Digital currencies from the first days to most people accustomed to good old cash sound rather strange and vague, but the news of huge jumps in the value of such currencies attract the attention of even those who avoid paying by credit card.
And how could it not when you consider that the value of Bitcoin this month exceeded $40,000, doubling in less than a month.
The value of Bitcoin at the beginning of the corona virus pandemic was about $4,000.
Bitcoin is the first cryptocurrency, created on March 1, 2009, and its founder(whose real identity is unknown), Satoshi Nakomoto, imagined Bitcoin as a P2P(Peer-to-Peer) digital cash, ie an anonymous, secure and transparent means of value transfer, without the need for an intermediary.
Decentralization of currency and finance
Blockchain technology is the foundation of Bitcoin and other cryptocurrencies, because it enables decentralization, immutability and security of such currencies.
Other cryptocurrencies were modeled on Bitcoin, but the real renaissance in this market was achieved by Ethereum, currently the second largest cryptocurrency, which came out in 2015.
Currently, over 90 percent of crypto ecosystems are built on Ethereum.
The idea of Ethereum is to be a “world computer”, ie a decentralized system on which other systems such as the current “decentralized finance”(DeFi) will be built.
The creation of cryptocurrencies depends on the consensus algorithm, which is selected in a particular project, and therefore there are several ways, but the most famous is the creation of new cryptocurrencies Proof-of-Work algorithm, which uses Bitcoin.
Proof-of-Work is a consensus algorithm, whose participants(miners) invest computing resources and thus check every Bitcoin transaction, secure the network and enable new transactions.
In exchange for the electricity consumed and the work for the benefit of the Bitcoin network, the miners were rewarded with new(mined) Bitcoins. This is how new Bitcoins are created.
It is still in its infancy and will surely progress
The second most well-known consensus algorithm is Proof-of-Stake, which Ethereum will implement in the next 18 months. Although in theory it sounds attractive, because it will reduce the cost of electricity, P-o-S has yet to be proven.
Every blockchain project must have its own cryptocurrency, and hence their usefulness.
Blockchain technology is still in its infancy and will certainly advance in the coming years, but we can already see various disruptive projects that have accompanying cryptocurrencies.
These cryptocurrencies are used to maintain certain ecosystems, transfer value, as proof of ownership of an asset, or to speculate on price movements.
These are just some of the items for which cryptocurrencies are used.
As common currencies have their coverage in “tangible” values, such as gold, cryptocurrencies raise doubts among many about the real value and their advantages.
Enormous profit and(or) catastrophic loss
If we look at cryptocurrencies as a form of investment, then their advantage is that their value can increase significantly in the short term and enable their owners an enormous profit. Of course, this instability has another side, as it can lead owners to a catastrophic loss when their value falls.
If used as a means of payment, they can provide a higher level of data privacy protection, because transactions do not share all the data that is shared during normal digital transactions(for example, using credit cards), but authorization is done with a digital key.
But this completely digital character again has its drawbacks, because you can never “withdraw cash” or use it for payments anywhere you want, or use the same as traditional means of payment on all occasions.
The benefits and disadvantages also depend on the user, personal preferences and specific purpose.
Key advantages of cryptocurrencies(outside price growth) ownership of own assets and, for the first time, the possibility of transferring value via the internet without intermediaries, anywhere in the world, almost instantly and for extremely low or even no fee using some cryptocurrencies.
Undoubted consequences for cash
In terms of “tangible money”, digital currencies will further contribute to reducing the share of cash in transactions and encourage faster and greater digitization and virtualization of national currencies, but even without cryptocurrencies this trend continues and cash is losing importance.
Some central banks have already issued their digital currencies, and some are preparing or analyzing this possibility. Thus, the trend has been launched and leads to a further decrease in the importance of cash, and gradually likely to disappear from use.
However, not so soon, as it seems at the moment, because it is not all about technological development, but it is also about the cultural and psychological moment, trust or lack of trust and the financial sector…