Understanding Cryptocurrency

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For us to understand cryptocurrency, it is essential to know the meaning of blockchain technology. Blockchain is potentially one of those disruptive technologies, that if implemented and established, could revolutionize the world economy. A blockchain is a time-stamped series of immutable records of data that is managed by a cluster of computers not owned by any single entity. Blockchain is, therefore, an open-source democratized public ledger system, allowing for transparency and user accountability. This technology permits secure and undisclosed transactions without the intervention of any central authorities, thereby, making it remotely a permission-less system.

Blockchain is essentially a smart utilization of coding to facilitate work that may have earlier been done by organizations tediously and ineffectively. It eliminates the need for a trusted third party to coordinate any transactions or verifications as secure relations can easily be established digitally. Cryptocurrency is, therefore, a type of digital token, designed as a medium of exchange for such transactions to take place in these distributed ledger infrastructures. Bitcoin is one such cryptocurrency created in the year 2009 by an unknown source, Satoshi Nakamoto. It is the most commonly-known form of cryptocurrency, and therefore, it is also the one that is accepted most often by people and businesses all over the world.

Cryptocurrency itself removes three specific problems of counterfeiting, trust, and central authority. Counterfeiting within an encrypted environment becomes close to impossible as advanced coding is involved in storing and transmitting cryptocurrency data between wallets and public ledgers. Trust, on the other hand, is something that usually acts as an extra cost during a firm’s monetary transactions. Such a cost, however, is eliminated when the firms incorporate more cryptography and blockchain ledger technologies. Security of transactions can be ensured using data mining. Data mining is the process by which so-called “miners” can connect different transacted data to form blockchains. This makes it harder for any unwanted source to hack into any block as the block in itself is connected to many others. Bitcoin and other cryptocurrencies also have blockchains that require special cryptocurrency miners to collaborate to establish links between the data sets in the network. Once a miner joins the network, they become what is called a ‘node’. Together, all these nodes communicate with one another and process transactions to add new blocks to the blockchain which is commonly known as the bitcoin network. These miners are then paid in bitcoins, in other words, they mine bitcoins synonymous with that of mining gold.

The reason for many to now be attracted to the crypto industry, in general, is because of its unprecedented nature. Masses with different demographics see immense potential for this idea to leap towards improving our standards of living on a global scale. An invention such as this has the potential to shock the world to its core, providing us with the same sense of anticipation that once was felt when the internet was created. In a world where trend-setting goes a long way, the media plays a crucial role in portraying such ideas to the general public. Cryptocurrency being one of them, gained huge media attention in recent years which pushed people towards investing, not only their money but also time, for either promoting or actively using this technology.

What impact did it have?

  1. Financial Institutions

Cryptocurrency challenges the traditional financial structures present in the economy today. Normally, these financial structures like any other institution have certain operating costs which are associated with their services. This makes the option of cryptocurrency far more attractive for many as it is relatively cheaper. The person may weigh the marginal costs and marginal benefits to carry out a certain decision and for it to be rational. Only when the marginal benefits are greater than the marginal costs, will the individual go forth with their decision. In this case, people are more likely to deviate to cryptocurrency due to these small changes in the costs which otherwise would have incurred on the services provided by the traditional banks.

2. Personal Financial Freedom

Digital currency can go a long way to provide greater opportunities for poorly banked countries. The utilization of cryptocurrencies by the people of these countries can grant them the opportunity to have similar financial facilities of lending, borrowing, and loans that could help them during a personal financial crisis. Such people would otherwise have been disadvantaged due to the lack of facilities, making it harder for them to sustain themselves. They would feel not only more in control of their situation but also more connected to the world, giving them a bigger perspective.

3. Trade

Not only does trade contribute to greater political relations but it also aids in alleviating the present standards of living for the respective partaking countries. Similarly, if we look at this concept on a micro level, families also apply this concept to their daily lives. The option of trade is, however, always voluntary and in the hands of the person. Cryptocurrency, being a secure and transparent means of payment, can facilitate such trade transactions, thereby, pushing people toward trading

4. Government Control

Fiat money is paper currency that is backed by the government as legal tender. This money can be issued by the central bank of the country, giving them greater control of the money supply and overall functioning of the economy. Through this money, the government can control the injection and leakages by implementing fiscal or monetary policies such as taxation, expenditure, or bank rates. Cryptocurrency, however, does not require these financial institutions or the central authorities for regulating these flows. Such a lack of control over these cryptocurrencies for many central governments is seen as threatening. Many believe that, if cryptocurrencies are implemented on a larger scale, they could have a negative externality in the form of monetary instability. To overcome this issue, many countries have banned private cryptocurrencies from being used. Generally, governments use their authoritative power to either bring about greater efficiency in the economy or simply to prevent any externalities which would at times make it harder to achieve the objectives of equality. In the case of the banishment of cryptocurrencies, the governments feel that a greater externality could occur if adopted largely. Some governments, however, have embraced this technology to help complement their financial structures. Ecuador was the first country to establish an electronic system of currency, followed by many other countries including Japan.

5. Drawbacks

But with anything, there are always trade-offs even for cryptocurrencies. For cryptocurrency, in order to implement it on a larger scale, one has to bear the risks which otherwise would not be present. Here, extensive use of natural resources or safety or stability may be considered the trade-off for efficiency. Data loss or breach of data can be possible in cases where hackers get a hold of the personal information input by a person, in such a case one may be robbed of bitcoins. On the other hand, extensive use of coal in countries like China which has a huge population of miners is done to obtain greater energy for advanced computers.

With constant modernization comes more problems to which solutions become necessary. Cryptocurrency is one such solution that can revolutionize the economy and leads us to find answers to newer problems.