Cryptocurrency is an innovative payment network and a new kind of money.
Cryptocurrency is an encrypted virtual currency that can be moved safely between parties, with every transaction fully and publicly recorded. Unlike traditional currencies, a cryptocurrency is not underwritten by a central bank or ruling government, which means its value comes from the collective agreement within a peer community. Cryptocurrencies have a fixed number of units, with the value created through scarcity. This digital currency is also untraceable by an issuing bank, the government, or any third party.
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Cryptocurrency is moved through the use of different wallets with non-identifying ‘addresses’ or ‘keys’ that are required to receive or send the particular currency. With a private key, the currency can be recorded as spent in the public ledger. With a public key, it is possible for others to send currency to a wallet. This means that cyber currency owners are not identifiable, but all transactions are publicly available in the blockchain. Wallets are purchased through cryptocurrency exchanges that are now required by law to collect the personal information of user accounts. This regulation makes it possible for the legal authorities to trace suspicious transactions, particularly money laundering, tax evasion, fraud or other criminal activity.
Most cryptocurrencies are created by its own network through 'mining', a process used by each network to validate transactions through the use of hashes. However, each network has its own way of generating and distributing its own currency. For reward the effort required to validate transactions, successful miners are rewarded with new cryptocurrency. The reward creates a complementary incentive to contribute to the processing power of the network which now demands specialised machines to solve complex hashing algorithms. This has become so complex in recent years that the value of the currency obtained for finding a hash often does not justify the amount of money spent on setting up the machines and running them since the amount of electricity required is huge.
Cryptocurrencies reached their highest values in 2017 but plummeted the next year. Bitcoin and others fell by around 70 percent in 2018, triggering warnings from regulators across the world concerned about consumer protection, financial stability and illegal use. However, the future for cryptocurrencies look strong as traditional banks, and some central banks have been investigating how to incorporate them within the traditional banking system.
When a cryptographic problem is solved, the solution is tested within the community and submitted to a 'public ledger' which records the transaction as a block or group of data entries. This block is added to the previous data blocks to form a block-chain, where each element has verified the others. The process of block-chains means that each transaction has been checked and verified which makes a transaction irreversible, so the chance of fraud is virtually nil.
What will push the cryptocurrency landscape in the future? Below are five trends to watch out for!
Bitcoin was the first traded cryptocurrency and is the one that is most used to date. Bitcoin’s blockchain was developed in 2009 by a man or a group of people with the name of Satoshi Nakamoto, which is still considered a pseudonym with the true identity still unknown...
Developed in 2015, Ethereum is the second most popular and valuable cryptocurrency after Bitcoin, but it is also a programming language that runs on Ethereum blockchain technology. In 2013, the concept was described by a Bitcoin programmer named Vitalik Buterin
Litecoin is most similar in form to Bitcoin but has innovated to provide faster payments and processes to allow many more transactions. On 12 January 2019, Litecoin had mined 60 million coins, with another 500,000 within the next month, leaving around 23.5 million coins still to mine.
Co-founded in 2012 by Chris Larsen and Jed McCaleb, Ripple is both a cryptocurrency and a digital payment network for other kinds of transactions. Considered by some as the next-generation Bitcoin, it uses blockchain technology which over time is moving away from the accusation of being centralised
Monero, with a currency code of XMR, is an open source, secure, private and untraceable cryptocurrency system that was created via crowd-funding. Transactions remain totally untraceable and cannot be linked. Monero grew from bytecoin, which had been losing credibility.
Cryptocurrencies are being used across a range of industries, offering security, speed and privacy. The uptake of encrypted currencies like Bitcoin, Ripple and others is increasing, with advances in technology leading to even more brands being launched.
By the end of 2018, almost 32 million bitcoin wallets had been set up around the world with more than seven million active Bitcoin users. Coinchange, one of the leading exchanges has more than 13 million users, with millions of unique users in emerging markets. This number is expected to soar as millennials increasingly join the market.
Banks have kept distant from cryptocurrencies for some time, due to the well-documented risks, yet cryptocurrencies are a more secure way to store banking records, and a faster, cheaper way of transferring money through the decentralisation provided by blockchain. There are already 200 banks worldwide, both public and private that are using blockchain technology, the base on which cryptocurrencies are built. These include ALFA Bank in Russia, Yes Bank in India, UOB (United Overseas Bank) in Singapore, CommonWealth Bank in Australia, and LatiPay in New Zealand. US Bank JP Morgan launched its own JP Coin cryptocurrency in February 2019.
Blockchain technology could make rigged votes, and vote hacks become a thing of the past. In the US, both republicans and democrats accept cryptocurrency as part of their election campaigns, though the limits are capped. In 2016, Senator Rand Paul became the first presidential candidate to accept cryptocurrency donations. Blockchain technologies could be used to remove bureaucratic red tape and corruption in government agencies in contractor agreements as well as foreign aid. Health and social care benefits could be more easily verified and distributed, eliminating fraud and waste.
The Medical Token Currency (MTC) transfers information by using blockchain as a trustworthy platform for accessing health information and helps to achieve an accurate diagnosis. MTC aims to expand to the Middle East and Asia by the middle of 2019. Launched in 2017, Patientory (PTOY) provides security of movement of health records, and PTOYs can be used to pay for health plans and hospitals. In 2019, the platform will be advanced further to include an AI diagnostic module and pharmaceutical pilot. Founded in the UK in February 2018 and launched in October, Medicalchain (MTN) is a similarly secure currency for moving medical records. MTN has launched its pilot in China, Japan and South Korea and a fully-functional Medicalchain platform is due in March 2019.
The benefits offered by cryptocurrencies in online gambling has seen a spike in the number of stakes being placed with cryptocurrencies. It is the anonymity of cryptocurrency that is the main appeal. Online gambling sites began processing cryptocurrencies around 2015, and now with more than 2,200 cryptocurrencies worldwide, this number is set to increase.
In 2015, just two percent of deposits and withdrawals related to gambling were related to cryptocurrencies. By 2018 the count of online gambling sites accepting Bitcoins had risen to 60 percent, mostly because the transactions are faster and cheaper. Also, compared to traditional banking methods which cost 13 percent on average to process, cryptocurrencies cost sites just two percent.
Many companies have been accepting Bitcoin for wagering deposits over the last few years, and numerous cryptocurrencies will be accepted by sports-betting companies capable of processing these types of transactions through jurisdiction-free wagering with companies outside land-based regulations, allowing sports-betting companies to operate at a lower cost. Over the next decade, the use of virtual reality, cryptocurrencies and betting free of laws will allow innovative companies to offer players superior value and increased privacy.
Interest in cryptocurrencies has been growing, even among traditional banks, since the fixed number of units of a cryptocurrency means it is inflation-proof. Interest has also grown because the fees applied to cryptocurrency transactions are much lower than interchange fees charged by traditional payment processors, and settlement is completed within minutes since no clearance process is required.
Cryptocurrencies are also appealing as a currency since they are impossible to counterfeit. Cryptocurrency transactions are initiated by the currency holder, and there is no risk of a company initiating a transaction for incorrect amounts.
Available to anyone with access to digital technology, cryptocurrencies are fast growing in the developing world where local currencies have a history of high inflation that erodes the value of any savings.
Whilst there is much interest in cryptocurrencies, their uptake is slow due to lack of understanding. For all the advantages, the lack of a central bank like the Bank of England means that cryptocurrencies are more susceptible to market volatility.
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