The craze behind cryptocurrencies

Cryptocurrency is real. It is not a vision for the future—it is happening today. The first and most important cryptocurrency, Bitcoin, was created in 2008 as a cash system with no central authority. Compared to the US dollar, Bitcoin may appear too volatile for a useful currency. But in countries like the Democratic Republic of the Congo and Zimbabwe, rapid inflation and political turmoil have made Bitcoin an attractive alternative to the national currency.

Unlike banks and digital cash like PayPal, cryptocurrency, or crypto for short, does not rely on any authority to manage transactions. Instead, the math behind encryption is used to protect against fraud. With centralized control, human error or malicious activity can easily result in money being misplaced. Cryptocurrencies’ decentralization means the chance of an improper transaction is virtually impossible.

Cryptocurrencies act like a distributed ledger | Photo courtesy of QuantInsti

When someone makes a transaction with a cryptocurrency, the information is broadcasted publicly. This is placed on a “block” that gets added to the “blockchain” of all transactions. In order for the block of data to be a confirmed transaction, a “miner” must verify it. To do this, the miner must be the first one to solve a difficult encryption that attaches the new block to the blockchain. As a reward, miners receive some tokens of the cryptocurrency. With over a million miners currently, it would be much easier to rob a bank than try to abuse crypto. Just like how you do not have to understand the inner workings of a bank, the math behind crypto is open for anyone to learn but far from a requirement to use it.

In addition to the security, cryptocurrencies offer many features that differ from standard currency, with positive and negative consequences. Unlike fiat currencies, crypto is truly global and transactions are not affected by location. Also, the lack of any authority means transactions are irreversible. While this makes mistakes costly, it helps to eliminate fraud. Crypto is also anonymous and permissionless. This carries the negative side effect of its viability as a black market currency. Yet what is often neglected is the protection of privacy and accessibility. In some countries, governments and banks prohibit savings and checking accounts based on gender, ethnicity, and other factors. Cryptocurrencies offer a path of freedom from this corruption.

From a monetary standpoint, cryptocurrencies share unique features. The supply of tokens can be limited. For example, the maximum number of Bitcoin in circulation is capped at 21 million. By fixing the supply, inflation and deflation are severely limited. In contrast to the money in a bank account, which is based upon debt in an IOU system, cryptocurrency is actually more like digital gold.

Cryptocurrency is a global phenomenon |
Photo courtesy of the University of Cambridge

Cryptocurrencies can even have various properties among themselves. Bitcoin resembles gold the most: its 21 million coin cap is relatively low compared to other crypto, its value is the most widely acknowledged, and it is harder to mine than others. Bitcoin, like gold, is seen as a safeguard against economic failure. Litecoin has been called a silver alternative because it is easier for an average person to mine. Others, like Zcash, Dash, and Monero offer more privacy in transactions. There are even cryptocurrencies that target specific groups, such as Ethereum for developers or Ripple for banking.

Compared to modern economic systems, cryptocurrency is too new and undeveloped to act as the main method of payments, but that does not mean they should be pushed away needlessly. As more people and organizations accept crypto, the system will continue to be refined with new currencies as well as accessibility, and the volatility will fade away. Although cryptocurrencies are currently limited in application, they will continue to grow in use and functionality as other financial systems fail to evolve with the technology. Just as cash and credit have come to replace bartering, the underlying technology behind crypto will replace other monetary systems. If the technology offers a fast, global, private, stable, and secure solution to our financial problems, we need to seize the opportunity.

Written by Johny Tran

Johny is a person, maybe.

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