Menu

Olga Pisarenko

Degree:

Diploma in Financial Strategy

Location:

UK

Industry:

Finance

Year:

2013

By Olga Pisarenko

Cryptocurrencies and its potential to change the future of money

It’s been just over a year, since I noticed how global the scale of cryptocurrency is. With Bitcoin, price surging to $19,187 (as of December 15th, 2017), it is almost impossible to ignore all the buzz around cryptocurrencies and new developments in the crypto-world. Having so much passion for technological innovation, I followed some real business start-ups, which managed to raise substantial capital through an Initial Coin Offering (the “ICO”) to finance their new projects and put ideas into life. After a year and half of research, I was able to act as an advisor to the existing business and helped them to prepare for the ICO.

 

Though not all of us use cryptocurrencies today, understanding the basics, I think, would be useful to many. Below is a helpful summary, which covers the relevant concepts, Blockchain phenomenon and its power for innovation.

I. What is cryptocurrency?

Money was introduced ages ago in a very different form from what we know it today. Through the history, money took a form of bartering or exchange, commodity money, fiat currencies (the form that we have today). Money derives its value by being a medium of exchange, a unit of measurement and a storehouse for wealth.

A cryptocurrency is digital asset designed to work as a medium of exchange using cryptography to secure the transactions and to control the creation of additional units of the currency. Cryptocurrencies are built on the basis of concepts and techniques of both – cryptography and cryptanalytics. Cryptography or cryptology (from Greek κρυπτός kryptós, “hidden, and secret) is the practice and study of techniques for secure communication in the presence of third parties called adversaries. And cryptanalysis is used to breach cryptographic security systems and gain access to the contents of encrypted messages, even if the cryptographic key is unknown.

II. Distributed ledger technology and blockchain

Issuance of cryptocurrencies was achieved with the help of the blockchain technology, which plays a fundamental role in delivering innovative products and services. For centuries, ledgers have been at the heart of economic transactions. Over the last few decades, computers allowed the process of record keeping and ledger maintenance with great convenience and speed. Nowadays, the information stored on computers is moving towards much higher form, which is fast, decentralized and cryptographically secured. Distributed ledger technology (DLT) is a notable example of technology, which offers exciting potential to support the needs of the market. It originated about 10 years ago and one of its most prominent options available today is a blockchain.

Blockchain is the decentralised settlement technology, which powers the issuance of cryptocurrencies, such as Bitcoin. Investopedia defines blockchain as “a public ledger of all cryptocurrency transactions that have ever been executed. It is constantly growing as “completed” blocks are added to it with a new set of recordings.” While blockchain focuses on how data is stored and linked to one another in a chronological manner within blocks, a DLT focuses on the sharing of the database amongst all the operational participants of the networks.

A major difference between a traditional transaction and one conducted through blockchain is the nature of contracting parties.

  • The conventional system needs only two parties, who enter into a contract governed by mutually agreed terms and conditions, and verify each transaction against the contract. No other party (apart from intermediary or agency, such as a bank) is required to execute the contract.
  • In a blockchain transaction, in contrast, the transacting parties, as well as every member of the network, must validate each transaction before it can go through. Therefore, it is highly secure and trustworthy. Any change must be approved by the entire network and is immediately reflected in every member’s copy of the ledger. Because the network validates every ledger entry by consensus, there is no longer a need for any intermediary.

The DLT is the reason for cryptocurrency existence as without the transparency engendered by blockchain, a bitcoin transaction, for example, which is totally anonymous and involves no intermediary or supervising authority, would have not been accepted by the market. The blockchain network assures the transacting parties that the undertaken cryptocurrency exchange is genuine.

Cryptocurrencies are classified as a subset of digital, alternative and virtual currencies.

 III. What cryptocurrencies are based on and the first cryptocurrency

Cryptocurrencies are based on mathematics. People around the world are using software programs that follow a mathematical formula, which is freely available, to produce cryptocurrencies. Different algorithms are used for different currencies (the SHA256 algorithm is used by Bitcoin, Mastercoin, Nubits).

 Bitcoin was the first cryptocurrency, created in 2009 by an unknown person, using the alias Satoshi Nakamoto. It was the first decentralized cryptocurrency and an electronic payment system based on mathematical proof. Cryptocurrency is independent of any central authority – i.e. decentralised. Such decentralised control is related to the use of bitcoin’s blockchain transaction database in the role of a distributed ledger.

IV. Advantageous characteristics of a leading cryptocurrency – Bitcoin

  • Decentralisation

The Bitcoin network isn’t controlled by one central authority. Every machine that mines Bitcoin and processes transactions is a part of the network, where machines work together. By its high decentralization, Bitcoin created a different form of payment network with an increased level of resilience and redundancy.

  • Transparency

All Bitcoin transactions are public and transparent. Bitcoin stores details of every network transaction that ever happened in blockchain. The blockchain tells all. This allows individuals and organisations to work with flexible transparency rules. If you have a publicly used bitcoin address, anyone can tell how many bitcoins are stored at that address. They just don’t know that it’s yours.

  • Global accessibility and convenience

Bitcoin allows any bank, business or individual to securely send and receive payments anywhere at any time. You can set up a bitcoin address in seconds with no questions being asked and with no fees payable. Bitcoin is available in many countries that remain out of reach for most payment systems. Bitcoin increases global access to commerce and it can help to boost international trades.

  • Security and Multi-signature accounts

Bitcoin gives an unprecedented level of security. The network provides users with protection against most prevalent frauds like chargebacks or unwanted charges, and bitcoins are impossible to counterfeit. Multiple signatures allow a transaction to be accepted by the network only if a certain number of a defined group of persons agree to sign the transaction.

  • Cost efficiency

Bitcoin is appropriate to be used in a new generation of automated services, hence, cutting their operating costs. With the use of cryptography, secure payments are possible without costly intermediaries. Transaction fees are miniscule.

  • Confidentiality

The integrity is protected by the ability of cryptography to recognize if any changes have been made. This allows for each transaction to be confidential and the information to be protected from the third party.

The transactions need to be authentic because it is being done through two people that do not know each other therefore the person needs to know that the message was sent to them, the proof of their identity and that the transaction is not disowned.

 V. Use of cryptocurrencies

  • Crowdfunding

Bitcoin or its alternatives are used to run crowdfunding campaigns.

  • Donations

Bitcoin is used as an efficient solution for donations as sending a payment over is very simple and only requires one click. Donations are visible for the public, giving increased transparency for non-profit organisations.

  • Dispute mediation

Bitcoin can be used to develop innovative dispute mediation services using multiple signatures. Such services could make it possible for a third party to approve or reject a transaction in case of disagreement between the other parties without having control on their money.

  • There are many physical stores and e-commerce websites that accept Bitcoin.

Microsoft added Bitcoin as a payment option back in 2014. You can pay with it for a variety of digital content like apps, games and videos across its online platforms. Dell is accepting Bitcoin through a partnership with Coinbase.

Overstock, NeweggTigerDirect, Monoprix, Bitcoinshop.us and hundreds of other retailers are now accepting Bitcoin. You can book a theatre ticket with UK’s Theatre Tickets Direct or a flight ticket with Cheapair.com. Earlier this year, a new start-up The London Block Exchange has launched a debit card that will allow people to spend cryptocurrencies across the UK. It plans to launch a sterling-to-cryptocurrency exchange and a prepaid Visa debit card that will allow people to convert Bitcoin, Ethereum, Litecoin, and Monero to Pound Sterling and spend it across the United Kingdom.

Things to remember

  • Bitcoin makes it possible to transfer value anywhere in a very easy way but, like with the fiat money, you need to keep your wallet secured.
  • Cryptocurrencies should be seen as high risk assets. Bitcoin price is volatile and can increase or decrease over a short period of time due to its young economy and relatively new nature.
  • Bitcoin payments are irreversible and any transaction issued with Bitcoin cannot be reversed, they can only be refunded by the person receiving the funds.
  • Bitcoin is not anonymous and all Bitcoin transactions are stored publicly and permanently on the network, which means anyone can see the balance and transactions of any Bitcoin address. However, the identity of the user behind an address remains unknown until information is revealed during a purchase or in other circumstances.
  • Bitcoin is not an official currency. The European Union has passed no specific legislation relative to the status of the bitcoin as a currency. However, most jurisdictions still require you to pay income, capital gains or corporation taxes on anything that has value, including Bitcoins. It is personal responsibility to ensure that you adhere to tax and other legal or regulatory mandates issued by your government and/or local municipalities.

Conclusion

Scepticism about Bitcoin is fading away but its’ future is still uncertain. The further development of cryptocurrencies is a continuous debate but more and more individuals and institutions are now seeing the value in the cryptocurrency market and the true potential that it has.

Back to top of article

Share this post:

follow us in feedly