Cryptocurrencies, bitcoin, blockchain. You may have heard all of these terms floating around before. But what do they mean, and what do they mean for you?
Cryptocurrencies are a form of digital currency which allows people to make payments to each other through an online system. They have no physical form, no intrinsic value and aren’t legislated as legal tender. This means that the value of cryptocurrencies is determined only by what people are willing to pay for them. Cryptocurrencies are stored using encryption technology to control the creation of their units and verify the transfer of funds between parties. Many companies have issued their own currencies, called tokens, that can be used in exchange for goods and services produced by the company. However, cryptocurrencies are not formally recognised as money. While they can be used to make payments, cryptocurrencies cannot be used as a store of value and unit of account in ways that conventional forms of money, like cash, can. As cryptocurrencies generate no cashflow, many people see them as a speculative trade rather than real investment.
Global interest in cryptocurrencies has risen exponentially since their creation. However, most people buy cryptocurrencies to make a profit rather than for the purpose of making a transaction. For this reason, there is high volatility in cryptocurrency markets. Indeed, the total value of all cryptocurrencies is now in the trillions of dollars, and there are more than 14,500 different cryptocurrencies traded publicly today.
As the most popular form of cryptocurrency, Bitcoin was launched in 2009 as a system that mimics features of a cash transaction but makes the process easier through peer-to-peer transactions which do not require the presence of an intermediating third party. This differs from conventional bank transfers which rely on a bank to verify and record the transactions. Instead, Bitcoin system uses blockchain technology to do this.
Blockchain is a decentralised technology which connects groups of transactions together over time in a ‘chain’. When a new transaction occurs, it forms part of a new block that is added to the chain. All bitcoin transactions are recorded in an online database known as a distributed ledger, which is secured by technology called cryptography that makes it almost impossible to counterfeit bitcoins. In place of a bank, bitcoin transactions are verified by other users in the network known as ‘miners’, who compete to solve complex codes and verify transactions in exchange for new bitcoins. As this process requires a lot of energy, the total amount traded is capped, where only 21 million bitcoins will ever exist at one time, preventing inflation and external manipulation.
Many individuals use blockchain for its benefits over conventional money, which include increased transparency, accurate tracking through the permanent ledger, inflation resistance, and reduced costs through a more streamlined process. Blockchain can also be applied in various industries. In finance, it can be used as a secure and cost-effective way to transfer funds and settle trades. In the political sphere, it can be used during elections to process voting results instantaneously. In healthcare, it can be used to share patients’ encrypted information with multiple providers without the risk of privacy breaches. However, cryptocurrencies also face concerns about its complex technology, its exchange rate volatility, the vulnerability of its underlying infrastructure, and the difficulty of regulating this field.
So, what is your view on cryptocurrencies? Their future will likely depend on the interactions between demand and supply in the market, which will in turn depend on factors such as cost and convenience. Overall, cryptocurrencies have dramatically transformed the way we do business in the past decade, and it will be interesting to see what happens next.
