Online currencies — the lowdown.
Online currencies are a hot topic right now. Created primarily to circumvent regular money, they have become a refuge for those seeking anonymity and privacy, but also proved to be a potent tool for various financial speculators.
In order to better understand the workings of cryptocurrencies (as they have become known), we must take a glance at their history, which is truly a subject for a hefty dissertation, let alone a short article. However, the history and inner workings have to be addressed, even if in a most casual of ways.
It was on Halloween of 2008 when a math prodigy Satoshi Nakamoto unveiled to the public a white paper which outlined the mechanics of a new form of currency named Bitcoin.
At the most basic, Bitcoin is a digital currency, which means it could be bought, traded and invested, albeit only online. It was supposed to be all virtual, except for the purchasing power.
A completely digital currency requires a number of safeguards to prevent hacking and theft — after all, a new way of procuring money means new ways of stealing it.
One of the main allures of the new form of currency is the fact that it doesn’t rely on a third-party banking or other financial institution. Bitcoin is decentralized, so rather than be secured by people or trust, it is secured by math, in this case strong cryptography or techniques for secure communication, hence the name cryptocurrency.
Cryptocurrencies use complex cryptographic algorithms in order to track and exchange digital currency, ones that build a digital ledger called a “blockchain.” Put simply, a blockchain or “digital ledger” is a way for many people to have one common record of all transactions. It is as if everyone involved in these transactions had a digitally connected notebook. Each time someone wrote in it, recording the purchase or sale of an item, the words appeared in yours and everyone else’s notebook. This notebook also has safeguards to prevent people from lying about their purchases, or buying items with money they don’t have.
Let’s compare this to natural resources sometimes used as currency, such as gold. Gold holds an inherent value because it’s availability is limited. Additionally, gold doesn’t have a central authority that arbitrarily regulates its creation and distribution. This means that gold is unlikely to experience hyperinflation, as the government cannot produce five metric tons of gold out of thin air, while they can simply print more money. Bitcoin, for example, is finite too, with only 21 million Bitcoins in existence. They are being mined (or acquired) at a steadily controlled rate. In fact, it’s estimated that the final Bitcoin will be mined in the year 2140. It’s because of these properties that Bitcoin has been repeatedly called “digital gold.”
Bitcoin is not the only cryptocurrency out there. Others quickly saw the power of having a decentralized currency that required no trust in third-party financial systems. This precipitated swift creation of other cryptocurrencies, sometimes referred to as altcoin. Other cryptocurrencies differ mainly in using a slightly different cryptographic algorithm or other technical differences. Newer currencies also allow for more transactions per second — one, NEO — allows for 10 000 transactions to take place in the space of one second. This is increasingly important as it allows more people to use cryptocurrency. It is simply a logical evolution, given that the number of people who want to use, trade and invest in cryptocurrencies is growing all the time. The investing part is crucial, because it fuels the bubble that grows around value of Bitcoin and altcoin.
Although it would seem that cryptocurrencies are in some sort of market competition, trying to win over investors, there is no indication that one cryptocurrency will eventually prevail over others. Each one offers something different with regards to safety, privacy and efficiency. In fact, given the relative ease of exchange between various cryptocurrencies, it’s possible that multiple cryptocurrencies will remain once the market settles. There’s not only room competitively, but there’s actually a necessity, because of scale and function of different currencies.
Obviously the most hyped cryptocurrency is Bitcoin. The combination of hype and actual potential is the reason why Bitcoin has seen such huge rises in value in the past few weeks. In addition to the great potential for cryptocurrencies, as well as its theoretical advantages over fiat currency, hedge funds and investors have just begun to invest in cryptocurrencies, which potentially means further growth for the cryptomarket.
Still, it is not just Bitcoin. Investors, always on the lookout for a quick buck often buy into other altcoins, because they are relatively cheap and the bubble encompassing Bitcoin gives hope that they too will skyrocket in value.
This is why, with such high degree of speculation the cryptocurrency market will inevitably loose much of its value. but this is only to be expected. Currently the values are being driven by market players with quick profits ever in their sights. Once it settles, the reasons why cryptocurrencies are so attractive will not change — security, privacy, anonymity and decentralization.
This is where services such as On.Live come in. An online platform that serve as a separate marketplace in service of valuable content that is democratically distributed and can be turned into a revenue stream by any and all of its participants. A platform that utilizes its own cryptocurrency — On.Live Tokens. The true nature of this project is a worthy subject for a separate article.