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What is Cryptocurrency?

Cryptocurrency pioneers wanted to change the rules of the banking system by putting the seller in charge with transparent transactions by eliminating the middlemen. Hence cryptocurrency came as a form of money that changed the consciousness of currency.

What is Cryptocurrency?
September 03, 2018      1061 Views     0 Comment(s)

Cryptocurrency definition

It is a virtual currency that uses cryptography for security. Its security is unique and highly competent in that it is not possible to tamper with it. The most defining attribute of a cryptocurrency is that it is completely decentralized because it is based in Blockchain technology. No government or a body is able to manipulate the value of such a digital asset.

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navak ravikanth

“Cryptocurrency currencies take the concept of money, and they take it native into computers, where everything is settled with computers and doesn’t require external institutions or trusted third parties to validate things.”– Naval Ravikant, CEO of AngelList

Understanding cryptocurrency

Satoshi Nakamoto didn’t intend to invent a currency when he/they created Bitcoin. In his/their own words Bitcoin is a ‘peer-to-peer electronic cash system’ andhis/their motive in creating such a system was to avoid double spending. There have been many attempts made in the past to create such digital money but they all failed. Because those systems were trust based but cryptocurrency is not based on trust. In cryptocurrency, you trust the process and not the organization or the individual. Double spending is supposed to be avoided by a central server which keeps record about the databases. Sometimes crooks manage to outsmart this system through manipulating the server.

Watch this video to additionally understand cryptocurrency :

In a system like that of the cryptocurrencies there is no server at all as the network is decentralized. Every peer in the network is involved in checking whether the transactions are valid or is a potential double spend. Cryptocurrencies have a unique feature that they are able to have consensus without a central authority. This was first of a kind innovation into the world and that is the reason why it has become so popular and widely used when all other centralized digital system of currency has failed.

Fiat currencies are backed by their respective governments which is involved in issuing them. Example, Indian rupee is backed by the Republic of India. The US dollar is backed by USA. This system is partly flawed in itself in that the central bank of a nation can print as much currency as they desire. Normally that wouldn’t happen but it shouldn’t be a surprise if it does. This causes the inflation and deflation of the respective monetary assets of a particular nation. In cryptocurrency system, however no single entity is responsible for creating new denominations of any particular cryptocurrency. Everyone knows exactly how much is the supply and how much it will be in the future. In fact, the last of the Bitcoin will be mined by 2140 and after that no new Bitcoin can be produced.

Various cryptocurrencies

Bitcoin – As AWS is for cloud similarly Bitcoin is for cryptocurrency. There is not stock or commodity that has grown so tremendously as Bitcoin did. The mammoth jewelry chain REEDS Jewelers in USA accepts Bitcoin. PayPal, Dell and even Microsoft accept it now. Typical problems using cryptocurrencies like Bitcoin is that hackers may steal it, there may be transaction delays and usually it is highly volatile. The threat from hackers is that they might steal the credentials of those who have cryptocurrency wallets and not the Bitcoin Blockchain cryptocurrency system network as the system is foolproof.

But inspite of this it has shown tremendous growth. Worsening economic situations in Greece and increasing interest from the Chinese boosted the price of a Bitcoin to about $1,200. The price of Bitcoin is over $15,000 as of now. There have always been naysayers who speculated that Bitcoin prices would come crashing down and the Bitcoin bubble would burst. Bitcoin prices did suffer when a rumor spread that the Chinese government is planning to shut down the Bitcoin exchanges. But they have recovered gracefully after that.

Go through this brief video of Bitcoin and cryptocurrency:

Goldman Sachs is betting big on Bitcoin. That is why it has used its strategic investment group and currency trading group to further its bet on Bitcoin. You might want to know that NASDAQ is planning to include Bitcoin Futures in its contracts. It is planning to base the Bitcoin price from 50 Bitcoin exchanges. Did you know that the FBI owns 1.5% of the world’s Bitcoins? In 2015, 800 citizens in USA have filed taxes on Bitcoin income. 81% of the Bitcoin network’s collective hashrate is controlled by Chinese mining pools. It is strongly speculated that Bitcoin will soon reach $100,000 mark.

Richard branson

“Well, I think it is working. There may be other currencies like it that may be even better. But in the meantime, there’s a big industry around Bitcoin. — People have made fortunes off Bitcoin, some have lost money. It is volatile, but people make money off of volatility too.” – Richard Branson, Founder of Virgin Galactic

 Let’s look into how bitcoin and Ethereum differ

BitcoinEthereum
10 minutes is the average block time12 seconds is the average block time
More than 66.67% of the bitcoins have already been minedNot even half of the Ethereum’s coins have been mined
Mining reward for a block is 12.5 bitcoinsMining reward for a block is 5 ether
Centralized ASICs ensure the proof-of-workMemory hard hashing algorithm called Ethash is used for proof-of-work
Centralized mining is predominant in bitcoin where Chinese mining pools own up the majority of the bitcoin mining.Through ghost protocol Ethereum shuns the practice of centralized mining pools. If it is carried out the reward is empty blocks.
Bitcoin’s internal code is not turing completeEthereum has internal code which is turing complete. Anything can be calculated with enough computing power and time.

Litecoin – Charlie Lee a former Google engineer and MIT graduate incepted Litecoin in 2011. It uses memory intensive ‘scrypt’ as proof of work and is an open source global payment network not controlled by any central authority. Compared to Bitcoin which has a block processing time of 10 minutes, Litecoin has a faster block generation rate where within 2.5 minutes blocks are processed and is hence key in providing faster transaction confirmation. Litecoin has a token supply which is four times that of Bitcoin in the range of 84 million tokens. In April 2013 it was around $4.18 for a litecoin. Now it is around $333 for a litecoin.

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Put the information in this video on cryptocurrency wallets in your mental knowledge wallet:

Ripple – If you are looking for a cryptocurrency that is not mined then Ripple is the straight answer. It is an instant, low-cost international payments network. It has a market cap of around $1.26 billion. There is reduced network latency and it is less demanding of the computing power due to the virtue that it doesn’t require mining. It was somewhere around $0.0059 for a Ripple in August 2013. Now it is about $0.7643. This shows how much it has grown in just 4 years.

Ripple –

Monero – It was incepted in April 2014 and became a subject of great interest among the cryptographic community. It is a form of currency that is untraceable, private and secure. By using a concept called ‘ring signatures’ Monero guarantees total privacy. Even miners with very low computing power can mine it using Raspberry Pi and providing proof of work is easy here. If you want to work on Raspberry Pi platform then you can learn it in our IoT training. It was somewhere around $3.43 for a Monero in August 2013. Now it is about $402. This shows how much it has grown in just 4 years.

Ethereum – Vitalik Buterin announced Ethereum project which had its own programing language in 2015. Voting systems, decentralized asset exchanges are all possible through smart contracts of Ethereum. Corrupt governments can’t manipulate the election process if Ethereum is used. In Ethereum, users can build software directly on the Ethereum Blockchain itself. There is a cryptographic token called ether on which Ethereum applications are run. Ethereum has a market cap of $41.4 billion and is second after Bitcoin. It was around $2.83 in August 2015 and now it has a whopping value of $797 for a single Ethereum.

Cryptocurrency mining

Cryptocurrency mining is the process of adding new blocks to the cryptocurrency Blockchain network through intensive mathematical computing. It is to be noted that reward for Bitcoin mining halves every 4 years. The reward for mining one block of Bitcoin as of now is 12.5 Bitcoins (approximately $200,000 or Rs 1,28,00,000). Mining other cryptocurrencies won’t yield as much reward as Bitcoin mining but any kind of mining is a difficult process.

albert arnold gore

“When bitcoin currency is converted from currency into cash, that interface has to remain under some regulatory safeguards. I think the fact that within the bitcoin universe an algorithm replaces the function of the government …[that] is actually pretty cool.” -Albert Arnold Gore, Former Vice President of the United States

What one can do with cryptocurrency?

The prices of these cryptocurrencies are highly volatile and therefore keeps fluctuating now and then. If one has the knack and expertise in trading then he can well engage in buying and selling of these currencies. If such short selling does turn favorable to you then you can make killing money. You just need to have patience.

On the other hand several businesses accept Bitcoin as payment. Other cryptocurrencies are still picking up as a payment medium. You can get premium access to Usenet and Mega which are among the biggest name in online file sharing through Bitcoins. You can get premium offering from Reddit through Bitcoins. Buying new and used computers, tablets, phones etc through Bitcoins is possible through Bitcoin Store, Bitmit. The prices in Bitcoin Store is cheaper than Amazon for certain products. You can use Amagi Metals and Coinabul to buy and sell metals like silver, gold etc in exchange for Bitcoin. FatProperty allows house renting through Bitcoins.

Ethereum is used in smart contracts. It is a well-known fact that Google makes billions every year selling our private search data to the large multinationals. Ethereum Blockchain is helpful in this regard as it logs when the search engine use our data and makes it publicly available. Large firms would think twice in using our data fearing privacy concerns from the public. The gambling industry is around $240billion in the USA. Players are often highly skeptical of casinos that they may lead them into a fraud. Ethereum or even Bitcoin for that matter can be used which will completely disrupt the casino industry because all transactions are secure here.

Advantages of Cryptocurrency

Immutable – No entity can change a transaction after it’s completed. Your transactions can’t be undone by any regulatory body as this is beyond all that. Once a transaction is done it is done for good.

Pseudonymous – No transaction or account can be traced to its real world identity. You send and receive cryptocurrencies on some character addresses. For Bitcoin it is about 30 characters. The transaction flow can be analyzed but not the true identity behind the addresses. In fact the group who started this cryptocurrency by incepting Bitcoin are under the pseudonamed Satoshi Nokamoto. Complete privacy is therefore guaranteed by this system.

Advantages of Cryptocurrency

Low transaction fee – Miners are rewarded in cryptocurrencies only and hence there is no fee or even if there is it is very little. Cryptocurrency and Blockchain may well be the alternative for corresponding banking transactions.

Brimming with real world examples this video puts out all the benefits of cryptocurrency:

Identity protection – Payment through a credit or debit card requires that you partake your identity at the POS or where you use the card. But if you use cryptocurrency you can transfer your funds directly to your intended individual without anyone anywhere knowing your real identity.

Better ownership – You are the sole owner of the currency assets which is also the same in BFSI sector. The difference and advantage of having currency assets here is that unlike banks these assets can’t be frozen.

Fast – Transactions happen instantly and are confirmed usually within minutes. The instantaneous exaction of the transaction is the reason why Blockchain technology which is

support behind cryptocurrency is being considered for Australian Stock Exchange. It doesn’t matter what your physical location is. If you are connected to a steady internet connection then sending cryptocurrencies to your friend in the city or relative across the continent is all possible and is the same.

melanie swan

“As a portfolio manager, when do you start advising to your clients that they have some cryptocurrency exposure? When will there be an index fund, a mutual fund of cryptocurrencies? It will happen.”– Melanie Swan, Technology Theorist in the Philosophy Department at Purdue University

Security – All those keen on security know that public key cryptography system is the best among cryptographic systems. Cryptocurrencies use this public key cryptographic system and that is why the security is robust. Only the owner of the private key is able to send the cryptocurrency and Bitcoin addresses are simply impregnable. It is no co incidence that this system has become so rampant owing to its robust security precautions.

Accessible – 40% of the global adult population doesn’t have a bank account. But majority of the world and these adults have some access to the internet. They can leverage this opportunity to use cryptocurrencies where without any intermediary they can send money across the world.

Conclusion

When a surgeon holds a knife he uses it save a life while a crook uses it to take one. Similarly cryptocurrencies are frowned upon because they are used in illicit activities. But it is all about how one uses it that matters. It’s not like the regular currency is easily traceable. Usually tax defaulters make use of various shell companies to evade tax and black money. This makes the detection of such funds extremely difficult by governments. The fact that these cryptocurrencies are independent of any regulatory bodies or government and hence can’t be responsible for inflation or deflation is their main selling point. It is also their weakness in that various governments have said a firm no on the adoption of these cryptocurrencies. But in the history of technology often those technologies which are decentralized have grown big. Take Internet as an example and even Blockchain is essentially decentralized. The growth of Blockchain technology and these cryptocurrencies will in a way be parallel as those who become confident of the robustness of the Blockchain technology won’t overlook these cryptocurrencies which are based on the technology. Stalwart companies like IBM are researching on Blockchain technology to improve its security, accountability and various other features. We now experience that Internet has become integrated into our lives that new technologies have emerged out of it. Looking that way even Blockchain has so much potential that in the future new technologies can emerge out of it.

Intellipaat’s Blockchain training can teach you all about Blockchain and its decentralized transaction network.

 

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