COVID-19 pandemic has turned the world upside down. As a result, most of us around the world are still stranded. The need for automation, remote working, online or mobile banking etc. got highlighted, when people couldn’t move around as freely as earlier. Similarly, bitcoin and cryptocurrency also started getting some attention.
In my article what is FINTECH, I gave a brief idea about the revolution of money and I have mentioned that Bitcoin and other forms of cryptocurrency are the latest and most revolutionary form of money. Today I’m going to discuss about cryptocurrency in detail.
What is Bitcoin and Cryptocurrency?
I’m sure you can find more than enough definitions for cryptocurrency. It all started on 31st October 2008. On that day, Satoshi Nakamoto published a paper proposing the Bitcoin protocol, describing it as a new electronic cash system, with no involvement of a centralized third party. Most of you must be thinking Satoshi Nakamoto is a Japanese individual who invented Bitcoin. Well actually it’s just a pseudonym which could be used by a person or a group of people. The identity of Satoshi Nakamoto is withheld and there is no evidence to find that out. That’s another amazing characteristic of cryptocurrency which is the identity of transaction parties are completely private.
How does Bitcoin and Cryptocurrency work?
Crypto works similar to cash or commodities like gold. The difference is it does not require a centralized party such as a government or a central bank to verify the validity of transactions. Instead of having a trusted third party (Eg: Government or central bank) to fulfill the verification role, Bitcoin rely upon a distributed network of computers and cryptographic algorithms to verify a transaction.
A shared public ledger called blockchain records the number of Bitcoins own by an address (like a user name), which is usually a long unique number. Any individual can create many such addresses as he wish to protect his privacy. There is absolutely no requirement to reveal the identity of the user of such address in any given time. Each of those addresses is protected by a lock called public key. When an individual who own bitcoin wish to make a payment in Bitcoin to another party, a private key will be randomly generated to sign off the payment. This private key is used to unlock the payer’s public key to prove that he owned the bitcoin he wishes to pay. In other words, the private key is valid only if it could unlock the unique public key of the payer.
The validity of the private key is verified by an open distributed network of computers called miners. A Bitcoin transaction considered valid when majority of miners independently verify the transaction and update the blockchain. That is when the bitcoin transaction considered complete.
As explained above, a Bitcoin transaction is verified by a network of miners. Bitcoin mining needs a special computer infrastructure which can be expensive. So to incentivize users to invest in this infrastructure and to do the verifications, the miners are rewarded in newly created (minted) Bitcoin. Miners also get compensated when the Bitcoin payer attach miner’s fee to the transaction. Miners get rewarded by a predetermined number of newly created Bitcoins and those Bitcoins never get removed from the circulation. The total number of Bitcoins that can ever exist is 21 million. As of 2014, there were over 12.7million Bitcoin in circulation and miners were rewarded with 25 Bitcoins to verify one block of transactions. This reward started with 50 Bitcoins and it dropped to 25 once the total number of Bitcoin in circulation is reach 10.5 million (50% of 21million). The 25 Bitcoin reward will drop to 12.5 Bitcoins once the total number of Bitcoin in circulation reach 15.75million (75% of 21million). This pattern will continue until the total number of Bitcoin in circulation reach 21million.
I already mentioned that all Bitcoin transactions get recorded in blockchain permanently. So there was one transaction took place in 2010 where someone has paid 10,000 Bitcoins for a pizza which cost around $25. Four years later in 2014 that 10,000 Bitcoins valued at approximately $4.4million. Due to this price inflation of Bitcoin most people tend to hold on to Bitcoins rather than spending. Why spend today if it worth more tomorrow?
Main Characteristics of Bitcoin
- Decentralized : As explained above Bitcoin does not need a centralized third party to verify its validity.
- Anonymous : Usually your bank has so much of your personal information and they own it once you reveal. For Bitcoin you do not need to reveal any of your personal information. You can be anonymous.
- Transparent : All the transaction took place in Bitcoin is recorded in Blockchain and it is open for public. So transaction details are totally transparent.
- Real-time : Bitcoin transactions take place real time. There is no waiting time. This eliminated the requirement for reconciliation as the payer and receiver share the same ledger (blockchain).
- Secure and non-reversible : Bitcoin transactions are completely secure and there is no way a transaction get reversed or amended. Therefore no one can claim they never got paid.
International remittance market is a considerably large market which was roughly estimated around $500 billion year where cryptocurrencies claim a bright future in. Remittance providers such as Western Union and MoneyGram charges close to 8.5% to 9% of transfer value which is very expensive and also the transaction takes few days to complete. There are many Bitcoin based startups that are providing remittances easier, cheaper and faster.
Downside of Bitcoin and Cryptocurrency
I have explained few unique characteristics of Bitcoin. Well those characteristics are good and bad. Many incidents occurred associated with illegal activities creating a negative perception for Bitcoin. First prominent incident is using Bitcoin to make transactions in “Silk Road” deals. Silk Road was launched in year 2011 and considered as eBay for illegal drug deals. Silk Road managed to provide complete anonymity to both buyers and sellers thanks to unique features of Bitcoin. Silk Road was eventually shut down by FBI in 2013. There were many incidents of black market dealings and money laundering took place using Bitcoin.
As a result of these events, Bitcoin and other cryptocurrencies attracted significant regulatory scrutiny from governments around the world. Most of the governments are not yet ready to accept crypto as a legitimate mode of transaction.
I want you to think about this. If I ask you whether you like to invest in Cryptocurrency you would probably say yes. But if I ask you whether you like to get paid in Crypto, you would rather say no due to many uncertainties. If that is the case what future holds for Cryptocurrency?
In my next article I will discuss about Blockchain technology. Blockchain was the distributed ledger system which ensures the immutable record of Bitcoin transaction. However it became a whole new innovation which is widely used at the moment. I would say Blockchain is the real treasure even though it is a by-product of Bitcoin.
Stay tuned. Stay safe !!!