Is there a Future for Cryptocurrency?
Cryptocurrency is a constant topic of conversation, especially as the popularity of blockchain and Bitcoin continues to grow. As society has progressed, we have transitioned from trading and bartering to paying for goods and services with cash and credit. Thanks to technology, digital currencies have been introduced and this has posed many questions about its viability – are cryptocurrencies the future?
What is Cryptocurrency?
Before you can tackle the question of whether there is a future for cryptocurrency, it is important to understand what a cryptocurrency is and how it differs from traditional currencies.
The cash and credit that we use on a day-to-day basis are called fiat currencies. A fiat currency is backed by the full faith and credit of the government that issues it and is centrally controlled by a nation’s bank. It generally has no intrinsic value, meaning it is not linked to physical reserves of gold or silver. The government regulates the amount of currency in circulation and often insures deposits against bank failures.
A cryptocurrency, on the other hand, is not controlled by any one central authority. Instead, it is a digital currency that is created and managed through the use of blockchain technology that utilizes advanced encryption methods to promote safety and security.
In order for something to actually be considered a currency, it must be portable, divisible, durable and recognizable – something that Bitcoin was able to accomplish digitally for the first time.
Blockchain is the technology that powers cryptocurrencies and allows the decentralized system to function. A blockchain is essentially a database of records that are not maintained by a central authority but rather verified by independent users across a network.
Whenever a transaction is initiated, it gets transmitted across the network and hundreds or thousands of individual computers validate, timestamp, and encrypt the record. Once the record is verified it becomes a block, and each of the blocks that represent the transaction is linked to form the blockchain.
As the records are independently verified and encrypted, there is inherent data integrity and users can trust the information found in the blockchain without having to trust the source explicitly. It is almost impossible for the information to be altered or manipulated because the data is encrypted. There is also no way of knowing where the transaction will be sent for verification and in which order the records will be linked.
In other words, if someone wanted to manipulate the blockchain they would have to change each of the blocks in the chain, sequentially. The data is also very secure because even if they were able to access the information, it is encrypted so it would be in an unreadable format.
The Surge of Cryptocurrencies
Although Bitcoin is the most popular, there are several others including Litecoin and Ripple. There are also more cryptocurrencies in the development process, including Libra that is set to be released in early 2020.
Bitcoin was released in 2009 and is widely considered to be the first cryptocurrency. It is now the most used alternative currency with a market cap above $100 billion. The value of Bitcoin is determined by supply and demand, as only 21 million Bitcoins will ever be in circulation. This is meant to level out inflation and attempt to stabilize its price, but it is still quite volatile as not all of the currency is in circulation and it is subject to swings when large transactions occur.
Litecoin was created in 2011 and is currently Bitcoin’s leading rival. It means to differentiate itself by being able to process smaller transactions faster, and unlike Bitcoin which requires significant computer equipment to mine, Litecoin can be mined with a normal desktop computer. Litecoin has set the maximum limit of currency at 84 million, which is four times that of Bitcoin.
In 2012 another cryptocurrency was released by OpenCoin called Ripple. Ripple functions as both a payment system and a currency and is based on math like Bitcoin. Since it has its own payment system it can transfer funds in seconds – much faster than Bitcoin transactions that can take 5 to 10 minutes to be validated.
Most recently, Facebook has announced its plan to launch its own cryptocurrency, Libra. The goal of this currency is to minimize transaction fees and for it to become a commonly accepted payment method online and in traditional brick-and-mortar stores. Unlike the other cryptocurrencies, Libra will have intrinsic value and will be backed by bank deposits of short-term government securities called the Libra Reserve. It was set up this way to encourage more merchants around the world to accept the currency and in the hopes of maintaining a stable value.
Cryptocurrencies: Pros and Cons
A driving factor in the growth of Bitcoin and other cryptocurrencies is the multitude of benefits that they provide. The largest benefit is payment freedom because coins can be sent or received anywhere in the world regardless of time or borders. This gives users a significant amount of freedom for how and where they can spend or collect currency.
This is a game-changer for people who live abroad and need to send money home to their families, or who transact in different countries on a regular basis. Not only does the standard value eliminate exchange rate risk, but also the ease of transfer reduces the need to pay bank remittance fees or risk sending a check by mail.
Another unique benefit of cryptocurrencies is the ability to control the value of fees paid. For example, there is no fee to receive Bitcoins and most wallets allow you to choose your fee based on how quickly you need to transfer to occurs.
In addition, the fees are not based on a percentage of the value being transferred, so whether you send 1 Bitcoin or a million you will pay the same price. This allows for the facilitation of smaller transactions that may normally be unfeasible due to the high credit card or transfer fees.
One of the biggest appeals of cryptocurrencies is the safety and security of data. Since transactions do not contain personal payment information and are irreversible once in the blockchain, it is not possible for merchants to charge unwanted fees or access your personal data.
While there are many benefits that support the adoption of cryptocurrencies, there are still some risks that need to be considered. For starters, the currencies are still relatively new, and most businesses and merchants will not accept them for payments of goods and services.
Since the technology is new as well, the software behind most of the currencies are still incomplete and would not have the processing power to handle a global, full-scale adoption just yet. In fact, there are still features of Bitcoin in active development that will eventually make the currency more secure and accessible, but these are still in the early stages.
Perhaps one of the most crucial drawbacks is the volatility of the currencies. Since the volume of currencies like Bitcoin is still quite limited, certain trades or business activities can cause significant price swings. The goal is for this to diminish as more coins are in circulation, but this could still take some time.
Other factors to consider are the reliance on computers and digital wallets for maintaining the value of your cryptocurrency portfolios and their susceptibility to hackers and crashes. As more people begin to adopt the currencies it is likely that regulators will try to interfere to protect consumers, but this will ultimately eliminate the fundamental benefit of a decentralized network.
Looking Towards the Future
As you can see, the popularity of cryptocurrencies is growing and does not appear to be slowing down anytime soon. So, is this the future? Will we soon be living in a world where traditional fiat currencies like dollars and euros are obsolete?
While we don’t have a crystal ball that can look into the future to tell us for sure, and the answers to these questions are under much debate, we can use Bitcoin as the basis for what cryptocurrency could be in the future. The speed at which the currency has taken off is promising, the number of merchants that accept it is still minimal.
In a perfect world, full adoption of a cryptocurrency would allow more people to have access to fair financial services, cheaper capital, and the ability to access and spend their money without red tape or borders.
For it to truly be successful in the future and be scalable across the globe, it needs to be complex enough to avoid fraud and hackers but simple enough for consumers to trust and understand. It would also have to maintain its decentralized nature, but not so much that it has no consumer safeguards and protections.
This will be no easy feat, but perhaps the upcoming Libra currency will meet some of these demands. The Libra Reserve concept should eliminate some of the intangibility of a cryptocurrency, giving consumers and merchants alike greater confidence in digital currency.
Regardless of which currency – Bitcoin, Libra, or any other one that may arise – takes off, the amount of innovation and investment around the topic indicates that cryptocurrency is where our future is headed. Digital transactions will likely become the standard, but when and how a cryptocurrency will become mainstream is still up for debate.