The rise in cryptocurrency technology, and its implications
by S I Harini
If you have been following Elon Musk’s Twitter handle recently, you may have come across terms like dogecoin, cryptocurrency, and bitcoin. So what is a cryptocurrency, and what do these terms mean? This article by S I Harini will explain all about Cryptocurrency technology and its implications.
Cryptocurrency is a digital currency that’s exchanged between peers without the need of a third party, like a bank. This concept first became mainstream in 2009 with the creation of Bitcoin, the first decentralized peer-to-peer payment system. The success of bitcoin ushered in the creation of a novel and booming set of payment services- known collectively as “cryptocurrencies”. Tokens and other types of digital assets that are not bitcoin were also created which were termed altcoins. Some important altcoins are Ethereum, Tether, Cardano, Litecoin, and Dogecoin. Cryptocurrency has been called one of the greatest technological breakthroughs since the Internet and has continued to gain traction in various facets of government, business, and personal financial activities. The market cap of bitcoin has risen from 0 $ in 2009 to an astonishing 880 B $ currently, whereas Ethereum stands at 200 B $.
But why have so many people invested their belief (and perhaps more importantly, their money) in digital currencies that have little-to-no intrinsic value and no state to back them up? The nature of the transactions enables consumers to digitally connect directly through a transparent process, showing the financial amount, but not the identities of the people conducting the transaction. Inevitably, by providing a means of making payments secretly and without government interference cryptocurrencies have become popular with providers of illicit products and those who would rather operate from behind the cloak of anonymity. These transactions are processed by a technology called blockchain, a decentralized public ledger that keeps a record of all transactions that take place across the peer-to-peer network. Since there is no central party involved, bitcoin and other cryptocurrencies are generally regarded as being protected from inflation originating from national government changes or restrictions.
This creates a “haven” for investors to put their wealth into, as it generally does not lose value based on inflation. The current societal and economic climate also brings about a situation for people to hold less cash and stay hedged against market swings. Recently, there has been a trend where public companies are converting their cash treasuries into cryptocurrency. Electric car maker Tesla has acquired $1.5 billion worth of bitcoin and plans to begin accepting it as a form of payment for its products shortly, the company disclosed in a filing with the U.S. Securities and Exchange Commission (SEC). Let’s take the case of Santander U.K., a subsidiary of a Spanish banking group ranked one of the largest in Europe in terms of market value. Santander U.K. is a new cross-border payments application based on Ripple’s distributed financial technology.Ripple enables financial institutions to achieve a single-step atomic settlement with Ripple — meaning that a transaction either settles all at once or not at all, eliminating settlement leg risk. Through its bidirectional messaging, app users can review sender and recipient information, foreign exchange (FX) rates, fees and estimated delivery time before a transaction executes, and also track payment status and delivery.It enables users to transfer anywhere from 10 to 10000 pounds to up to 21 countries. The app was able to address many flaws in the traditional cross-border payments like lack of visibility into costs and delivery timelines and was effective in lowering operational costs and reducing the risk associated with payment errors. As more and more industries are investing in crypto some countries like Iceland are planning to introduce national cryptocurrencies. Though the bitcoin revolution is taking over the global market its use is still limited to high-risk investors, corporate giants, and Silicon Valley insiders. If they become the global norm for transactions shortly, chances are it could do away with national barriers and exchange rates.
Businesses are beginning to see the value in using cryptocurrencies for international transactions, especially when transactions need to occur quickly in response to an emergency. The low fees associated with transactions using digital currencies such as Litecoin (LTC), stellar (XLM), or bitcoin cash (BCH) make them excellent payment systems for international money transfers. The thriving e-commerce market has also fueled the possibility of the use of bitcoin for payments due to its advantage over traditional card-based payments.Overstock.com, Expedia and Shopify are just a few examples of large companies that are now taking cryptocurrencies as payment. The use of cryptocurrency, such as Bitcoin, for obtaining goods, carries much less risk than credit cards, which today are subject to many types of fraud. It also eliminates the transaction fees charged normally in card-based transactions. Apart from that, cryptocurrency can also act like a commodity similar to gold. The commodity market is a widely accepted form of trade worldwide, and it has seemingly begun to mimic the characteristics of gold.
As more people realize its unlimited potential, and as new users can participate in the various networks, the use of cryptocurrencies will reach every corner of the world.