What are some of the core problems with your traditional payment systems? In 2008, a Japanese individual known by the pseudonym Satoshi Nakamoto realized that money shouldn’t be centralized. He proposed in a white paper that a currency must be decentralized and encrypted digitally- the government or some other banking institution shouldn’t control it. Hence, this led to the introduction of blockchain, and the world saw the birth of Bitcoin – the world’s first digital currency. Blockchain served as a public ledger for BTC and has revolutionized the world of finance and economics.
So, how does crypto work, what are its benefits, and should we invest in it? We’ll briefly answer all these questions here for a layman’s understanding.
How does cryptocurrency work?
The intricacies of cryptocurrency aren’t complex to understand. It’s a digital currency (existing purely on computers) where transactions are recorded on a public digital ledger called the blockchain. A single sequence of discrete blocks constitutes a blockchain. These blocks – containing information about that transaction – eliminates the need for a middleman (i.e., the bank). As there’s no intermediary involved, we can have peer-to-peer transactions. This public ledger is distributed, which means it’s stored on many computers across the world. The word “crypto” comes from the fact that this digital money is encrypted to enhance its security. You can trade cryptocurrencies on online exchanges, and here’s how that happens.
All you need is software, a.k.a crypto wallets, for transferring balances to someone else’s account. Users won’t know the personal identities of the two peers, but the knowledge of the transaction is public. The process of “mining” records these transactions to the public ledger, which people can download. People who place new cryptocurrencies into circulation receive coins as a reward. They’re simply adding blocks of transactions to the ledger by solving puzzles.
There are several other digital currencies to mine, including Ether, Ripple, and Litecoin, collectively called “altcoins.” You can learn more about these decentralized currencies by enrolling in a cryptocurrency short course online. It will provide you with working knowledge of how cryptocurrencies operate, especially if you’re considering investing in them.
The importance of digital currency
The first quarter of the year 2021 was dominated by American entrepreneur Elon Musk’s shenanigans on Twitter. The self-made billionaire announced his support for the cryptocurrency Dogecoin, declaring his intentions to put this coin “literally” on the moon. In 2020, he’d already stated that SpaceX‘s planned terraforming of Mars would be followed by crypto being the planet’s official currency. In June 2021, Tesla announced to resume accepting Bitcoin after miners ensured they would be using approximately 50% clean energy to mine. So, why does one of the world’s wealthiest people think that digital currency is crucial? Because:
- It’s instant:- The Medicis strengthened the banking system among Europeans in the 15th century. It’s about time that this financial institution is replaced by modern technology. Now, with a smartphone and strong internet connection, you can become the bank. Cryptocurrency allows instant settlements.
- It’s transparent:- A public ledger on the internet stores all confirmed transactions, thereby making them fraud-proof. The blockchain allows “smart contracts” that make cryptocurrency unhackable. So identity theft becomes impossible in such transactions since you can’t reverse a transaction once miners finalize it.
- It’s decentralized:- Cryptocurrency has been labeled as “the people’s currency” because of the individual ownership rights it offers. Unless you authorize someone to control your digital wallet, you are it’s only owner. Thus, it eliminates the threat of the bank freezing your accounts or assets.
- It’s accessible:- Recent statistics published by Oberlo show that around 4.66 billion people have access to the internet. This makes cryptocurrency more accessible than the traditional banking system. So, it allows you to effectively conduct business digitally with anyone from anywhere in the world.
- It’s confidential:- There aren’t banking charges involved in a digital transaction as your identity remains anonymous from other users. Unlike the traditional system where your financial information can be exposed at any given instant, cryptocurrency enables investors to escape the clutches of identity theft.
The future of cryptocurrency
In January 2021, CNBC published a report explaining the psychological reasons why people invested in Bitcoin and other cryptocurrencies. According to this report, cryptocurrency has become a culture, and people wish to embrace this identity. So, they don’t just invest in digital currency. Instead, they’re participating in a global cultural phenomenon. Experts expect the global blockchain market size to grow to $40 billion by 2025. No wonder the supporters of blockchain technology believe it’ll transform the world just like the internet did back in the ’90s.
Now, should you invest in crypto? Well, it depends on your perspective as a potential investor. How do you view cryptocurrency in today’s world? Some investors consider it a commodity/currency, while others compare it to owning some gold. People often argue that Bitcoin and its derivatives aren’t stable and may not be a wise long-term investment. Entrepreneurs such as Warren Buffet believe that digital currency does not have any real value. But does that mean there isn’t any guaranteed future for cryptocurrency?
In the last century, a newspaper called the internet a passing “fad” people would soon forget. We all know how wrong that prediction was! On the contrary, investors believe that Bitcoin will become mainstream in the coming decade since the world is already switching to paperless transactions. The international economy will ultimately incorporate a digital ecosystem. Though, the future of cryptocurrency is disputed among its supporters – who admire its limitless potential – and opponents – who only see a lot of risks!
Though whatever predictions experts make about cryptocurrency, one can safely assume that this tech will heavily influence the future of economics. Digital currencies will disrupt traditional finance in the next few decades even if they eventually get unseated by some other superior technology later on. It depends on countries as well as whether they view Bitcoin as a competitor to government-issued banknotes. But it is difficult to deny one thing: cryptocurrencies are native to the world’s digital economy and will continue to be so.
Some final thoughts
In 2018, financial experts predicted that the global blockchain market would exceed $23 billion by 2023. It seems now that – with Musk’s increased intervention – cryptocurrency can become the official currency of Mars in the future. Digital currency, unlike paper money, isn’t a government-issued currency. Instead, it derives its value from a native blockchain. Using this digital money removes the middle man and secures the transaction since it’s decentralized. So, you can establish transparent audit trails, thereby making this method accessible to anyone around the world. Soon it will become an investment option for stock market enthusiasts among millennials, eventually paving the way for decentralized finances worldwide.
