In the run up to 2018 the news feed was regularly filled with reports of a cryptocurrency (a virtual currency issued digitally which is secured using cryptography ), named Bitcoin’s value surging by more than a whooping 1500% per year to cross the $15,000 mark.
This stellar surge in the values of cryptocurrencies wasn’t limited to Bitcoin alone and the whole market surged from about $19 billion at the start of 2017 to about $600 billion till the end of the year.
The other winners of this bull run included cryptocurrenies like, Ethereum (rose 5000% in 2017) and Litecoin (rose 7500% in a year).
Amidst all this hysteria, let’s try and answer a few basic questions like, what exactly is this technology, what led to it and what it got to offer.
All this prominently began on 31st October, 2008 when an anonymous individual who called himself Satoshi Nakamoto, submitted a white paper, proposing a peer-to-peer electronic cash system.
This system was proposed in the backdrop of the global financial meltdown, which had grossly dented the confidence in existing financial institutions. It aimed at introducing a currency which would surpass them by becoming a peer to peer network, where the buyer and seller would directly exchange the currency, without any third party interference.
The white paper also laid down various principles and procedures on how these transactions can be verified and recorded using a public ledger, which will be stored as an open source, on every CPU that is connected to the network.
This heightened transparency where all the transactions would be recorded publicly using a ledger, (essentially meaning that every bitcoin would be accounted for), which meant that bitcoin became one of the first mediums which started using the blockchain technology.
Blockchain basically is that digital decentralised public ledger of cryptocurrencies, which literally means a chain comprising of blocks. Here one block denotes a new transaction and once it is complete, it is linked to the other existing transactions, thereby forming a chain.
These links can be only be verified and built by those who are authorised to decode the language, which also means that, even if the data of the block chain is leaked, it is of no value as it cannot be deciphered. Making it the most important aspect of this technology.
Now these transactions in question, in order to be performed, require solving complex mathematics problems, and in order to incentivise this process, the problem solvers during the process are rewarded with bitcoins. This process is known as mining.
With the cryptocurrency market having an enormous amount of potential, now a days many startups & established institutions have started to come up with their own cryptocurency which may be based on block chain technology.
In order to raise fund for this venture, they use a process called Initial Coin Offering (ICO), which bypasses the regulated capital raising process necessitated by banks and venture capitalists. Similar to the initial public offering (IPO) used in the stock market, the startup which wishes to raise the funds, creates a white paper to describe its technology.
Like a crowd-funding, the investors, buy the cryptocurrency using means like, traditional currency formats like dollars and rupees to give a kickstart to the venture. One of the most successful ICO’s was recorded in 2014 when Ethereum raised $18 million in bitcoins.
With the implementation of block chain technology in just the currency market, we saw a huge new potential being created. Just imagine what wonders can be done when the technology is applied in other fields.
We may in future see a CryptoIdentity – which may solve the Adhaar security issue if any, CryptoChain – a supply chain solution, CryptoRide- a peer-to-peer secure ride sharing network, CryptoVote – a network to make election process faster & cheaper, CryptoWelfare – a network to transfer public benefits in secure and quick manner.
While the future holds much promise, this cryptocurrency revolution calls for maintaining a sense of cautious optimism.
Just on Wednesday the Bitcoin experienced a bloodbath, with its value falling about 12%, to trade below $10,000 due to the global cryptocurrency market experiencing a major sell-off for a second straight day. This sell-off was largely believed to have been a result of investors fearing the prospects of stricter rules being introduced around the system.
This does bring us to the point of the government possibly being the biggest adversary of the whole cryptocurrency revolution, because it challenges the monopoly of the central banks in the monetary process. We can already see the signs of the ‘establishment’ possibly getting rustled, with the Indian Finance Ministry likening cryptocurrency as a ponzi scheme.
Many would argue that a heightened regulation is needed to imbibe confidence into the system. Recent days have seen a mainstreaming of cryptocurrencies with the advent of various various trading platforms like cex.io and CoinDesk, where one can buy and sell cryptocurrency in exchange of conventional currencies like Rupees and Dollars.
The RBI has till date issued three notifications in connection with virtual currencies and it remains to be seen what the future holds for cryptocurrencies in India and abroad in the near future.