What is Cryptocurrency?
A cryptocurrency is an encrypted string of data which denotes a unit of currency. It is quite similar to the currency in the real world, except it does not have any physical form, and it uses cryptography to work. It is organized and tracked or monitored by a network called blockchain which is a peer-to-peer network, which also acts as a secure ledger of transactions, example: purchasing, selling and transferring.
Cryptocurrencies are decentralized which is unlike the physical money that we are familiar to and this also means that these are not issued by governments or any other financial institutions.
These cryptocurrencies are made and secured through cryptographic algorithms that confirmed and maintained though a process which is known as mining, where a network of computers or hardware which is specialized in that like application specific integrated circuits (ASICs) process and validate the transferring and receiving. The process gives cryptocurrency as the incentives to the miners who run the network.
Some examples of popular cryptocurrencies are: Bitcoin, Litecoin, Ether, dogecoin etc.
Because of the reason that cryptocurrencies operate without any dependence to government or any of its institution and in a decentralized manner, without a bank or a central authority, so the new units can only be added after certain conditions are met.
For example, with Bitcoin, only after a block has been added to the blockchain will the miner be rewarded with bitcoins, and this is the only way new bitcoins can be generated. The limit for bitcoins is 21 million; after this, no more bitcoins will be produced.
What is Blockchain?
The central thing to the functionality of Ethereum and other cryptocurrencies is the blockchain technology. Similar to the meaning of its name blockchain is a set of blocks that are connected or an online ledger (ledger: a book or other collection of financial accounts). In each of the block there is a set of transactions that has been verified independently by each member of the network.
Before being confirmed every newly generated block is verified by each node, and this makes it almost impossible for transaction history to be forged. The entire network of the individual node or any computer maintain a copy of the ledger must agree on the contents of the online ledger.
The experts say that this blockchain technology can serve a number of industries, like the supply chain and other processes like online voting and crowdfunding. Financial institutions like JP Morgan Chase 7& Co. are even testing the use of blockchain technology to lower transaction costs by streamlining payment processing.
What are the types of cryptocurrencies?
Today Bitcoin is the most popular and valuable cryptocurrency. Satoshi Nakamoto who is an anonymous person invented it and introduced it to the world with the help of white paper in 2008 and now there are thousands of cryptocurrencies are here in the market. Every cryptocurrency out there claims to have different function and specifications.
For example: Ethereum’s ether advertises itself as gas for the underlying smart contract platform. Ripple;s XRP is used to facilitate transactions between different geographies. Bitcoin is the most widely traded cryptocurrency in the world and it was made public in 2009. In May 2022, over 19 Million bitcoins were out there in circulation with the total market cap of $576 Billion.
As per its set condition only 21 million Bitcoin will ever exist. After the success of bitcoin may other cryptocurrencies which are known as “altcoins” have been launched. While some of these are clones of bitcoin on the other hand others were built from the scratch. Some of them are Solana, Litecoin, Ether, etc. The aggregate value of cryptocurrencies have reached $2.1 trillion by November, 2021.
The legality of Cryptocurrencies:
The real-life currencies or fiat currencies get their authority as the mediums of transactions from the authority of the government and the monetary authorities. But cryptocurrencies are not backed by any public or private entity. So, it has been different story in terms of legality in different parts of the world. The legal status of cryptocurrencies has implications for their use in daily transactions and trading.
Wire transfers of the cryptocurrencies should be subject to requirements of its Travel rule, and that requires AML compliance was recommended by the Financial Action Task Force (FATF) in June 2019.
El Salvador is the only country in the world which allowed Bitcoin which is a cryptocurrency as the legal Tender for monetary transactions in December 2021.
Japan’s Payment Services Act defines Bitcoin as legal property and on the other hand China has banned cryptocurrency exchanges and its mining within its border. Even in India huge sanctions have been put over the cryptocurrencies demotivating people to invest in it.
Even in European Union cryptocurrencies are legal although its derivatives and other products that use cryptocurrencies will need to qualify as financial instruments. In U.S. the future of crypto derivatives like bitcoin is available on the Chicago Mercantile Exchange but the Securities and Exchange Commission has said that Bitcoin and Ethereum are not securities.
What is the process for Generating Cryptocurrency?
Cryptocurrencies are generated from a process known as mining. For example: Ether is generated from ethermine. For this process to happen a software is downloaded that contains full or partial history of the transactions that have happened on its network.
Although anyone with a computer and internet can mine cryptocurrency but the energy and resource consuming process of mining is dominated by the huge firms with a lot of resources at their hand.
Reasons for the existence of cryptocurrency:
Cryptocurrencies are new model of the money that we know of. It has the potential to streamline i.e. to optimise the existing financial structure and make it much more faster and cheaper.
The technology of cryptocurrencies and their structure decentralize and make the existing monetary system more independent and this makes it possible for the parties who are involved in transaction to exchange value and money without any dependence on any intermediary institutions such as banks.
Role of Cryptocurrencies as Securities:
Investment in cryptocurrencies and ICOs (Initial Coin Offering) is very risky as it is highly speculative and no one can predict whether it’s price is going to rise or fall and this is one of the reasons why India has put sanctions over it for saving its citizens from any unforeseen fall in the crypto market.
The Security and Exchange Commission of U.S. has even said that Bitcoin and Ethereum two of the leading cryptocurrencies of its country are securities.
Cryptocurrency and its importance in future:
The economists and digital innovators are in different opinions regarding the role that cryptocurrencies and blockchain might play in the future financial system but many of them are in favour of the cryptocurrencies.
Cryptocurrencies are certainly valuable to the world economy and society. Money plays an important role in our society it has four basic functions as a medium, as a measure, as a standard and as a Store. It was money which opened so many doors to the increases trade and economic growth of the world.
But that money has no digital asset, with the arrival of internet we are watching the transition from value that was in physical asset to value created by the digital asset. Now we can see the world’s leading companies are all technology companies, so we can say that its an era of being digital.
Cryptocurrencies have the potential to serve as a stable store of value in a world where the classic money that we know of is directly dependent on the actions of the government both in domestic as well as international currency market. Cryptocurrencies will particularly be beneficial for the countries which are going through economic crisis as these cryptocurrencies are based on global ledger no one country or national government has control over its price.
As the phrase says “data is the new oil” so the cryptocurrency can effectively substitute the old currency and because of the distributed global network the price of this currency solely depends on demand and supply and no country has control over that.
Cryptocurrency has a great potential to revolutionise the financial system of the world. As cryptocurrency is an independent unit it can optimize the financing system to a great extent by making it much more faster and much more cheaper and all this will be possible because it will eliminate the intermediary institutions such as the banks and this will result in fastening up the transactions between two parties.
What are the Problems with cryptocurrency:
Although cryptocurrency is a viable option and better alternative of the present-day money but still we are lacking some the infrastructure and regulations which are one of the important precondition for cryptocurrency to become a global currency first and foremost would be true decentralization with least susceptibility to centralized control.
Regulations can become a key barrier in mass adoption of cryptocurrencies as well, depends on how different governments will choose to regulate the technology in their nations as well as how different market players will interact with the technology.