The Essentials of Cryptocurrency

Posted on January 28, 2019

By Natalie Lord

The advent of cryptocurrencies has taken the world by storm and surprise on a rollercoaster of highs and lows. Some perceive it as the currency of the future and others the unicorn of the 21st century. Time will be the test of fortitude for digital currencies, but for the moment here are some facts you might like to know about cryptocurrencies.

US Senator told Congress in 2013 that: “Virtual currencies, perhaps most notably Bitcoin, have captured the imagination of some, struck fear among others, and confused the heck out of the rest of us.” His comments are as true now as they were then.

Satoshi Nakamoto

Not many people know that cryptocurrencies came about as a by-product of another invention. Satoshi Nakamoto, the unknown entity behind Bitcoin, never intended to create a currency. Instead he developed what he perceived to be a peer-to-peer electronic cash system. The key to Nakamoto’s success in the creation of Bitcoin was that he had found a way to build a decentralized digital cash system, and this discovery became the birth of cryptocurrency.

In its simplest form, a cryptocurrency is a series of limited entries in a database that noone can change without fulfilling specific conditions. That may seem hard to comprehend but think about your bank account. It is merely a list of entries in a database that can be changed under specific conditions. Even physical coins and notes are entries in a public physical database that can only be changed if you match certain criteria. Money is all about a verified entry in some kind of database of transactions, balances and accounts.

Digital Gold

Cryptocurrencies are digital gold. They are monies that are secure from political influence, funds that promise to preserve and increase in value over time. They are a fast and easy way of making payments globally and are private and anonymous.

They work because digital cash can be realised with a decentralized network, meaning that consensus can be achieved without any central authority. They are called cryptocurrencies because the consensus-keeping process is secured by cryptography. Cryptocurrencies are secured by cryptography rather than trust or people. It has been alleged that it is more probable that an asteroid will fall on your house than a bitcoin address be compromised.

Transactional Properties

Cryptocurrencies have a number of key transactional properties. Transactions cannot be reversed so once you’ve sent money that’s it, it’s gone. Neither transactions nor accounts are linked to real-world identities, meaning that you’re dealing with chains of characters rather than people with identities. Transactions are instantaneous and can be confirmed in a couple of minutes regardless of where you are in the world. Cryptocurrency funds are secure because they are locked in a public key cryptography system. Only the owner of the private key can send cryptography. You don’t have to ask anyone’s permission to use cryptocurrency. It’s simply software that’s available to everyone to download free of charge.

The monetary properties of cryptocurrencies are that they are in controlled supply. Most cryptocurrencies limit the supply of tokens. With Bitcoin the supply decreases with time and will reach its final number by about 2140. The supply of tokens is controlled by a schedule written in the code, meaning that the monetary supply of any cryptocurrency at any given moment can be calculated today. Cryptocurrencies don’t represent debt, they represent themselves and are comparable to coins of gold.

Monetary System to Readjust

For example, being a permissionless, irreversible and pseudonymous means of payment, Bitcoin is a threat to banks and governments over the monetary transactions of their citizens and the scope of monetary policy. You can’t prevent someone from using Bitcoin, you can’t stop someone accepting a payment in Bitcoin and you can’t undo a transaction. Cryptocurrencies take away the control central banks have on inflation or deflation by manipulating the monetary supply.

“You can’t stop things like Bitcoin,” says John McAfee, Founder of software company McAfee Associates. “It will be everywhere and the world will have to readjust. World governments will have to readjust.”

But the cryptocurrency market is volatile. New cryptocurrencies emerge or die with regularity. Early adopters get wealthy and investors lose money. Each cryptocurrency comes with a promise to change the world yet few survive the first few months. Next week we look at some of the most successful cryptocurrencies to enter the space.




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Singapore Cryptocurrency and Blockchain Industry Association

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