What Are Cryptocurrencies and the Technology Behind It?

Like many revolutionary inventions, Cryptocurrency was never meant to be what it is today! In fact, its most iconic form – the Bitcoin – was founded in 2008 by a man shrouded in mystery who goes by the alias Sato Nakamoto. This simple idea of a peer-to-peer electronic cash system has brought the world into frenzy, and with it, a new age of digital consumerism.

Source: Geekwire.com

So, what exactly are cryptocurrencies? To put it simply, it is a digital currency that can be transferred between peers without having to go through a central agency. This means that instead of dealing with the bank, your cryptocurrency transaction need only be validated by a peer-to-peer network consisting of computers known as nodes. This process will first verify the transaction and username, and then create a new block of data or combine the date with another block to be inserted into the public ledger as record-keeping,

Source: Weforum.org

This almighty public ledger contains information about all the transactions ever done, cryptocurrency or otherwise. Within the ledger, the blocks of data are connected like Lego bricks and they are very much open to the general public. The technology of cryptocurrency systems does not allow users to alter the date in these blocks, and any attempts to alter them will affect other blocks in the same chain. This became a safety feature in the ledger system which had been heavily criticized for its lack of security.

Almost 10 years since the creation of Bitcoin, cryptocurrencies has been gradually gaining international attention. Other cryptocurrencies, such as Ethereum, Litecoin, and Ripple, work just like conventional money in which different countries have their own currency. What’s more, there are specific exchange rates between different cryptocurrencies and conventional currencies, and they even have their own markets that works just like the traditional stock markets! However, cryptocurrencies has also been thrown into the spotlight for the wrong reasons. One such case is the recent global event where the Wannacry ransomware outbreak demanded for their ransom to be paid in Bitcoins.

Source: Nascenia.com

Growth of a New Market, Friend or Foe?

Nevertheless, a quick search on Google Trends tells us that more people are searching the word “cryptocurrency” in recent years, indicating the growing interest in this unique cash system. And this sector is naturally growing due to the public’s increasing awareness of it.

The rising interest in cryptocurrencies can perhaps be attributed to how they have adapted to the present demands of market. Cryptocurrencies have certainly come a long way since the days when transacting bitcoins meant dodgy meetings in equally dodgy cafes. These days, one can easily purchase and exchange bitcoins on online(?) platforms like Coinbase. Gold pegged currencies like OneGram coin is exciting many investors, especially within the Muslim crowd as conservative Muslims can present it as fiat money which is not deemed shariah compliant.

Moreover, the value of cryptocurrencies is more subjected to public perception than most kinds of investments. This has its ups and downs. Bitcoin, for example, is positively influenced by the fact that it is hard to tamper with and hence is perceived to be much safer and less corrupt than the conventional banking system. It is well known that there is a limited amount of Bitcoin that can be mined, specifically, 21 million coins. Due to the finite nature of Bitcoin, the price movement follows the pattern of a limited commodity.

However, it is negatively influenced by its association with black market transactions due to the perceived anonymity of its currency. The validity or invalidity of the perception has little bearing on its effects. The price decline of Ethereum after news broke that Vitalik Buterin, its co-creator, had died in a car crash, is a testament to the extreme fragility of this perception based system. By the time Buterin had disproved his death one day after the release of the false news, the price of Ethereum had already dropped from 300 USD to 260 USD.

Concerns About Bubbles and Volatile Price Trends

Several blockchain-based companies have been able to raise a large amount of capital, usually in tens and hundreds of million dollars, through initial coin offerings (ICOs) even though the company is not selling any products! These investors are pouring their money into the cryptocurrency market with the hopes of gaining instant monetary gratification.

Due to the mentality of these investors, it is very likely that the prices of the cryptocurrencies will be volatile based on their sentiments and recent happenings in the markets. These investors have no patience and would convert their investments into profits and tangible cash as soon as possible. Indeed, some of these ICOs have no intrinsic value and is merely a gimmick to gain capital. However, it does not deter the investors’ intention to invest in these companies.

As mentioned before, with the influx of investments in cryptocurrency markets, prices are soaring for certain cryptocurrencies such as Bitcoin or Ethereum. However, the high prices are often not a reflection of the actual value of the cryptocurrency but merely the inflated value stemmed from speculation and questionable market practices.

A cryptocurrency market is akin to a bubble. When a bubble bursts, it will trigger serious repercussions within any given sector. This concept is similar to a housing bubble, and The most recent bubble burst that we’ve all come to know and fear is the 2008 Housing Crisis. Although it happened in the property sector, its devastating effects are to be feared and learned so that history does not repeat itself.

Just a month ago, prices of Bitcoin surged past the $3000 mark. While this is treated as a positive news for some investors due to their huge capital gains, there are concerns about the exponential growth of the price and future trends. True enough, in mid July 2017, Bitcoin’s price declined by a big margin, closing at prices around the $1800 mark at one point. Bitcoin’s nearest rival, Ethereum, peaked at almost $400 the same time Bitcoin experienced the decline. It is now fluctuating around the $100 mark and is experiencing high volatility in its prices that may swing within minutes of trading.

Other than concerns in monetary terms, lack of regulation might lead to fraudulent usage of cryptocurrency as a medium of transaction. Cryptocurrencies can be used for illegal activities or even tax evasion as it is difficult to trace the parties involved in the transaction. Take the Wannacry ransomware attack as an example, hackers demanded ransom in Bitcoins rather than conventional currencies as it would be hard for authorities to trace them. Unregulated markets also meant that security will be loose. Hence, the companies are prone to hackers and malwares, because the only line of defense for these companies will be themselves.

What Does the Future Hold for Cryptocurrencies?

Based on the current trend in financial services, financial technology (FinTech) is an area that every relevant institution is investing in for the future. It is strongly believed that digital economy will become the new form of marketplace in years to come. Compared to traditional or fiat currencies, cryptocurrencies are more stabilised in terms of its value and it is also safer due to its blockchain system.

In the future, cryptocurrencies will no longer be used just for daily transactions in the digital world, but as a store of value because of its limited supply and stability of its value. Until the year 2140, the circular flow will maintain at the amount of 21 million coins. With this limit, Bitcoin will not lose its value due to an oversupply of coins. Compared to a traditional currency note, the central bank or Federal Reserve can increase the money supply by printing more of the notes, which in turn leads to a fall in currency value. With global economy outlook looking uncertain as ever, cryptocurrencies is becoming more popular among potential investors, who find this digital platform more appealing than conventional financial markers because it is free from the geopolitical tensions and business speculations. Hence, the usage of cryptocurrencies is expected to expand in the future.

On the other hand, cryptocurrencies still might face some competition from conventional financial service providers such as banks that are planning to issue their own types of cryptocurrencies in response to the innovation in FinTech. This poses a threat to all existing digital currency providers. However, it is evident that the new form of currency is gaining recognition from all parties as more attention and resources are diverted into this booming sector. Hopefully, in the near future, cryptocurrencies can completely replace the existing currency systems in every country.

Currently, cryptocurrency is still outside of government regulations as not much attention was initially given to its development. In recent years, several countries are beginning to establish new monetary regulations pertaining to cryptocurrencies in order to protect users from potential fraud. Despite the tight regulations from government agencies, this will not halt the operations of the digital currency. Intervention from the government, such as operation policies and transaction supervision, can act as a catalyst for consumer sentiment towards cryptocurrencies.

Summing It Up, Are Cryptocurrencies Good or Bad?

The key to a successful product is to sustain it in the competitive global markets. Cryptocurrencies can only stay if they are able to explore their strengths more thoroughly, mitigate any risks imposed towards them, and offer solutions to overcome any issues and loopholes in the system. As for now, cryptocurrency markets are still in a bullish state. With the increased popularity of cryptocurrencies among investors, it can be said that the bullish markets are expected to continue for the near future. The timeline below shows the major events that has happened since the creation of cryptocurrencies, with years 2018 and beyond labeled as a question mark for now. Hopefully cryptocurrencies can stand the test of time and emerge as a new trend among financial sectors in the future.

Prepared by:
Researchers – Lee Hou Yin, Chong Ker Sun, Marlena Fee.
Editor – Lim Shu Ni.

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