Disclaimer: This is not financial advice.
…The journey continues.
As promised, this is blog no. 2 of our cryptocurrency series, where we take a deeper meaning to understand the meaning of cryptocurrencies. I am excited and I hope you are too.
For those who are new, I highly recommend you read blog no. 1, Blockchain and the Future of Data.
In the previous blog, we understood the functions & implications of blockchain in crypto.
Today we leap into understanding what crypto is, its use cases, and its advantages & disadvantages.
Note: Before we start, I want to clarify that Bitcoin is not the only crypto. There are many more.
Brief History of cryptocurrency
- The initial concept of crypto goes way deep to the year 1983.
- In 1983, David Chaum conceived an anonymous cryptographic electronic money called ecash.
- In 1996, the National Security Agency(NSA) published a paper entitled How to Make a Mint: the Cryptography of Anonymous Electronic Cash, describing a cryptocurrency system, first publishing it in an MIT mailing list.
- In 1998, Wei Dai published a description of “b-money”
- In 2009, Satoshi Nakamoto launched the first decentralized crypto: Bitcoin, with a major innovation, the use of Blockchain.
- In March 2018, the word: cryptocurrency was introduced in the Merriam-Webster dictionary.
From the data above, I can say, the crypto we see today has matured from its mistakes in the past. Therefore, as I see it, crypto has a good foundation.
The stock market was the last known mainstream asset invented in the year 1611. That means we have a new asset class as crypto after 398 yrs. How exciting is that!!!
Unlike stock exchanges, crypto is boundless. It has access to world liquidity. Imagine the money from all parts of the world entering crypto. The potential market capitalization is massive.
What are Cryptocurrencies?
- Cryptocurrencies are assets existing digitally and are decentralized (not controlled by a single person or entity). Further, to avoid any malicious activities, they are secured with cryptography.
- Crypto uses cryptography for three main reasons:
- Secure transactions.
- Avoid the creation of additional units; i.e. if there are 21 million bitcoin today, there will be 21 million bitcoin until the end of time.
- Verify the transfer of assets.
Note: Want to know more about cryptography used in cryptocurrencies? Follow this link https://www.worldcryptoindex.com/how-cryptography-is-used-crypto/.
- Cryptocurrencies have two major categories:
- Bitcoin &
- Altcoin (Alternative cryptocurrencies): Altcoins consist of any coin or token apart from bitcoin.
Note: There is a difference between a coin & a token.
- A coin is crypto operating its blockchain, each with its unique properties.
e.g. Bitcoin, Ethereum, Binance, etc.
- Tokens are crypto built on the blockchain of a coin. They utilize the blockchain’s technological benefits. This process is fulfilled through smart contracts like (BEP 20 for Binance), (ERC 20 for Ethereum), etc.
Eg. Let us understand it with a railway analogy. Consider, IRCTC is the Coin, the railway track is the Blockchain & the trains are the Tokens. Here IRCTC is the entity that has created the railway track used by multiple trains.
2.1. Stablecoins: As the name implies, they are stable altcoins i.e. their price is stable. Their price is often pegged to the US dollar.
Features of crypto
- Balance of Power
Power can corrupt people. Therefore, crypto & blockchain put a stop to it. Consider it as an upgraded democracy with total decentralization. With the help of decentralization, the power is distributed among the people. There is no single entity dominating the play.
- Eliminates excess money printing
Most cryptocurrencies have a predefined supply that cannot be exceeded. The limit has been set and is final. Thus inherently attaining an anti-inflationary property.
I think due to its inherent accessibility crypto will be the beginning of world unity. A world where people will be more familiarized with each other gaining trust and building rapport.
- Uncertain Waters
Though the concept of crypto dates back to 1983, crypto today is nothing like it. It has evolved. And as it goes mainstream, it will be scrutinized & will Ultimately lead to uncertain volatility. You can also consider it as a high-risk, high-reward stage.
Vigilance and Information are of utmost importance in crypto. The power is in your hands and with power comes great responsibilities. Lack of vigilance and information may lead you directly into the grip of scammers.
Common crypto myths
- Crypto gives rise to illicit activity
The concept of money itself gives rise to illicit activities. Two sides of a coin. Anyways let us look at some stat comparisons between crypto & paper money(cash).
According to an expert from Chainalysis’ 2021 report, in 2019, criminal activity represented 2.1% of all crypto transaction volume (roughly $21.4 billion worth of transfers). In 2020, the criminal share of all crypto activity fell to just 0.34% ($10 billion in transaction volume).
According to the UN, it’s estimated that between 2% and 5% of global GDP ($1.6 to $4 trillion) annually is connected with money laundering and illicit activity.
Therefore, we can see that crypto accounts for only a small chunk of the $1.6 – $4 trillion that seems to be decreasing by the year.
2. Crypto means Bitcoin
Nothing could be further from the truth. Considering Bitcoin as the only crypto would not even scratch the tip of the iceberg. As I write this, there are 18,651 cryptocurrencies in existence. Each with its unique characteristics. A lot of them will sink to the final test of time. But the point is, there is soo much out there apart from Bitcoin.
I have presented the knowledge in the blogs 1 & 2 of the cryptocurrency series. The decision of “Cryptocurrency: A Revolution or a Scam?” I leave in your capable hands.
Let us know your thoughts in the comments section below.
I agree that cryptocurrencies are in ruins today but so are all the other Financial instruments. The only reasons being the crisis flowing throughout the world. The war, inflation & possible recession etc. That said, it is a fact that these conditions are temporary. All I am saying is the developers are developing, the creators are creating & the investors are investing.
In the upcoming blog, we will discuss the categories in the crypto universe. Categories like: Metaverse, Defi, etc. I will also give you examples of some exciting projects I have come across.
And later, we will conclude the series with some faqs concerning crypto. Questions like: Where does crypto derive its value from? If crypto is digital, is it secure? There are so many coins, how do you know which one’s to choose? etc.
Stay Tuned, Stay Informed & Stay Excited.