Whilst these competitors, which are sometimes known as altcoin, have increased in value, Bitcoin still dominates, owning around 68% of the market value.

Recognition and Endorsements

Cryptocurrencies have been praised for transparency, resisting monetary inflation, low transaction fees, protection against identity theft, preventing funds drawback fraud and allowing access to anyone who wants to join the network.

One of the benefits of using cryptocurrencies is that there are no geographical limits. The currency can be used by anyone all over the world, with lower transaction fees compared to the standard financial organisations.

As well as lower transaction fees, the decentralisation of cryptocurrency allows for its users to dictate the rules without the influence of a political governing body. One of the benefits of this system is that the number of coins is limited which decreases the possibility of monetary inflation in the system.

Furthermore, the technology ensures transparency while ensuring anonymity, as every single transaction is recorded on the blockchain; however, the account cannot be linked to personal information unless the user chooses so and this can limit identity theft. Cryptocurrencies fight fraud further, by preventing the drawback of funds once a transaction has been made.

Concerns and Criticisms

Over its short history, cryptocurrency has been highly criticised for its security, lack of centralisation and market prices.

Although, it is an incredibly secure form of currency exchange, cryptocurrency is still prone to threats from hackers and the decentralised, enigmatic environment of the cryptocurrency technology can make it an ideal tool for illegal activities like tax evasion or money laundering. Some cryptocurrencies like Monero and Dash are specifically developed with privacy in mind and make it harder to trace and prosecute criminals.

Storing cryptocurrencies has also raised some concerns. If you are using a device such as a computer or a specialised cryptocurrency wallet to store coins, you must remember your password and ensure the security of the device. If you are unable to access the coins or you lose the device, the coins will be lost forever and there is no option to retrieve them.

Cryptocurrencies are available to anyone, but the technology is not yet widely understood and accepted for everyday use. Thankfully, all cryptocurrencies can be exchanged for another currency; however, the rate of exchange can vary widely depending on supply and demand at that point in time.

The bottom line is that cryptocurrencies still have a long way to go until they are fully integrated into our financial matrix. Many people lack knowledge of what cryptocurrencies are and the benefits and traps that come with them. The appeal of giving users the control over their money and improving user experience with fast transactions and low fees is projected to grow compared to traditionally used currencies.

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