Cryptocurrency is a decentralized currency in digital form. It is encrypted and can be transferred among people through a process known as mining. It uses the process of cryptography to track purchases and transfers that are being made between different peers. Cryptography is the name given to encryption in the world of crypto. It is designed to keep a check on the transactions along with controlling the creation of the coins.
Cryptocurrency is encrypted mainly because the identity of coin owners is not revealed. Cryptographic techniques are used to ensure that record keeping of different coin owners is done in a legitimate manner. The record of all transactions made by the coin owner from the start of their cryptocurrency’s account creation is stored within a public ledger.
Public ledger also has a built in digital wallet that is responsible for calculating that whether the transactions made are in line with the amount of coins an individual holds. Each individual has his own digital wallet. Funds are transferred from one digital wallet to another through a process called mining.
As soon as an individual makes a transaction it gets transferred to the public ledger where it awaits confirmation. The element that makes the entire transfer process credible and authentic is that each wallet has an encrypted electronic signature that belongs to the owner of the wallet. The signature is verified on every transaction or transfer of currency. The process of mining confirms the transaction and adds it to the public ledger.
Miners create the coins that are being used in the world of cryptocurrency. Similar to gold, a lot of mining is being done to give value to the coins. The value of the coins tends to fluctuate along with a change in their demand and level of scarcity. It can be said that the value of cryptocurrency is linked to the factors like utility, supply and demand.
Cryptocurrency – a revival of the old Gold Standard
Ever since cryptocurrency has been launched, many comparisons are being made between the old gold standard and the new form of digital currency.
In order to compare cryptocurrency with the gold standard, one needs to know about the gold standard. Gold Standard was a monetary system where the value of currency was directly linked to the amount of gold, a particular country had. The productive nations, at that point in time, used to receive gold on every export, which means that the more gold they had in their reserves the more money they could print. However, the main problem with gold standard was that countries were too obsessed with their gold. They focused more on filling up their reserves rather than on improving the business climate.
The similarity that Bitcoin has with the Gold Standard is that both bitcoin and gold are stateless, which means that they have the capacity to provide international money base. Secondly, bitcoin is also limited in quantity just like gold that was being used under the gold standard.
The difference between the two is that gold is a physical asset whereas bitcoin is a digital asset that can be traded or transferred through accessing the digital world.
An article was published in Bloomberg, which pointed out why Bitcoin should be considered as the new gold and why bitcoin cannot be considered as a replacement of the traditional currency.
The article pointed out three main reasons. The first two reasons were technological whereas the third one was economic. First reason highlights that the transaction time of Bitcoin is slow because the verification process is done in the form of small blocks. Miners are responsible for verifying the transactions and in return bitcoin blockchain, compensates them by creating more currency.
Secondly, as soon as 21 million bitcoins will get mined, transaction fees would be needed to pay the miners behind the verification process.
Thirdly, cryptocurrency has a good long-term stores of value hence short term volatility is bad for such modes of payments. The process of confirmation takes time and people might not know how much they are actually spending to pay for a good or commodity. Cryptocurrencies are good for making financial investments but they cannot replace actual currencies. There is a lot of uncertainty involved in cryptocuurrency, therefore; relying solely on cryptocurrency is not an option.
It would be interesting to find out whether cryptocurrency is here to stay or will it eventually become a part of history just like the Gold Standard.