Cryptocurrency is a type of digital money that is produced on the Internet using complex mathematical calculations, it is also stored on the Internet in virtual wallets. To date, the total capitalization of all cryptocurrencies (their total value) exceeds $600,000,000,000. This is more than, for example, the economy of Sweden.
The cost of bitcoin, the very first and most popular cryptocurrency, has increased by 1795% since the beginning of 2017. Cryptocurrencies are rapidly changing the global economy and the lives of millions of people. So what happens next?
I’ve heard about cryptocurrencies but why do we need one?
There are three main uses for cryptocurrencies:
- Transactions. In other words, money transfer. Transfer of cryptocurrency is always carried out directly between users, that is without intermediaries. Before the emergence of cryptocurrency, transfer of real money via the Internet was possible only with the participation of an intermediary (i.e., a bank), which incurred certain inconveniences. The bank could delay the transfer, limit its amount, or turn out to be crooked altogether. The appearance of cryptocurrency has solved this issue. Now users can conduct absolutely safe and anonymous direct transactions, deciding how much money should be transferred.
- Storage of value. For centuries, people would keep their savings in gold, silver and other precious metals. Later those were joined by paper money and savings deposits. Recently, cryptocurrencies have managed, albeit slightly, to drive out the usual types of savings. The amount of each cryptocurrency is predetermined in advance (it is impossible to get more coins than it was intended originally), this excludes any possibility of inflation. Portability (a hard drive would suffice for storage) and divisibility (each crypto coin can be divided into any amount of parts, not even integers) add up to the list of advantages.
- Investing. In 2017, the crypto industry experienced a real boom. Over the past 11 months, the price of one bitcoin has soared from $900 to $18,500. Because of cryptocurrency investments, thousands of people around the world have become millionaires, having started with quite modest investments. Consider this: a few years ago you could buy from 700 to 1600 bitcoins for one dollar only.
It becomes clear why this subject attracts so much interest not only among technical specialists and professional investors but also among ordinary people.
Where does cryptocurrency come from?
In order to understand how cryptocurrency appears, you first need to understand the blockchain. The blockchain is a chain of information blocks, each of those storing the data about transactions made. In other words, it is a digital analog of an account ledger. Most cryptocurrencies are based on this technology.
Unlike the usual databases, blockchain is not stored in one place, it gets duplicated by all network participants. This enables real-time verification of copies of blocks between themselves and deleting the invalid ones. Hence, the high degree of security: fake blocks simply will not fall into the chain. Theoretically, it is possible to «hack» a cryptocurrency, but it would require so many resources that the task itself becomes economically unprofitable and difficult to implement from the technical perspective. Due to the very structure of the blockchain, all information about the transactions is publicly available, which adds transparency to the system.
Unlike the conventional money, cryptocurrencies are issued not by the central bank, but by the community of people
They provide their own computers for solving complex cryptographic problems (hence the «crypto» in the title), and in return they receive the cryptocurrency. Such people are called miners, and the process of cryptocurrency production is called mining.
The financial system that existed before the cryptocurrency, did not always suit the consumer. It involved too many middlemen. With mediators come problems. Additional costs and protracted transactions were an integral part of the system run by banks. Cryptocurrencies appeared as a solution to these (and not only these) problems. They let you transfer funds quickly, cheaply and safely.
The creator of the first cryptocurrency, bitcoin, was a man (or a group of people, no one actually knows) under the pseudonym of Satoshi Nakamoto. In 2009, he launched his project and told about it to a narrow circle of interested people. Since then, the amount of cryptocurrencies has increased significantly, as well as their popularity.
How is the cryptocurrency market organized?
It is difficult to tell the exact number of existing cryptocurrencies - they come and go, sometimes completely unnoticed. According to the CoinMarketCap.com, their number has exceeded 1,350. Meanwhile, Bitcoin occupies about 50% of the crypto market, and the total value of the ten largest cryptocurrencies is about 85%. Therefore, we can say that there are several strong players on the crypto market, while the remaining cryptocurrencies are rarely used.
How does this affect our lives?
People take out large loans to invest in bitcoin, dreaming of getting rich quickly. However, the ones who go big risk losing everything in case of a sudden market drop.
Anonymity, which cryptocurrency provides to its users, has attracted the attention of criminals. This, in turn, may negatively affect the reputation of the cryptocurrency and lead to a tightened state control.
Experts predict that the central banks of various countries will begin using cryptocurrencies as gold and international reserves in 2018
Over 70 commercial banks around the world are already using Ripple cryptocurrency to make fast transactions. Despite the fact that the future of the cryptocurrency is still a mystery, one can argue that they are an integral part of the international financial system.
Who monitors all this?
There is no single international body that would monitor this market, therefore each state itself determines the rules of the game. Not all cryptocurrencies are controlled identically. The greatest attention on the part of legislators is traditionally received by bitcoin, the first and at the moment the largest of all cryptocurrencies.
The legal status of bitcoin in each country is determined individually, but usually falls into one of three categories:
- Storage and trade are allowed (EU countries, USA, Canada, Australia);
- Only storage is allowed, or there are restrictions on operations (China, Japan);
- Storage and trade are prohibited (Iceland, Vietnam, Bolivia).
Expert opinions on the future of cryptocurrency are divided: no one knows exactly what will happen next. Some believe that cryptocurrency is a bubble that can burst at any time. They consider cryptocurrency to be a purely speculative phenomenon, the behavior of which cannot be predicted or mathematically calculated. Others are confident that the cryptocurrency in the current state will continue to function with periodic ups and downs. Meanwhile, the most frantic experts believe that the evolution of cryptocurrency will cause abandoning traditional money. And in that case, crypto technologies will truly change the world we live in.