Cryptocurrency on the Rise

Image credit:  Venture Beat

Image credit: Venture Beat

What is Cryptocurrency?

Cryptocurrency is virtual currency created as a method of transacting or making an exchange, using cryptography for security, verification, and overall control of token units (often structured through a blockchain, whose technology creates trusted authority). 

Prior attempts at adoption of a digital currency have been made, such as eCash and HashCash in the 90s, but eventually failed due to fraud, poor infrastructure and controls, lack of convenience, and minimal merchant adoption.  

In 2009, an anonymous programmer working as Satoshi Nakamoto introduced Bitcoin in a white paper. Satoshi explained it as an 'electronic cashless system" that was completely decentralized (no need for a central server or a single company to act be an intermediary).  This document would fuel the cryptocurrency market that exists today, leading other variations of platforms and tokens.

How it Works

The biggest issue for bitcoin (and other cryptocurrencies in development) to address was duplicate payment — how to avoid currency being spent twice?  Without a third-party intermediary, cryptocurrencies rely on their blockchain structure, in which each user plays the part of trusted authority and record keeper. Each of these database records has a unique key (encrypted user code) for the respective recipient, sender, and transfer amounts.  Once all the transaction request details are submitted, the record gets sent to the network for confirmation.

In this network, miners have the responsibility of transaction confirmation by providing solutions to a cryptographic puzzle. Transactions that are accepted are then spread throughout the network as a connecting point and additional database entry.  “Proof of work” determines how these entries are clustered in blocks, which are then linked together in a chain. These posted records cannot be altered or cancelled (creating independent trust and control), and the miner who solved the puzzle gets paid in cryptocurrency.  

From White Paper to Adoption

Due to its anonymity and privacy, cryptocurrencies (starting with bitcoin) at first grew in popularity from suspicious financial and criminal activity in 2011. A haven for these transactions was the online marketplace of the dark web’s Silk Road, which eventually became overrun by drug trafficking.

In April 2013, there was a tremendous jump in value for bitcoin in particular (~700%), potentially linked to the financial chaos in Cyprus, in which citizens lost all asset value on deposit in financial institutions. Due to the independent, decentralized nature of bitcoin, cryptocurrency holders would have retained all their value regardless of the country’s financial system.

Toward the end of 2013, China further fueled cryptocurrency awareness onto the global main stage as tremendous demand in the country pushed the People’s Bank of China to stop usage of bitcoin. The United States also stepped in at this time to close down the Silk Road online marketplace due to rampant criminal transaction activity.

Growth and Current Usage

In 2017, the underlying blockchain technology behind cryptocurrency started to show immense potential to impact multiple industries outside of finance. Many more tokens became widely available, such as Ethereum, Ripple, Litecoin, Zcash, and Monero, each with its own unique characteristics and purpose. The alternative fundraising source of initial coin offerings (ICOs) has also helped growth in this sector, as billions in capital have been raised by companies outside of traditional venture capital and investment merely by issuing coins for specific projects. Due to the highly speculative nature of ICOs and multiple fraudulent offerings resulting in investor losses, regulators have stepped in against companies using this method.

In terms of usage, the number of merchants accepting cryptocurrencies is growing both online (e.g. Apple's App Store) and at physical locations, allowing individuals to travel, purchase home goods or gift cards, and even pay for tuition; however, bitcoin is, by a wide margin, the main token of acceptance currently, with other digital currencies following suit.  

Ongoing Investment and Regulation

Buying cryptoassets as an alternative investment has become the hot topic, as 2017 saw the valuations of some tokens dramatically soar (i.e. bitcoin went from $800 to over $8000 in less than 12 months).  This category can be broken down into:

  • cryptocurrencies - transactional focus, for exchanging value;

  • cryptocommodities - used as part of a platform / infrastructure;

  • cryptotokens - exclusively for digital content transactions on social media and gaming sites.

Despite huge increases in value, all cryptoassets are still considered very high-risk with expected fluctuations and volatility due to their unregulated nature and risk for cyberattack.

Countries around the world have varied regulatory views on cryptocurrency ranging from minimal oversight up to banning transactions and exchanges. In the US alone, government agencies differ on their stance: Commodities Futures Trading Commission applies the label of commodities, and the Internal Revenue Service as property.

Overall, this age of cryptoassets will continue to test the waters of the financial system as it seeks wider adoption and growth. The success of blockchain technology as a valid and improved business solution, millennial investment, and a specified regulatory ecosystem will determine the long-term trajectory of cryptocurrency.

 Some recent FinTechtris articles on Cryptocurrency:

 Can Cryptocurrency Truly Replace Money?

Setting a Framework for Cryptocurrency

Cryptocurrency as the Next Evolution in Finance

Ripple, the Cryptocurrency for Transfers, Gets Tested

How Should Cryptocurrency Be Classified?

Cryptocurrency Regulation Around the World

Worried About Bitcoin’s Volatility? It’s OK, Just Part of Its 9-Year History