Cryptocurrency

 

Cryptocurrency - what is it? You may have come across it in the news or from your friends, but as far as you're concerned, it's just some vague third-party currency with a cool name. In this post, we'll be having a look into how cryptocurrency works, why people are going crazy about it, some of the problems with it, and the future of these currencies. 

First, we have to go back in time (as if this isn't already technologically overloaded). Long before the concept of money, people used to 'purchase' goods through barter. In other words, they would exchange their own goods for another good they wanted. For example, let's say John wanted some of Steve's fresh oranges - in order to acquire this, he would have to be willing to give something to Steve in return, say apples. This would form a transaction, and like this, there would be several such transactions. A stick for a pebble, a dog for a cat, a kingdom for a horse etc. However, there was one slight issue: what if the person giving you the good didn't want what you offered? What if Steve didn't want John's apples in exchange for his oranges? There needed to be some sort of consistent way of paying for an item or service.

Enter coins. Whilst we may see them today as just small pieces of metal with the queen's face on it and unintelligible writing, this was the way people started to pay for goods in a consistent manner. If Steve gives John his oranges, he no longer expects apples - he may want 5 coins. The value of the coins was not only the fact that they were made of precious materials such as gold and silver, but also because they could then be used to buy other goods. With the developments of banks and governments (we'll cover this later in another post), bank notes started to be issued, as this was more convenient. Its value lay not in the material it was made of, which was just paper or plastic, but in the idea that the government said it had value. A £5 note is after all just a thin slab of plastic. However, it's worth the five pounds because the governing body has officially stated that it is worth five pounds. 

As time goes on, we have started to try making transactions more convenien. So much so that we no longer have to see our money. When transferring money from one bank account to another, the information about this exchange is used to update the amount of money in bank accounts virtually. Of course, every transaction needs to be approved by some sort of authority such as the banks and governments. However, this process raises some problems, including exchange rates, interest rates, transaction fees, delays in transfer - just to name a few. Also, it's prone to a lot of theft. All it takes is for someone to guess your pin code and break into your account. 

Introducing cryptocurrency, a currency revolving around the transfer of digital assets. All transactions that you make are entered into a spreadsheet, called a ledger. However, it's not just your own transactions: ledgers contain entries about transactions of everyone using it, and everyone has their own copy of a ledger. Information about the transaction, such as who it's sent from and who receives it, are stored as a block. Multiple blocks form a chain of blocks, called a blockchain. In other words, a blockchain is just a secured ledger. 

But what makes cryptocurrencies such as Bitcoin and Ethereum any different to, say, PayPal? The key difference is that they are decentralised and are not in any way controlled or operated by banks. This means that transactions made through cryptocurrencies do not require authorisation by banks, and therefore make transfers of digital assets almost instantaneous. Unlike regular transactions, cryptocurrencies have little to no transaction fees with factors such as exchange rates and interest out of the picture. 

All that's great, but who's actually monitoring it? Wouldn't the system be more vulnerable to hacking and fraudulence if it's not being policed by an authority of sorts? Remember the blockchain, the secured ledger of transactions made by crypto users? As well as containing the sender-recipient information, blocks also contain what's known as a hash (a unique ID) and the hash of the previous block. Therefore, if someone wanted to tamper with the crypto system, simply changing the hash of one of the blocks won't work as this would make the subsequent blocks invalid. They would have to modify the hashes for all the subsequent blocks which, let's face it, is pretty difficult to do. 

That's not all. You see, tampering with the information of your blockchain only changes the information of your blockchain. Since everyone has their own copy of the ledger, they're blockchains will remain untampered. Since most ledgers will be the same, it won't be too difficult to find out if one of them has been messed around with. 

The cryptography behind cryptocurrency is understandably hard to get your head around, and there's so much more to it than just some fancy string of blocks. Not to worry though, I'll be doing another post about the crypto in cryptocurrency soon. What you need to understand for now is that they're pretty hard to crack, and so are arguably one of the most secure forms of currencies out there.

However, there are some disadvantages of using cryptocurrency. First, as it is quite a recent technology, it's very volatile. For example, the value of Bitcoin, one of the largest cryptocurrencies, fluctuates so much even within a day. Here's a graph showing the value of 1 Bitcoin in a single day (source: Google): 

 No wonder companies which have previously invested in Bitcoin aren't always too pleased. Which raises another issue, which is its usage. At a time, certain companies actually started allowing Bitcoin to be used as payment as well as the regular cash-card methods. However, given how new and risky it has proven to be, they seem to have stopped this. 

However, people are still investing in cryptocurrencies, especially Bitcoin. They say that Bitcoin is going to become the next 'big thing', and as it does so, its value will shoot up. So, investing in Bitcoin now may seem like a smart idea as it could be worth much more in the future, and therefore be converted to a higher amount of 'actual' money. 

In conclusion, we've covered what cryptocurrency is, the advantages and disadvantages of using things like Bitcoin, as well as the potential to invest in them and how this may pay off in the future. Cryptocurrency is still in its adolescence, and it's not too clear what it may bring about. One thing is for sure, it is going to revolutionise the financial world and redefine the precious money we know today.