Today we begin a short excursion on an essay on the topic of making cryptocurrency as a modern monetary instrument. Let’s analyze what and in what form we – the human race – perceived as money, and for what we used them. And also we’ll look at how the emergence of new types of financial instruments affects the existing economic system.
What is Cryptocurrency?
Cryptocurrency is a digital (virtual) currency, the unit of which is a coin. The coin is protected from forgery, because it is an encrypted information that can not be copied (using cryptography and defined the prefix “crypto” in the name). And how does the electronic cryptocurrency differ from ordinary money in electronic form? In order for ordinary money to appear on the account in electronic form, first they must be deposited into the account in the physical incarnation, for example, through a bank or payment terminal. That is, for ordinary currency, the electronic form is only one of the forms of representation. Cryptocurrency is emitted directly on the network and is not connected in any way with any ordinary currency or with any official currency system. Thus, the answer to the question of “What is Cryptocurrency?” in simple words will sound like “this is electronic money”.
Anyone who has computer equipment of the required capacity and special software, can be engaged in its production in the network (the so-called mining). In the process of mining, the computing power of the equipment is solved by algorithms, the complexity of which is gradually growing and deciding to extract a coin – a set of encrypted information. The proof of the coin in the network is a blockchain – a kind of account. This currency is stored decentrally, distributed by cryptocurrency wallet users.
From its properties and features, there are advantages and disadvantages in comparison with conventional traditional currencies:
Advantages of Cryptocurrency
- Open source of algorithm allows everyone to mine it.
- Anonymity of transactions – information about the owner of the cryptocurrency wallet is absent (there is only a wallet number).
- Decentralized nature, absence of a single digital bank, lack of control over transactions and payments.
- Not subject to inflation (a limited number of coins are issued).
- Security: it can not be copied.
Disadvantages of Cryptocurrency
- Due to the lack of regulatory mechanisms, there is no guarantee of the safety of electronic cryptocurrency wallets.
- High volatility due to the specifics of use.
- On the part of national regulators, there may be negative actions in its relation.
- The loss of the password to the electronic cryptocurrency wallet or its inefficiency leads to the irretrievable loss of all the cryptocoins in it.
- With the increase in the level of complexity, it becomes unprofitable to mine a cryptocurrency on the equipment of individual users.
Today, the most popular cryptocurrency is Bitcoin. In 2007-2009, a certain group of individuals developed a unique algorithm of bitcoin and began its emission and production online. At first, bitcoin was little known and was the lot of techies and IT specialists. The number of miners due to this was limited, mining was slow, no one managed the process of introducing bitcoin (accordingly, there were no strategies and concepts), there was no clarity at all why bitcoin is needed and what to do with it. The cost of mining was also low, from $0.1 per coin. In 2010, the fate of bitcoin was influenced by certain events, the consequences of which have developed for it so successfully. The breakthrough was the provision of one of the exchanges the possibility of exchanging bitcoin for real money, albeit at a small exchange rate then. At the same time, some portals of clandestine trade drew attention to bitcoin as the ideal means of anonymous transactions. All this caused a rapid increase in interest, bitcoin gained fame, the cost began to grow very rapidly, and traders led bitcoin to the global level of fame. Then there was the rise of bitcoin to $1,100 for a coin in 2013, a fall to the level of $200-250 per 1 BTC in 2015, and again the rapid rise in 2016-2017 to the modern (as of November 2017) level of more than $7000 for one bitcoin.
Today, bitcoin is the most popular and famous cryptocurrency, which also has the largest capitalization of $118.664.313.380 (November 3, 2017). Today, bitcoin can be exchanged in some ATMs for ordinary currencies, some outlets and websites accept bitcoin as payment for goods and services, bitcoin has long lost its initial dependence on the institutions of clandestine trade, and now bitcoin is used both in financial markets and in the real industries.
Another popular cryptocurrency is Ethereum, ETH, although it is not as widely represented as bitcoin. Capitalization of ETH is $27.446.281.734 (November 3, 2017). Modern cryptocurrencies occupy their own small niche in the market. This is connected, among other things, with the chain “mining-possession-storage-use”: The miners use their servers or connect to server pools, mine a virtual currency in order to earn ordinary currency by speculation. Mined bitcoins – what to do with them next? The natural question is: if you have a cryptocurrency, what can you buy with it? You can store it in your cryptocurrency wallets, you can use it – sell it to those who do not have mining capabilities, you can spend on those services that provide for payment in bitcoin. And what kind of shops accept bitcoin – they are, oddly enough, online shops selling the same mining equipment, or gaming portals that provide for quick earnings and quick withdrawal of funds. There are, of course, the usual shops and online services that accept bitcoin, but this is not very systematic. Thus, today the cryptocurrency market is unbalanced, largely dependent on speculative sentiments of participants, which leads to large volatility.
Today, anyone can obtain cryptocurrency (and its varieties), you can even create your own. The success of the cryptocurrency today is due to the breadth of the audience, this currency should be known and popular among people.