Cryptocurrency 101: What is It? How Does it Work & What Does the Future Look Like?

By Susan

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Last Updated: November 13, 2021

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Cryptocurrencies are digital currencies that exist on a distributed and decentralized log in the form of tokens or coins.

With the creation of Bitcoin in 2009, cryptocurrency went from being a theoretical concept to (virtual) reality. Cryptocurrency has grown in popularity in recent years, but there is still plenty to learn about this rapidly evolving technology.

Many people are worried about the technology's potential to disrupt existing financial structures. 

 

Understanding Blockchain Technology, Monetary Power Abolition & Cryptocurrency Use in Transactions

Consider blockchain as a database in which data is stored in blocks with chains linking them in chronological order.

A blockchain may store a variety of data; for example, it is used in land registers to record structural modifications to structures, and all relevant documentation may be transferred to the new owner if the property is sold. Every transaction is recorded, timestamped, and verifiable. 

To date, the most common use of blockchain has been as a ledger for transactions.

Bitcoin transactions are recorded in a decentralized way on a blockchain, which implies that no single person or organization has authority over how data is kept, but rather that all users collectively do.

This preserves the integrity of the ledger and prevents anybody from undermining the system, unlike our old currencies, which were controlled by our central banks and governments.

This isn't to claim that decentralized systems are impenetrable to hacking, but it does indicate that they lack a single point of failure, making them extremely hack-resistant.

Even though cryptocurrencies lack traditional legal tender, there is no reason why they cannot be accepted as a form of payment.

First, credit card payments are not legal tender, but they are widely accepted as a form of payment Secondly, Starbucks, Whole Foods, and other big merchants have already accepted Bitcoin as a means of payment.

Elon Musk's electric car firm, Tesla, also purchased $1.5 billion (£1.1 billion) in Bitcoin this year. It stated that it plans to accept it as payment in the future. This purchase resulted in a significant increase in the value of Bitcoin, illustrating that an increase in market confidence equals a rise in market worth.

 

An Extremely Volatile Market

Bitcoin was valued at less than a dollar when it was originally introduced.

It is now valued at more than $50,000 (£36,000) in the United States. Because there are only 21 million Bitcoins that can be mined, the price increase is due to basic supply and demand.

18.638 million Bitcoins have been mined as of February 24, 2021, leaving 2.362 million to be released into circulation.

Decisions by the SEC and the FCA, for example, add to the volatility of the cryptocurrency market by inducing more uncertainty in the entire crypto market, causing traders to make emotional decisions, resulting in more market volatility and fast liquidity.

What may be the end result of all of this?

Bitcoin and other cryptocurrencies, according to Grundfest, aren't entirely trustless systems in the sense that they aren't wholly unconnected to any government, government, or other institution.

They are still reliant on the underlying technology that underpins cryptocurrencies like Bitcoin, which is based mostly in China. The Chinese government may potentially make big changes to cryptocurrencies by forcing its will on the data miners who keep them functioning.

People lost faith in the existing financial infrastructure after the 2008 financial crisis, which prompted interest in cryptocurrency, Bitcoin at that time. Key events such as World War I and II and the 2008 great recession wreaked havoc on the global economy and had long-term consequences.

Following the current COVID-19 outbreak, our livelihoods and economy have taken yet another hit in the midst of recovery.

 

Crypto is Growing in Popularity

Cryptocurrencies have grown in popularity as a kind of digital currency that can be used for online transactions during the past few years, causing their prices to rise.

However, cryptocurrency prices had a blow on the 19th of May, 2021 after Tesla CEO, Elon Musk said in series of tweets that the firm would no longer take Bitcoin, a prominent cryptocurrency, as a means of payment due to the growing consumption of fossil fuels for Bitcoin mining and transactions. 

Furthermore, the Chinese government has made it illegal for financial institutions to offer cryptocurrency services.

Despite this, Bitcoin prices have been steadily rising since then. In reality, according to a CNBC article, Bitcoin prices climbed roughly 4% in the afternoon of May 24 after Elon Musk tweeted that he had spoken to North American Bitcoin miners about the currency's long-term viability.

In any event, cryptocurrency prices have soared in the last year. As of early periods (central American time) of the 28th of May values of prominent cryptocurrencies such as Bitcoin, Ethereum, Cardano, and Dogecoin had increased by more than 100% over the previous year, according to Coinbase data.

Furthermore, the bitcoin market is projected to continue its upward trend. In a GlobeNewswire story, ReportLinker reported that the cryptocurrency market is predicted to reach $2.2 billion by 2026, up from $1.6 billion in 2021, at a CAGR of 7.1 percent.

Crypto as a native digital currency will expand in value over the next ten years as more individuals work remotely and remain connected to the Internet through different technologies.

Now, the future of cryptocurrency in India has become a subject of deliberation after the Reserve Bank of India (RBI) filed a draft bill titled “Banning of Cryptocurrency and Regulation of Official Digital Currency Bill 2019” that proposes banning cryptocurrency from India and arresting and prosecuting those who run, hold or sell cryptocurrency in any form with up to ten years in prison.

Ruchir Sharma, Morgan Stanley's chief global strategist, believes Bitcoin has the potential to terminate the dollar's dominance or at the very least, that the digital currency represents a substantial threat to the Greenback's supremacy.

 

Stablecoins

Cryptocurrencies may or maybe not survive but they are altering people's perceptions of money and banks.

Stablecoins are a new type of cryptocurrency that aims to have consistent values and so make digital payments easier. Facebook intends to launch its own cryptocurrency, dubbed Diem, that will be backed one-to-one by US dollars, ensuring that its value remains consistent.

However, the value of Stablecoins is derived from the fact that they are backed by government-issued currencies. As a result, while dollars may become less essential in payments, the dollar's predominance as a store of value will not be challenged.

Stablecoins will expedite the ascendance of digital payments, ushering out paper currency, as the technology matures. The threat of competition from private currencies has prompted central banks all over the world to create digital copies of their currencies.

The Bahamas has already implemented a central bank digital currency, while countries such as China, Japan, and Sweden are testing their official digital currencies. If you still have any dollar bills in your wallet, they may soon become antiquities.

Businesses and individuals are adapting as a result of the above and the present rate of technological innovation.

Consider the fintech firms that have already begun to access new blockchain-based technologies in order to stay ahead of the competition. While authorities are enacting cryptocurrency rules, they recognize that they cannot halt progress since markets and technology are constantly evolving and fintech may be a strong force for good.

This could indicate that within the next five to ten years, blockchain and cryptocurrencies will become popular.

Photo by Executium on Unsplash

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