Excitement continues to build around the concept of Bitcoin and other cryptocurrencies. Optimists claim that Bitcoin will fundamentally alter payments, economics, and even politics around the world. Pessimists claim Bitcoin is inherently broken and will suffer an inevitable and spectacular collapse. Underlying these differing views is significant confusion about what cryptocurrency is and how it works. To really understand what is special about it, we need to understand how this alternate currency works at a technical level. Bitcoin, as an example, is truly a new technology and one can only get so far by explaining it through simple analogies to past technologies. This overview assumes basic understanding of computer science ??” how computers work, data structures and algorithms, and some programming knowledge. In this presentation we will focus on the beginnings of cryptocurrency, how is value is created, transactional security, currency decentralization, and cryptocurrency’s future.
The development of cryptocurrency and Bitcoin, specifically, was first introduced in 2009 by Satoshi Nakomoto. Cryptocurrency is a digital form of an asset equivalent to a currency unit which utilizes encryption to complete secure financial transactions between two entities. The process uses a peer-to-peer verification of all transactions. This allows virtual currency to exchange hands without an intermediary party like a financial institution. This is done through an intricate process called a blockchain which consists of multiple nodes that act as the verification chain. Once the verification process is confirmed, the currency is transferred between digital wallets. This process uses a cryptographic signature for confirmation so that it can be verified on each side of the transaction as the owner of the currency to be used for the transaction (How, 2018).
The security of these transactions comes from the multiple authentication or verification parts of the blockchain. All nodes must provide verification before a transaction is approved and completed. Additionally, all transactions through the block chain are permanent and become part of a public ledger in which all transactions are kept. If all blockchain ledger entries do not match, then the transaction will fail, and the transaction is void. (Table 1) The miner who solves the mathematical puzzles is paid in cryptocurrency for their work. Anyone can choose to be a miner. This process is completed by computers all over the world that operate together to constantly verify transactions. Some potential users are skeptical because of this concept as it is digital currency and not a paper one that they can handle and count. The idea of digital currency in broad everyday use is still in its investigation stages. Although it is used in many places, it is not likely that cryptocurrency will be used as a modern form of payment, because it is still perceived to be high risk and unpredictable (How, 2018).
There are a few emerging types of cryptocurrency in use today with the most popular being Bitcoin, which is considered to be the “gold standard” in the industry. Its popularity comes from both the fact it was the first to enter the crypto arena and it is traceable. The acquisition of cryptocurrency, or “coins”, is done through a process called mining, introduced above. Mining is the confirming of the transactions through a very complex mathematical problem which ends with the transfer and adding of the record to the ledger. Since 2009, there have been numerous other types of miners to enter the crypto arena including Ethereum, Monera, and Litecoin. These all operate on the same premise of mining transaction verification to create digital currency. An often-misunderstood aspect of this process is what gives this type of currency value. To put it simply, supply and demand are what drive the value of cryptocurrencies (Chang, 2018).
Furthermore, financial investments, such as the purchase of stocks or bonds and not those for goods supplied or services, are the most typical transactions used. Since its creation, the demand has been rising faster than the supply which has created a large increase in price and value. It is neither regulated by the federal government nor affected by the possibility of economic decline. Yet, it is also not insured like FDIC funds in a traditional banking arrangement. The FDIC only insures the U.S. dollar deposit component and not the digital currency after conversion. Because all transactions are, peer-to-peer, there is no central authority or regulator of these transactions. The intricate encryption creates a secure environment for the exchange of the cryptocurrency (Chang, 2018).
Although these transactions are completed utilizing high levels of encryption, there is still room for failure points in the process. After the transactions are completed, which is an intricate process, the next question is where to store it. If stored on a hard drive, it is highly vulnerable to hacking and loss if the hard drive was to fail. As stated before, there is no regulation or insurance on this digital currency so when lost or stolen there is no recourse that the owner can take to recover these funds. This fact alone makes it an extremely unstable currency to consider using in a broader base of transactions. There have been very few barriers to entry into this cryptocurrency market, but many have not been able to effectively and safely store the currency, inevitably failing and in the process of litigation. Mt. Gox is an example of an organization who ceased all operation after a giant hacking scam in 2014 in Japan. The shutdown of this exchange platform led to individual users losing as much as 650,000 Bitcoins (Dierksmeier, 2018).
While the emergence of cryptocurrency and it’s increasing incorporation in more every day transactions suggest the opportunities associated with blockchain as well as the integration of the Internet of Things (IoT), there are significant technical, economic, systemic, and societal risks also to be considered. Far from traditional banking, cryptocurrency transactions are anonymous and don’t rely on the authority or system that has been in place with the supposed intention of decentralizing currency. To decentralize currency would be to eliminate the need for a third party to transfer money, further solidifying the IoT and the concept that our every action will somehow be connected to a device that is also connected to all other devices.
Understandably, this brings to light the concerns of transactions associated with criminal activity such as drug, ransom, and extortion payments, as well as money laundering (Weaver, 2018). Furthermore, it appears that the very nature of cryptocurrency has led to a market held by just a few investors, moving the concentration of wealth in a way that seems to contradict its very purpose. This has been particularly apparent in Bitcoin, where 1,600 investors collectively hold $37.5 bn, almost third of the available total of the currency. For smaller investors, this poses an added risk as these “Bitcoin whales” have an enormous effect on and, essentially, control, the market (Bitcoin, 2018).
It seems that the irreversibility of Bitcoin exchange also poses a problem for most recipients as they often choose to immediately convert the cryptocurrency into dollars, a task permeated with uncertainty in such a volatile market. Not only this, but the perceived notion that more companies are taking Bitcoin directly as currency is incorrect. Indeed, most sites actually, “instead us[e] a service that both adjusts the Bitcoin price dynamically (so the merchant is actually pricing in U.S. dollars) and immediately sells the Bitcoin” (Neumann, 2018, p 22). For those recipients or buyers who choose to hold their Bitcoin using a third-party service, as is common, they take a chance that the service is not breached, which is, unfortunately, also common. The lack of security that comes with a private key associated with Bitcoin and other cryptocurrencies may lead investors to store their own money, which is still in danger of theft through seemingly insignificant mistakes on the user’s part (Weaver, 2018).
From its inception, the prospect of this alternative currency has varied and remained an uncertainty to the masses and experts alike. Although users should be wary of the idea that Bitcoin is, “virtually impossible to hack,” as noted above, the incentive to keep the currency secure is also driven by how valuable it is. This gives some investors hope that as the process evolves, the system will seem less like a, “forbidding fringe technology” and will become more easily adopted by individuals as well as merchants. To usher this in, an emerging group of professionals who are well-immersed in the world of Bitcoin and other cryptocurrencies are beginning to establish themselves as “crypto-consultants” for those trying to get into the game. Those who are already prepared to adopt blockchain as a way of life see even more fascinating application of the IoT in our daily routines. Will Salmon, a man who quit his job to pursue the revolution of cryptocurrency, envisions a world where autonomous cars allow for more public use of the streets. Then, he could launch Fitcoin, a system where the state would reward citizens tokens for using something like public bike transit. These Fitcoins could then be traded in for public services such as those offered at the local library. Others see platforms taking advantage of blockchains abilities to help charities operate transparently, allowing each donation and how it is spent to be tracked by the public (Mann, 2018).
The Bitcoin creators’ intention was to develop a decentralized cash-like electronic payment system. In this process, they faced the fundamental challenge of how to establish and transfer digital property rights of a monetary unit without a central authority. They solved this challenge by inventing the Bitcoin blockchain. This novel technology allows us to store and transfer a monetary unit without the need for a central authority, similar to cash. Price volatility and scaling issues frequently raise concerns about the suitability of Bitcoin as a payment instrument. As an asset, however, Bitcoin and alternative blockchain-based tokens should not be neglected. The innovation makes it possible to represent digital property without the need for a central authority. This could lead to the creation of a new asset class that might mature into a valuable portfolio diversification instrument.
Moreover, blockchain technology provides an infrastructure that enables numerous applications. Promising applications include using colored coins, smart contracts, and the possibility of using fingerprints to secure the integrity of data files in a block chain, which may bring change to the world of finance and to man other sectors. Cryptocurrency, an encrypted, peer-to-peer network for facilitating digital barter, is a technology developed eight years ago. Bitcoin, the first and most popular Cryptocurrency, is paving the way as a disruptive technology to long standing and unchanged financial payment systems that have been in place for many decades. While Cryptocurrencies are not likely to replace traditional fiat currency, they could change the way Internet-connected global markets interact with each other, clearing away barriers surrounding normative national currencies and exchange rates. Technology advances at a rapid rate, and the success of a given technology is almost solely dictated by the market upon which it seeks to improve. Cryptocurrencies may revolutionize digital trade markets by creating a free-flowing trading system without fees.
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