Do Cryptocurrencies hold the power to shape our future?
Bitcoin! A word popular on many investors’ minds as well as on news articles. It has been 9 years since the arrival of the most popular cryptocurrency Bitcoin. Since the advent of Bitcoin, it didn’t take long for rumors of cryptocurrency replacing the current banking system to surface. Countries like Kenya and Zimbabwe whose fiat currencies have little to no value in the market are using Bitcoin and cryptocurrencies for daily transactions as their local currencies have much more volatility. Various other cryptocurrencies such as Litecoin, Dogecoin, Ethereum, etc. are also coming in the market suggesting that cryptocurrencies do have a future despite low usage in transactions today.
With increasing popularity of cryptocurrencies one may wonder if cryptocurrencies would really hold the power to become our currencies. Will the current banking system be obsolete? The answer isn’t simple or direct. Beyond a few press releases and hypes, the information on Cryptocurrencies, mainly Bitcoin has been scarce. Majority of people, including bankers, accountants, developers have limited knowledge on this. So let’s first dive down into the history of cryptocurrencies which have truly shaken and challenged the current banking system model to its core!
History of Cryptocurrencies
The word “crypto” in cryptocurrencies refers to complicated cryptography which allows for a particular digital token to be generated, stored, and transacted securely and, typically, anonymously. Hence, cryptocurrencies is considered as a virtual money which is in form of tokens or coins. Bitcoin which came in 2009 as an open source software is considered as the first decentralized cryptocurrency. Cryptocurrencies use decentralized control as opposed to centralized digital currency and central banking systems which are in power today. Cryptocurrencies use distribution ledger technology of blockchain, an ingenious invention by a person known as Satoshi Nakamoto whose sole aim was to create a digital decentralized cash system. By allowing digital information to be distributed but not copied, blockchain technology created the backbone of a new type of internet. Blockchain technology can’t be controlled by a single entity and there is no single point of failure. This makes it immune against the problems faced by the centralized big banks. Since advent of Bitcoin over 4000 new cryptocurrencies have come into existence. The second most popular cryptocurrency is Ethereum which has a market capital of $9,503,138,295 USD and is known for its feature of ‘smart contracts’.
Even countries like Venezuela developed their own cryptocurrency ‘Petro’ or ‘Petromoneda’ and launched it in February 2018. The main intention of developing this currency by the Venezuelan government was to arrest its falling currencies and to bypass the mighty dollar to trade oil in the international markets.
Future of Cryptocurrencies
The pros:
Till date Bitcoin has worked without any significant disruption and the problems associated with Bitcoin are mostly due to hacking and human mismanagement. In other words, these problems come from human errors or human ill-will and not the underlying concept. The reason Bitcoin and other cryptocurrencies became so popular was because blockchain technology promises to free the transactions from influence of the wealthy bankers and the government. This very factor can be a game changer for the crypto based currencies, especially with the rise of anti-globalization sentiments all over the world. Such movements, mainly across the western world have accused globalization as the reason for widening the gap between the poor and the rich and believe that decentralization of currencies would help to prevent corruption in the corporate elite.
In case of Bitcoin everybody can be a miner (A person who confirms the transactions in case of Bitcoin). Since a decentralized network has no authority to delegate this task, a cryptocurrency needs some kind of mechanism to prevent one ruling party from abusing it. Imagine a hacker creating thousands of peers and spreads forged transactions. The system would crumble down immediately! To solve this problem, Satoshi set the rule that the miners need to invest some work of their computers to qualify for this task. In fact, they have to find a hash – a product of a cryptographic function. Miners have to compete against each other to solve cryptologic puzzles to build blocks and add it to blockchain. The level of difficulty is very high and it increases with each level, thus limiting the amount of bitcoins being produced. The miners in return for their hard work get acquire Bitcoins. The uniqueness of transactional properties of cryptocurrencies make them better than our regular banking system. Some of such transactional properties of cryptocurrencies are given below:
1) Irreversible
Once a transaction is complete in blockchain, no one can reverse it back, not banks, governments, developers or even miners. Once you send it, there is no looking back.
2) Anonymous
With the rising usage of VPN, people are expressing in clear voice that they want the government and ad agencies to stay out of their private life. This property of remaining anonymous is followed by Bitcoin and other cryptocurrencies which never uses your real identities while transacting. Neither the transactions nor the accounts are linked to real world identities.
3) Faster
Transactions are extremely fast since they are carried out in global computers regardless of your physical location. This also means that no one can determine your location while the transaction is ongoing.
4) Free and permission less
The software through which you can transact can be downloaded freely on internet and you don’t need any permission for that! No one can prevent it and no one is the gate keeper!
5) Extremely secure
The code generated by cryptocurrency system cannot be broken into easily as only the owner of the private key can send the cryptocurrency. This property makes this system more secure than even the security of Fort Knox!
6) Transparency
All transactions are recorded and monitored. Once a transaction is completed and recorded on the ledger, it cannot be changed. Transactions are available for verification by anyone, anywhere and anytime!
The cons:
We have seen all the good things that cryptocurrencies can offer us. Then the big question arises, why they aren’t already in use if they are so revolutionary! One might argue that it is the special interests of the super elite and the bankers who are preventing this. While there may be some truth to that conspiracy theory, there are some factors which prevent Bitcoin from becoming our daily currency. They are mentioned below:
1) High Volatility
Cryptocurrencies lack intrinsic value and hence it is extremely difficult to predict if it is in oversold or undersold zone. The lack of institutional funds such as hedge funds make the run of cryptocurrencies somewhat limited in mutual funds as well as stocks.
2) Lack of use in real world
Bitcoin and other cryptocurrencies have a limited use in real world as a few companies are accepting them. Countries like India, China, Iceland, Sweden have banned Bitcoin altogether!
This makes the usage of Bitcoin and other cryptocurrencies extremely limited. The use of cryptocurrencies is however increasing nevertheless.
3) Non-Environmental friendly
Bitcoin mining uses large amounts of energy which can prove to be detrimental to our earth’s environment. Without reducing its carbon footprint, cryptocurrency could soon worsen the state of the earth to disastrous consequences unless a newer method of mining is discovered.
4) Lack of investments
Currently the noise and buzz of Bitcoin and other crypto is created by the millennials who lack the financial capital to make significant investments in this sector. The mature bankers and investors who invest mostly for long periods are still shying away from investing. This leads to shortage of funds. However, this is slowly changing as people are discovering the benefits of using Bitcoin and other crypto.
We can safely conclude that Bitcoin and other cryptocurrencies can be the future of currencies provided they alleviate or remove altogether their drawbacks. The day is not far away when the sun would finally shine brightly on the cryptos!
Written by Mihir Mhatre
https://www.dhirubhai.net/in/mihir-mhatre-660971120/