Cryptocurrency fundamentals and applications

Cryptocurrencies: Background, Details, Advantages

Anyone mildly acquainted with cryptocurrency has probably heard of a currency called Bitcoin. Bitcoin and the success of bitcoin are what helped surge interest within the entire cryptocurrency market, as many view bitcoin as the pioneer of the market as a whole. According to the authoritative website cointelegraph.com, “A cryptocurrency is a digital or virtual currency designed to work as a medium of exchange. It uses cryptography to secure and verify transactions as well as to control the creation of new units of a particular cryptocurrency. Essentially, cryptocurrencies are limited entries in a database that no one can change unless specific conditions are fulfilled” (2017). The marketplace of cryptocurrency now has several digital-based coins, and many investors view it as where the future of money is headed, though to many it remains a nebulous somewhat mysterious place. 

Most Popular

As stated earlier, bitcoin is probably one of the most popular and most well known forms of cryptocurrency, and this is largely because its success helped put other cryptocurrencies on the map. In November of 2017, bitcoin surged in the stock market, instantly transforming it from an alternative investment, to a viable option of future currency trading. At this time in the stock market, the price of a single bitcoin was $3,000, something that was unheard of just a few months earlier. The next month, it was as high as $19,000. These dramatic upward trending movements guaranteed one thing: cryptocurrency was going to definitively change the future of finance and how money is traded. Since bitcoin has enjoyed all of the success within this market, it has in many ways set the standard for all cryptocurrencies to copy. Virtually every cryptocurrency have worked hard to brand themselves as better versions of bitcoins, and some of them are in fact easier to use—though usually at a certain cost. For example, Charlie Lee (MIT grad and Google engineer) launched Litecoin in 2011 as a peer to bitcoin, sometimes being referred to as the “silver to bitcoin’s gold” (Bajpai, 2017). “Litecoin is based on an open source global payment network that is not controlled by any central authority and uses ‘scrypt’ as a proof of work, which can be decoded with the help of CPUs of consumer grade” (Bajpai, 2017). Some users of Litecoin like it because it offers faster transaction validation and some find that it is being accepted more and more.

Ethereum debuted in 2015 as a specific type of decentralized software platform that empowers something known as “Smart Contracts” and Distributed Applications to be developed and used without any waiting or intrusion from third parties. Thus, the cryptocurrency, Ether, allows one to engage on the Ethereum platform and trade virtually anything one wants (Bajpai, 2017). The privacy and security that this platform offers is very appealing to many investors and those in the tech world. 

Finally, there’s a cryptocurrency referred to as Zcash, one that is also decentralized and open-source (Bajpai, 2017). Zcash appeals to many users because of the extreme privacy it offers and the ability to have transparency with certain transactions, based on the users preferences and decisions (Bajpai, 2017). Hence, this gives the user an added amount of security and privacy—since bits of data such as the sender, recipient and other details remain concealed. Zcash also allows the user to engage in shielded transactions for extra security, which means each exchange is swathed in a cryptographic technique (Bajpai, 2017).

Use of Cryptocurrencies: Legal and Illegal

The use of cryptocurrencies demonstrates just how and why people find them so exciting. Cryptocurrencies are decentralized, meaning no corrupt banks or other institutions have a hand in them, they orbit around anonymity, and they’re essentially electric and digital at their core means that they can drastically alter how we live. Examining some of the more common uses of cryptocurrencies in this day and age can help provide insight into how they will be used in the future and how they will continue to develop. For example, some experts believe that cryptocurrencies will be the way that people battle electoral fraud, or any other corruption that is money-based—due to the incorruptibility of the blockchain (Medal, 2017). Speaking of corruption, more and more charities are accepting cryptocurrencies as a way to thwart corruption from within charitable organizations and foundations. “Because of its ability to keep companies accountable, blockchain can eliminate many problems occurring with charities, such as fund leaks. That's why the World Food Programme (WFP) is using blockchain to securely distribute cash assistance to the hungry” (Medal, 2017). More and more websites connected to travel are using bitcoin so that travelers can use them to book airfare, hotels and car rentals (Medal, 2017). Likewise, there has been an uptrend in the number of institutions for higher learning that are accepting bitcoin. It has not just been schools in the United States, but universities in Switzerland, Germany and Cyprus who are taking the currency from students to allow them to pay for tuition and fees (Medal, 2017). This is very significant, since universities are major institutions with major funding and their actions with currencies and their behavior around the stock market can influence the direction of the future very significantly. Finally, more and more fundraising websites are using cryptocurrency to as means of bankrolling their ideas and the things they want to accomplish. While sites like IndieGoGo and Kickstarter are still taking traditional forms of payment, other startups are looking to gather capital using cryptocurrency. This is largely due to a variety of reasons but its transparency and how easy it is track definitely makes it appealing to investors (Medal, 2017). 

Naturally, given how private, anonymous and secure cryptocurrencies are, they inherently appeal to those who desire to commit crimes. A recent study conducted found that almost half of all Bitcoin transactions were connected to illegal activity (Foley et al., 2018). “For example, approximately one-quarter of all users (25%) and close to one-half of bitcoin transactions (44%) are associated with illegal activity. The estimated 24 million bitcoin market participants that use bitcoin primarily for illegal purposes (as at April 2017) annually conduct around 36 million transactions, with a value of around $72 billion, and collectively hold around $8 billion worth of bitcoin” (Foley et al., 2018). Some experts have concluded that this is precisely why the price of bitcoin has soared so high, because criminals are using the currency to bankroll expensive trades such as the illegal drug industry. Criminals like the anonymity that bitcoin provides them with, and with that anonymity, the inherent protection. Hence, bitcoin is used not just by drug traffickers, but by those in illegal arms trading, prostitution, human trafficking, and other criminal enterprises. However, authorities are becoming more adept at tracking bitcoin, so it is possible that those using it to break the law and to finance criminal enterprises will begin to shy away from it. 

On the other hand, some argue that the fact that Bitcoin and other such currencies are so widely used by criminals combined with recent incidents of hacking on cryptocurrency sphere, mean that we should abolish them (Bloomberg, 2018). Though many believe that cryptocurrencies have gathered too much momentum for that to ever happen. 

Key Terms

One of the major and most important terms when it comes to cryptocurrencies is the blockchain. This refers to the public ledger of all bitcoin interactions: “It's the public ledger for all bitcoin transactions. It lets information get distributed for the sake of accountability but not copied” (Rogers, 2017). A blockchain is like a virtual spreadsheet that anyone can view across a network of computers, allowing for full transparency (Rogers, 2017). “Bitcoin mining is how new money is added to the public ledger… Anyone who has access to the Internet and decent hardware can mine” (Rogers, 2017). Mining requires participants to solve incredibly complex puzzles; the individual who solves it gets to put a new block on the blockchain and reap the rewards (Rogers, 2017). 

Anyone who has heard of bitcoin has probably also heard of the bitcoin wallet. This refers to a gathering of either private keys or the software used to direct those keys and all interactions on the bitcoin universe. Exchanges within the crypotcurrency world are important and are a vital part of the overall cryptocurrency world. Exchanging and trading cryptocurrencies means buying and selling them over the cryptocurrency market. 

The Future of Cryptocurrency

The future of cryptocurrency looks exceedingly bright. With each passing year, it becomes accepted by more and more organizations and institutions. Just as digital and online payments changed the way that we do business and how the parts of the economy operate, cryptocurrencies are likely to have the same impact on society. The ability to eliminate much of the inbuilt corruption inherent within the banking system and so many financial transactions is very appealing to so many and could be tremendously beneficial for society as a whole.