Are cryptocurrencies the money of the future or something that came and went rapidly, i.e., a flash in the pan? We read about this new digital money and how cryptocurrency millionaires and even billionaires have sprouted across the world. However, at the same time, experts and financial institutions warn that this type of virtual money is unsustainable.
The police and national security agencies worry that cryptocurrencies allow criminals to operate anonymously. In other words, they can send each other money without revealing their identities. Nobody ever knows who the sender or receiver of the alternative currency is.
So, who is right? Are Bitcoins, Ethereums, etc., here to stay or will nobody be talking about them in five to ten years’ time
Even though we read about cryptocurrencies, very few of us know how they operate.
What are cryptocurrencies?
A cryptocurrency is a kind of digital money. ‘Digital’ means that it exists purely in electronic form. We also call it digital currency, alternative currency, or virtual currency.
The creators of digital currencies designed them to be ultra-secure. In the vast majority of cases, they are also anonymous.
Cryptocurrencies are online forms of money that use cryptography. Cryptography is the art of creating code and also deciphering code.
Thanks to encryption, cryptocurrencies are extremely secure, and their transaction costs are amazingly cheap.
There are no intermediaries or central authority in the world of cryptocurrencies. In other words, there is no agency or central bank.
Nearly all cryptocurrencies use a blockchain. A blockchain is a growing list of records (blocks). Each block is secured and linked chronologically using cryptography.
Cryptocurrencies use a distributed ledger
Every time there is a transaction, the system replicates that transaction data across the whole blockchain. This is something that does not exist with traditional currencies such as dollars, euros, pounds, yen, yuan, or rupees.
Let’s imagine a typical bank with 30,000 employees who are cashiers. Each time an employee performs a transaction on behalf of two parties, that data is recorded in a centralized ledger.
With cryptocurrencies, the employee (block) replicates that transaction’s data and broadcasts it to all 30,000 employees (blocks). Therefore, are 30,000 identical records of that transaction. In other words, the transaction is distributed across the whole system.
This is what the cryptocurrencies’ blockchain systems do. Records of every single transaction appear in every single block. This is a distributed system as opposed to a centralized system. We call it a distributed ledger system.
If hackers or cyber attackers wanted to manipulate cryptocurrency data, they would have to attack every single block simultaneously. This is virtually impossible. Hence, cryptocurrencies are much more secure than traditional currencies.
It is much easier for counterfeiters to make fake dollars, euros, or pounds, for example, than Bitcoins. Bitcoin is a cryptocurrency. It is the most common cryptocurrency in the world today. The second-most popular is Ethereum.
So, we come back to the question about cryptocurrencies’ future. Are they here to stay or not?
Personally, I think they are here to stay. In their current nascent form, cryptocurrencies probably represent the basic building blocks of future money.
Today, cryptocurrencies are more secure than traditional currencies. Sending money to loved ones abroad using digital money is considerably cheaper than using banks or services like MoneyGram or Western Union.
Banks and other financial institutions will probably fight hard to undermine cryptocurrencies’ success. They will fight hard because cryptocurrencies represent a serious threat to their existence.
For governments and crime-fighting entities, there are two serious concerns:
– First, we will need to find a way of taking away the anonymity feature that exists with current digital currencies.
The risks of allowing trillions upon trillions of dollars to move about anonymously are huge.
– Second is taxation. How will governments know whether people are truthful when they fill in their tax returns? Governments need income, i.e., to collect taxes. This second concern is also related to the anonymity feature.
Earlier this month, Vitalik Buterin, co-founder of cryptocurrency Ethereum, warned that cryptocurrencies could lose virtually all their value. Buterin said they “could drop to near zero at any time.”