Cryptocurrency – A New Payment System

Old fashioned coin before cryptocurrency invented
Before cryptocurrency, man traded in shells, gold and silver coins

For thousands of years before the introduction of cryptocurrency, mankind have used physical tokens as a means of payment. It has evolved from shells to gold coins, bank notes and cheques.

Back then, before the advent of digital banking, online transfers and cryptocurrency we use today, the only way to achieve an immediate and final settlement between a seller’s goods and buyer’s physical tokens was to directly exchange them in the same location.

The demand for instantaneous transactions and borderless transfer-of-ownership when the two parties are not present in the same location led to an invention in the early 1970s which changed the history of money and commerce. The invention: Usage of tokens in digital form, in other words, digital currencies or cryptocurrency.

Digital Currency Evolved

The role of digital currency has grown, pushing the limits of mobility, convenience and security.

Man using digital currency to shop online
The role of digital currency has grown, pushing the limits of mobility, convenience and security.

Most of us are familiar with the concept of digital currency. We use our debit and credit cards, point of sale chip and pin and contactless technology daily.

I personally love shopping from the convenience of my home. It’s a miracle when you think about it. By pressing BUY I put an entire world in motion to meet my personal needs.

Thanks to the rise and rise of the e-Commerce marketplace, new mobile and peer-to-peer (P2P) payment methods, I am no longer bound by the necessity to enter an overcrowded shopping centre in search of a pair of jeans stocked in a retail outlet which is permanently displaying a “closing down, all stock must go” banner.

I just press BUY. There we go. Voila. Bring it to me. All these payment options combined with evidence that cash lies at the heart of some of today’s most intractable public finance and monetary problems, have strengthened and promoted the use of digital currency.

But recently, interest has grown in a new type of digital currency – cryptocurrency.

The Birth of Cryptocurrency

As a payment technology, cryptocurrency meets the demand of individuals and organisations seeking to transact securely, anonymously and independent of government influence.

Bitcoin cryptocurrency coin representation
Since the creation of Bitcoin in 2009, there has been an astronomical surge in the volume and usage of private cryptocurrency.

Since the creation of Bitcoin in 2009, there has been an astronomical surge in the volume and usage of private cryptocurrency.

Currently there are 1408 cryptocurrencies traded in over 7800 markets worldwide and their total market value has reached 758 billion USD in January 2018. This is more than the market capitalization of the biggest companies in the world including Apple, Amazon, Facebook and Alphabet.

Bitcoin is by far the most preferred and successful cryptocurrency accounting for approximately 72% of transactions but there are other star performers such as Ethereum, Dash and Monero, as well as rising stars Ripple’s XRP and Nem.

For readers less familiar with cryptocurrencies, the space can be really confusing.

The information available tends to assume an advanced level of experience with cryptography, computer programming, financial markets, and mathematics in general.

However, once you’ve taken a few steps, or even a random walk down crypto street and discover some of their key features and their main differences from traditional payment systems, the space suddenly becomes incredibly exciting, dynamic and full of endless possibilities.

What is Cryptocurrency, and Why Would You Use it?

In a digital currency system, the means of payment is simply a string of bits representing monetary units which are electronically created and stored.

The world networked through a decentralised cryptocurrency
Cryptocurrency is decentralised and operated in a peer-to-peer manner.

Some, but certainly not all digital currencies are cryptocurrencies.  Cryptocurrency is classed as a subset of digital currencies. They still make use of digitally coded scripts, essentially a digital coin you can use as a medium of exchange for goods, services, or funds, however, they use cryptography for security which makes cryptocurrencies extremely difficult to counterfeit.

Another important characteristic of cryptocurrencies is that they are decentralised.

Traditional currencies such as sterling, dollar and yen are issued and controlled by the respective governments, treasuries and are backed by central banks.

Cryptocurrencies on the other hand, have no central authority or entity responsible for issuing them and they are independent of traditional banks.

In other words, cryptocurrencies operate in a peer-to-peer manner, effectively transferring power out of the hands of governments and central bankers, putting it back in the hands of the people.

In such a setting there are no banks, therefore no bankers and you and I control our own digital coins and store them in our own digital account called a wallet.

We can make payments or send money across time zones faster and cheaper without having to rely on our stagnant banking system which runs on an obsolete infrastructure where making a payment overseas to a retailer or person requires planning ahead with so many factors to consider that its worth enlisting a specialist money transfer service.

Cryptocurrency and Blockchain

An additional benefit as the result of the absence of a central authority is that every cryptocurrency transaction made with these encrypted digital coins are recorded in an ever-growing database known as blockchain, a publicly-viewable, digital ledger.

Woman using her phone to trade cryptocurrency on a blockchain
You can download and view the blockchain of any cryptocurrency and view transactions in near real-time.

You can download and view the blockchain of any cryptocurrency and view transactions in near real-time.

With this level of transparency, a truly tamper-proof record system is created, eliminating corruption so often present in a scenario where a central authority has a monopoly.

Every cryptocurrency transaction record within this ledger undergoes computationally intensive process called “mining” performed by a highly-efficient network of powerful computers securing and validating the transaction record, essentially ruling out that a transaction goes ahead without the necessary funds available, or by spending the same coin twice.

Interestingly, to defraud cryptocurrency systems by altering transactions within the blockchain is virtually impossible.

Using Bitcoin as the example, you would have to control at least 51% of the “mining” capacity which equates to more power than the world’s 500 biggest supercomputers.

Decentralised, secure and cheap.

Whether you start delving into the many different cryptocurrencies out there each with different goals and each with their own unique opportunities and practical applications or start where it all began with Bitcoin, one thing is sure, the world is marching on and possibilities are endless.