Cryptocurrency Basics: Bitcoin, Blockchain, and the Future

Introduction to Cryptocurrency

Anyone mildly acquainted with cryptocurrency has probably heard of Bitcoin. Bitcoin's success helped surge interest across the entire cryptocurrency market, and many view it as the pioneer of the space. According to Cointelegraph, "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 cryptocurrency marketplace now hosts several digital coins, and many investors view it as the future of money — though to many it remains a nebulous and somewhat mysterious domain.

Most Popular Cryptocurrencies

As noted above, Bitcoin is probably the most popular and best-known form of cryptocurrency, largely because its success helped put other cryptocurrencies on the map. In November 2017, Bitcoin surged dramatically in the market, instantly transforming it from an alternative investment into a viable option for future currency trading. At that time, the price of a single Bitcoin was $3,000 — something unheard of just a few months earlier. The following month, it climbed as high as $19,000. These dramatic upward movements guaranteed one thing: cryptocurrency was going to definitively change the future of finance and how money is traded.

Since Bitcoin has enjoyed such outsized success, it has in many ways set the standard that all other cryptocurrencies attempt to match. Virtually every cryptocurrency has worked to brand itself as a better version of Bitcoin, and some are in fact easier to use — though usually at a certain cost. For example, Charlie Lee, an MIT graduate and Google engineer, launched Litecoin in 2011 as a peer to Bitcoin, sometimes 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 favor Litecoin because it offers faster transaction validation and is increasingly accepted by merchants.

Ethereum debuted in 2015 as a decentralized software platform that enables what are known as "Smart Contracts" and Distributed Applications to be developed and run without waiting or interference from third parties. The associated cryptocurrency, Ether, allows users to engage on the Ethereum platform and trade virtually anything they choose (Bajpai, 2017). The privacy and security that this platform offers are very appealing to investors and those in the technology sector.

Finally, there is a cryptocurrency called Zcash, which is also decentralized and open-source (Bajpai, 2017). Zcash appeals to many users because of the extreme privacy it offers alongside the ability to maintain transparency in certain transactions, based on the user's own preferences and decisions (Bajpai, 2017). This gives the user an added layer of security and privacy, since data such as the sender's identity, the recipient, and other transaction details remain concealed. Zcash also allows users to engage in shielded transactions for extra security, meaning each exchange is wrapped in a cryptographic technique (Bajpai, 2017).

Legal and Illegal Uses of Cryptocurrency

The uses of cryptocurrencies illustrate why so many people find them exciting. Cryptocurrencies are decentralized, meaning no banks or other institutions have a hand in them; they are built around anonymity; and their fundamentally digital nature means they can drastically alter how we live. Examining some of the more common uses of cryptocurrencies today can provide insight into how they will develop in the future. For example, some experts believe that cryptocurrencies will be the mechanism by which people combat electoral fraud and other forms of monetary corruption — due to the incorruptibility of the blockchain (Medal, 2017).

Speaking of corruption, a growing number of charities are accepting cryptocurrencies as a way to thwart internal misconduct. "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 travel websites are using Bitcoin so that travelers can book airfare, hotels, and car rentals (Medal, 2017). Similarly, there has been an upward trend in the number of higher education institutions accepting Bitcoin — not only in the United States, but also at universities in Switzerland, Germany, and Cyprus, which are accepting cryptocurrency from students for tuition and fees (Medal, 2017). Because universities are major institutions with significant financial influence, their behavior around currency can shape the direction of broader economic trends. Additionally, more and more fundraising websites are using cryptocurrency to bankroll ideas and projects. While platforms such as IndieGoGo and Kickstarter still accept traditional payment methods, other startups are seeking capital through cryptocurrency — largely because of its transparency and the ease with which transactions can be tracked (Medal, 2017).

Naturally, given how private, anonymous, and secure cryptocurrencies are, they also appeal to those who wish to commit crimes. A study found that nearly 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 finance expensive illicit trades such as the illegal drug industry. Criminals value the anonymity Bitcoin provides, along with the protection that anonymity affords. Bitcoin is therefore used not just by drug traffickers, but by those involved 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 finance criminal activity will begin to shy away from it.

On the other hand, some argue that the widespread criminal use of Bitcoin and other cryptocurrencies, combined with recent hacking incidents within the cryptocurrency space, constitute grounds for abolishing them entirely (Bloomberg, 2018). However, many believe that cryptocurrencies have gathered too much momentum for that to ever be a realistic outcome.

Conclusion and Current Market Snapshot

The prices below demonstrate where some of the more common cryptocurrencies were trading at the time of writing: Bitcoin was trading at $9,273; Ethereum at $681.31; Litecoin at $150.79; and Zcash at $286.16. Other currencies, such as Storm, were trading at $0.06, and Cryptonex at $6.13. For the interested investor, there is an entry point into the cryptocurrency market at a wide range of starting prices.

References

Bajpai, P. (2018, March 18). What are the 6 most important cryptocurrencies other than Bitcoin? Retrieved from https://www.investopedia.com/tech/most-important-cryptocurrencies-other-than-bitcoin/

Bloomberg, J. (2018, March 10). We need to shut Bitcoin and all other cryptocurrencies down. Here's why. Retrieved from https://www.forbes.com/sites/jasonbloomberg/2018/03/10/we-need-to-shut-bitcoin-and-all-other-cryptocurrencies-down-heres-why/

Bradford, L. (2018, February 26). How millennials are using cryptocurrency to build the future. Retrieved from https://www.forbes.com/sites/laurencebradford/2018/02/26/how-millennials-are-using-cryptocurrency-to-build-the-future/

Cointelegraph.com. (2017, December 5). What is cryptocurrency: Guide for beginners. Retrieved from

Foley, S., Karlsen, J., & Putniņš, T. J. (2018). Sex, drugs, and Bitcoin: How much illegal activity is financed through cryptocurrencies?

Medal, A. (2017, November). 10 incredible uses for cryptocurrency and blockchain you probably haven't thought of. Retrieved from https://www.entrepreneur.com/article/305859

Rogers, S. (2018, March 12). 8 important words you should know about cryptocurrencies. Retrieved from https://interestingengineering.com/8-important-words-you-should-know-about-cryptocurrencies