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Cryptocurrency: The Fintech Disruptor
Blockchains, sidechains, mining – terminologies in the secret world of cryptocurrencies pile up in minutes. While it may seem counterintuitive to introduce new financial terms in the already complex world of finance, cryptocurrencies offer a much-needed solution to one of the biggest scourges in today’s money market – the security of transactions in the digital world. Cryptocurrency is a decisive and ground-breaking innovation in the rapidly developing world of fin-tech, a fitting answer to the need for a secure medium of exchange in the days of virtual transactions. At a time when business is all about digits and numbers, cryptocurrency offers exactly that!
In its most basic form, cryptocurrency is a proof of concept for an alternative virtual currency that promises secure, anonymous transactions over a peer-to-peer online network. The wrong term is more of a feature than an actual currency. Unlike everyday money, cryptocurrency models work without a central authority, as a decentralized digital mechanism. In a distributed cryptocurrency mechanism, money is issued, managed and validated by a collective peer-to-peer community network – whose continuous activity is known as mining on a peer’s machine. Successful miners also receive coins as a thank you for their time and resources. Once transaction information is used, it is broadcast to the network’s blockchain under a public key, preventing the same user from spending each coin twice. Blockchain can be thought of as a cash register. Coins are secured to a digital wallet protected by a password that represents the user.
The supply of coins in the world of digital currencies is decided in advance by individuals, organizations, government entities and financial institutions, without manipulation. The cryptocurrency system is known for its speed, as transaction activities through digital wallets can materialize funds within minutes compared to the traditional banking system. It is also largely irreversible by design, which further reinforces the idea of anonymity and eliminates any further possibility of tracing the money back to its original owner. Unfortunately, the main features – speed, security and anonymity – have also turned crypto-coins into a means of transaction for many illegal trades.
Just like the real world money market, currency rates fluctuate in the digital coin ecosystem. Due to the limited supply of coins, when the demand for the currency increases, the value of the coins inflates. Bitcoin is the largest and most successful cryptocurrency ever, with a market cap of $15.3 billion, covering 37.6% of the market and currently trading at $8,997.31. Bitcoin entered the currency market in December 2017 when it traded at $19,783.21 per coin before facing a sudden drop in 2018. The decline is partly due to the growth of alternative digital coins such as Ethereum, NPCcoin, Ripple, EOS, Litecoin and MintChip.
Due to the hard-coded limits on their supply, cryptocurrencies are considered to follow the same economic principles as gold – the price is determined by limited supply and fluctuating demand. With constant fluctuations in exchange rates, their sustainability still needs to be determined. As a result, investing in virtual currencies is currently more of a speculation than an everyday money market.
After the industrial revolution, this digital currency is an indispensable part of technological disruption. From the perspective of a casual observer, this climb can be exciting, threatening and mysterious at the same time. While some economists remain skeptical, others see this as a lightning revolution in the money industry. Predictably, digital currencies will replace about a quarter of national currencies in developed countries by 2030. This has already created a new asset class in addition to the traditional global economy, and a new set of investment assets will come from crypto-finance in the coming years. Recently, bitcoin may have taken a dip to put other cryptocurrencies in the spotlight. However, this does not mean any crash of the cryptocurrency itself. While some financial advisers emphasize the role of governments in suppressing the secret council to regulate the central mechanism of governance, others insist on continuing the current free flow. The more popular cryptocurrencies become, the more scrutiny and regulation they attract—a common paradox that plagues the digital record and undermines the primary purpose of its existence. Either way, the lack of intermediaries and oversight makes it extremely attractive to investors and causes a drastic change in day trading. Even the International Monetary Fund (IMF) fears that cryptocurrencies will displace central banks and international banking in the near future. After 2030, regular trade will be dominated by the crypto supply chain, offering less friction and greater economic value between tech-savvy buyers and sellers.
If a cryptocurrency is to become an essential part of the existing financial system, it will have to meet very different financial, regulatory and social criteria. It will need to be hacker-proof, user-friendly and heavily protected to offer its core benefit to the mainstream money system. It must maintain the anonymity of users without being a conduit for money laundering, tax evasion and internet fraud. As these are necessary things for a digital system, it will take a few more years to understand whether cryptocurrency can compete with real world currency in full swing. While this is likely to happen, the cryptocurrency’s success (or lack thereof) in meeting the challenges will determine the fate of the monetary system in the coming days.
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