The Rise of Cryptocurrency: Is it Good or Bad?
Unless you have been living under a rock, you would have presumably heard of BitCoin. What is it?
It is a cryptocurrency. So let us delve into a short version of what cryptocurrency is. Without losing you in a bore-fest and making sure you get the gist of it. Here goes…
What Is Cryptocurrency?
A cryptocurrency is a digital currency or asset designed to work as a medium of exchange for goods and services (and everything in between) using cryptography to secure the transactions and to control the creation of additional units of the currency. Unlike physical currencies, digital currencies are not printed or regulated by a central bank but, are instead “mined” and ownership can be transferred- more on that in a minute. The digital currency works on computer networks and you will often hear people say it works on a peer-to-peer basis, meaning if you have a computer and I have a computer and we can communicate over a network, then we can create a currency like ‘LinkCoin’.
How Does It Get Its Value?
As you may or may not know, our central bank controlled currencies used to be backed by gold. However, as of 1973 that changed. Now, the government prints money, says it is worth a certain amount and we all agree and voilà! Currency is born. The same principle applies for cryptocurrency. A network of people agree that for example, a BitCoin is worth 2000 Dollars and so we have a currency.
Just as a side note, at the moment the value of one BitCoin = USD2,358.81 today Wednesday 19th July 2017. That’s some serious digital cash.
How Does It work?
Every computer has a file on it that contains information such as IDs for transactions, balances and accounts. Let’s say each time a BitCoin is used in a purchase, the file creates unique code in this file and adds to the list of transactions for that user. To transact, the file gets added to and is exchanged. This is a whole lot of code! But simply put, each BitCoin owner has a private key which acts as a sort of signature. So Henry gives 1 BitCoin to Sarah and this transaction is signed by Henry’s private key. So you can think of it as a linkchain. Each time a new transaction is carried-out, a new link is added to the chain. Each transaction is verified by miners. Once they stamp a transaction as confirmed, then all nodes on the peer-to-peer network have that transaction as confirmed. It cannot be changed and the miners get rewarded with for example BitCoins. Anyone can be a miner since there is no centralized controller. There are two ways to get BitCoins; either you buy them with physical cash or you mine them.
What Is Crypto Currency Mining?
Mining cryptocurrency means you actually need to solve certain algorithms in order to create the currency. For example, if you were mining BitCoins then you would create algorithms that add transaction records to BitCoin's public ledger of past transactions or blockchain. This ledger of past transactions is called the blockchain as it is a chain of blocks. The block chain serves to confirm transactions to the rest of the nodes on the network as having taken place. You then get paid BitCoins for every correct algorithm you add to the blockchain. By the way, this is how BitCoins are added to the cryptocurrency economy.
Mining requires a tremendous amount of computation power as these algorithms use what is known as SHA-256. SHA stands for Secure Hash Algorithm; a form of cryptographic hash functions that serve as a signature for the block chain.
Good Or Bad?
So the currency is controlled by the network and not by one centralized authority. For example, there are currently 16 million BitCoins in circulation. The more BitCoins added to the network the more difficult it is to actually create them. The maximum limit for BitCoins to be in circulation is 21 million.
Some merchants have signed up to the BitCoin concept such as Subway, PayPal and Overstock.com. In fact, those who trade on financial markets can also trade on the value of BitCoins like you would trade any stock, commodity or currency.
That’s good right? Perhaps…
What’s the bad? Let me jog your memory. Remember not so long ago, May 2017 to be precise there was the global cyber attack of the WannaCry Ransomware? The demand was that those whose computer networks were attacked and taken “hostage” were to pay in BitCoin cryptocurrency in order to have their networks and computers released. Now I know you’re your probably thinking “And?” Well, the UK’s National Health Services was one of the hijakees and it ended up having to run some of its services on emergency-only basis! It was that bad.
The motive was clear. The attackers wanted cryptocurrency. So in light of all this, there are definitely advantages to cryptocurrency however, it is wise to maintain a healthy sense of skepticism because there are also major disadvantages. The major bone of contention is this: Do we need cryptocurrency and is its existence good or bad for the financial future?
What do you think?