What Cryptocurrencies are, and their benefits
Some of the benefits of cryptocurrencies include decentralisation, deregulation, anonymity, increased transaction transparency, and the facilitation of cross-border trade. Cryptocurrencies are not based in any single country or jurisdiction, because the ledgers and servers are spread out over the globe. Since there is no central bank, the system is distributed and therefore not easily manipulated either by large institutions or by governments. This means there is little regulation and more freedom on who spends how much on what and where. This benefit is enhanced by the fact that there is less private information attached to each transaction. There are even cryptocurrencies whose main goal is to provide an untraceable, secure, and anonymous means of payment.
Payments are transparent because every transaction can be verified by anyone. This means fraud is more difficult because there are many copies of the transaction record available for anyone to see. Furthermore, everyone knows how much every wallet contains (though real names are not included). The public balances come from the way in which balances are implemented in the technology.
As for cross-border trade, since cryptocurrencies are non-national, anyone can pay anyone anywhere without needing to convert currencies. This raises interesting questions on conversion and payments, as owning 1 BTC (Bitcoin’s currency symbol) in France and owning 1 BTC in Thailand are not the same. If converted to a local currency, it means much different buying power in the two host countries.
How they work
There is a distributed ledger or a publicly viewable list of transactions. Since they are distributed, there is more than one copy (there are actually a lot of copies). There are “miners”, who are like the keepers of the system.
Whenever a transaction is made, the keepers of the system broadcast the transaction to everyone. The transaction is placed in a pool of pending transactions, whose order of addition to the chain is determined by competing miners. Participants choose a transaction and solve a math problem linking it to the last recorded transaction. Whichever miner can solve their problem first gets to add their transaction to the end of the chain, effectively determining a unique order.
If two miners finish different blocks at the same time, the blockchain branches. Each node keeps its own copy of the transaction set and works from that. Once the next block is solved, all nodes switch to the transaction set used by the last solve.
Since transactions are simply messages with the sender, receiver, and an amount, it is essential that all transactions are signed. This is completed using the sending wallet’s private key, and the signature is unique for each transaction, so it cannot be duplicated. Furthermore, a message cannot be altered or the resulting signature will no longer be valid. Even more, since transactions are lumped together in blocks, if one transaction changes, the hash output of the entire block changes, and hence doesn’t link correctly with the next block – i.e., it is not possible to modify blocks undetected.
Balances are not stored in the system, but they are based on previous transactions (basically add prior transactions A + B + … to determine if you have enough for transaction 1). This requires that “unspent” transactions be added every time one wants to send money, but it does not require the processing of the entire blockchain (that would be rather inefficient).
Where does Cryptocurrency get its value
Like fiat currencies, cryptocurrencies have no intrinsic value. They’re just numbers stored on a system somewhere, much like the way modern digital banking treats national currencies. Fiat currencies then derive their value from the collective faith of a society using them. If A believes B will accept USD, then A will accept USD for whatever they want to trade, too. B will only accept USD if s/he thinks C will also take USD, and from this collective faith, the value of USD arises.
Cryptocurrencies are similar. They are only worth as much as everyone deems them to be worth. One advantage for national fiat currencies is that a central authority issues and regulates them, and one can generally trust the government in this regard. Furthermore, governments require that taxes be paid, and they will usually only accept their own currency for this. Hence, to be a citizen of a country, one must deal with the national currency. This is a good basis to simply use the same currency for every transaction within the country.
Major Price Gains (and a major adoption event)
One major reason for the generally increasing value of cryptocurrencies is more widespread interest. While cryptocurrencies may not be prevalent, they do have a following on the Internet, and many people will ask for cryptocurrencies donations or payments. If the demand for such currencies increases faster than units are added the price will rise.
Looking at the charts of the four largest cryptocurrencies after conversion to USD, it looks like there has been a significant increase recently in all four (not all the same scale, as these are the lifetime charts). This is a phenomenon that is clear in 2017.
Fears over capital restrictions and government spying may be pushing up the price. A renewed interested in privacy, especially after the Snowden leaks, might be a reason. The increasingly watchful eye of Big Data by both Google et al. and the banks and credit card companies may be a reason. The wider general acceptance is almost certainly a reason.
Government Acceptance?
This acceptance extends to governments. Most notably, Japan, a market highly accepting of innovative technologies, recognised Bitcoin on April 1st, 2017. It is also set to standardise blockchain technology. This acceptance by the world’s third largest economy is a huge boon to cryptocurrencies. There is a clear uptrend for the four largest cryptocurrencies around the time of recognition. Russia is also attempting to legitimise, as it would help the government crack down on money laundering.
Why is cryptocurrencies value always fluctuating against national currencies
It is important to note that national fiat currencies are valued against other currencies based on the state of the issuer’s economy. If it is expected that many people will want to buy Korean products, there is more demand for KRW. This means each KRW costs more JPY, whether the central bank of Korea does anything or not. Cryptocurrencies are really no different, but they fluctuate much more.
Looking at any charts of cryptocurrencies against a national currency (usually the USD, but it doesn’t matter), one can see there are huge fluctuations. Since there is no central authority, there is no one to stabilise cryptocurrencies against national currencies. One of the libertarian goals of many cryptocurrencies is exactly this fact: market forces are the only forces that influence the value.
Advocates of a global cryptocurrencies system argue that as it becomes more popular the value should stabilise on its own. The main driver of upside movements so far has been more interest, i.e., more demand. It is somewhat similar to real estate. If someone buys 100 acres in a secluded area, it may not be worth much at first. However, if the area starts to become populated, the original owner can divide the 100 acres, unchanged in physical size, into smaller pieces, each worth as much as the original 100 acres. However, there is an upper limit to the divisions, because people can’t build houses on one one-hundredth of an acre (let’s ignore building up for this example).
Cryptocurrencies may appreciate over time, but there is also an upper limit to the number of units that are available in a currency. For example, Bitcoin miners will no longer receive coins for solving the blockchain linking problem around 2140. This is when the supply is expected to hit 21 million BTC, which is the set upper limit. At this point, coins will probably start to fall out of circulation without a replacement.
Each cryptocurrency has an associated “market capitalization”, or what the entire exchange would trade for in a national currency equivalent. This can be a determinant in which system to use because someone trying to move large amounts wouldn’t be able to trade on a small exchange or currency.
There are many cryptocurrencies out there. They have different features for different users. This is actually one major problem for widespread adoption – without a dominant currency, which one should people adopt? Small ones inveigle people with potentially large gains, but big ones have a better chance of acceptance by more people. Being early on a new social network could give you star status later, or you could forever be confined to a quiet corner of the social media space.
