Cryptocurrency has gained a lot of interest in the last few years. There are currently more than 1600 cryptocurrencies available with more than 42 million users participating in the mining and of these currencies. The value of the cryptocurrencies currently being traded is estimated at $100 billion which is more than the GDP of 127 countries. The value of a Bitcoin increased from few cents to more than $8500. These numbers show how important cryptocurrencies have become now.
Cryptocurrency is a special term used to represent an asset or value to be used to pay for goods and services similar to the use of traditional money. The main motive behind developing a cryptocurrency is related to improving personal privacy and freedom while limiting governmental monitoring and control of financial transactions.
Cryptocurrencies use decentralized control through a technology called blockchain or distributed ledger technology. The technology can be simply described as distributing the monitoring of transactions or transfers among different computers owned by different users around the world. The users act as “witnesses” for the transactions recording a stamp for the time and partners of every transaction. However, the transactions are coded in a certain way that keeps the identity of the users anonymous.
The development of this technology also has a very interesting story. The technology was described in a white paper published in 2009 by anonymous author who was named Satoshi Nakamoto. The developer continued to actively develop the technology untill December 2010 when the potential of double-spending of cryptocurrency was prevented using peer-to-peer network.
Production of the digital money has a different process from the printing or production of conventional money. This process has been termed cryptocurrency mining. The digital money is produced in a way and rate specified by the controlling program. Generally, computers are used to solve complex computational problems and are then rewarded by a certain value of the currency. The computational problem also involves stamping the generated money with the time and ownership in addition to monitoring its transfer.
The reward for computational mining is called hash which is exchanged for the cryptocurrency. The hash rate depends on the computational power used for mining which is simialr to the computing power of gaming graphic cards. It also depends on the hashing algorithms as SHA-256 and Scrypt.
The first cryptocurrency released was Bitcoin and it is still the most important and the most widely used. The currency is traded and controlled using the blockchain technology without a central bank or administration. It was developed in 2008 and released in the following year as open source software. Many experts considered the rise of Bitcoin to be an economic bubble following the introduction of the new technology.
Some online merchants are currently accepting Bitcoins for payment. In 2013, the first Bitcoin ATM machine was installed in Vancouver, Canada. The currency can also be kept in the form of a physical wallet. This is basically a tool used to store the credentials needed to transfer the Bitcoin on a computer. It can simply be a piece of paper, USB stick, a token or any other form.
The popularity of Bitcoin motivated the development of hundreds of other cryptocurrencies which were termed altcoins or alternative coins. The most famous of these altcoins is Ethereum. This currency was developed in 2014 and released the following year by Vitalik Buterin who worked for Bitcoin Magazine.
Development of the cryptocurrency attracted anarchists and libertarians. This is because transactions cannot be traced, limiting governmental monitoring of financial transactions. Initially, people were joining the cryptocurrency community simply to support this revolutionary idea. Then trading the currency started to generate profit too.
The concept of cryptocurrency nowadays faces a lot of criticism. As mentioned earlier, it is viewed by many people -including 8 Nobel in Economics laureates- as an economic bubble. This means at some point the exchange rate for these cryptocurrencies will suddenly crash.
Additionaly, some say that blockchain technology consumes very high power since computers used to mine the currency are kept running 24/7 to generate the money and monitor the transactions. However, power consumption of cryptocurrency was estimated by The Economist to be 166.7 megawatts, which equals 6% only of power consumption of the banking sector. If this power consumption increased by 100 folds, it will represent less than 2% of global power consumption.
There were also some claims that blockchain technology is another form of Ponzi scheme. However, these claims were refuted by reports from the World Bank and the Swiss Federal Council.
There are several security concerns regarding the trading of cryptocurrency since it can be subject to theft and fraud. In 2014, Mt. Gox which is the largest platform for Bitcoin exchange declared that around 750,000 bitcoins were stolen which were equivalent to $473 million. The news about the theft resulted in around 65% loss of the value of Bitcoin at that time. Similar incidents also happened to Tether cryptocurrency, Bitcoin Gold, Coinrail and two other platforms in 2017 and 2018.
The anonymous identity of cryptocurrency users motivated its use in some illegal trades including black online markets as Silk Road which allowed users to buy drugs online. The use of cryptocurrency allowed keeping the identity of the website and the users unknown. The website was shutdown in 2013. However, two other versions opened again since then. Some countries also expressed their concerns that cryptocurrency can be used to provide funds to terrorism without being traced.
Cryptocurrencies are rarely accepted by merchants due to a technical limitation related to the transaction processing time. Blockchain technology requires delay time of about 10 minutes for each transaction which makes impractical to use in retail. In 2018, the total value of Bitcoins used to purchase goods or services dropped to $69 million from $411 million in 2017. This decline imposes doubts on the future of cryptocurrency and the possibility of replacing conventional currencies.