Game of Cryptos: The Digital Coin Revolution

We saw crazy things happening in last 1-year, Crude Oil crashing to negative (-ve), equity markets all over the world tumbling down due to coronavirus fear, unemployment rising to the highest level globally, GDP growth declining in almost every country, tourism & aviation industry coming to a dead stop and the list is endless and frightening. But one segment which remained unharmed and kept on growing was Cryptocurrency, primarily known by all laymen as Bitcoin (BTC) & Ethereum (ETH). The national lockdown, along with working from home, seems to have brought in a flurry of new participants and increased trading volumes in cryptocurrency.

So, what was the reason for such fearless faith shown in this segment? Why people were ready to take the risk in this highly volatile market? Was it a race to make a quick profit? Was it a race to double the money in a few hours, days, week or month? OR a digital asset to hold for long term investment?

Let’s first recall the precepts of cryptocurrency before getting into the boom!!!!

Cryptocurrencies have essentially created a new form of payment system that is based on Blockchain Technology, which utilizes a distributed public ledger system that is validated by a decentralized user network and whose integrity is derived from the usage of sophisticated cryptographic algorithms.

The motive of creating the Bitcoin and other cryptocurrencies was to introduce a secure, immutable and verifiable means of currency exchange without any central regulatory authority (bank or payment gateway). Bitcoin-to-Bitcoin transfers are carried out over a peer-to-peer (P2P) network by digitally exchanging anonymous, heavily encrypted hash codes. The P2P network keeps track of and verifies Bitcoin transfers between users.

Bitcoin doesn’t happen to be the only cryptocurrency in the market today. Following in the footsteps, are more than 1500 listed cryptocurrencies (popularly known as “Alt Coins”), out of which some have managed to gain support and popularity. These include names like Ethereum, Bitcoin Cash, Ripple and Litecoin. Each of these currencies is focused on different motives but function on the same Blockchain Technology.

How does it Work?

Bitcoins are self-contained digital currency tokens that have a value of their own. There is no need for any bank to store them or maintain their value. This self-regulating currency works on the principle of Blockchain and several different cryptographic technologies.

Public key cryptography is one of the most fundamental cryptographic technologies that make up the essence of Bitcoin. Each of the Bitcoin is associated with the owner’s ECDSA (Elliptic Curve Digital Signature Algorithm) key. When a transaction is made, the key gets attached to the number of coins and the message thus formed is signed with the owner’s private key. This message is then broadcasted to the Bitcoin network (network based on Blockchain) for the peers to know that the new owner of these coins is the individual who possesses the new key. The signature of the previous owner ensures authenticity and the transaction is stored as a record with everyone for future verification.

These transaction records are stored in the form of blocks, forming the complete Blockchain ledger. All participant computers in the network keep a copy of the Blockchain which is updated by passing new blocks. In order to ensure that the blocks are secured and immutable, each new block confirms the integrity of its predecessor, back to the very first addition in the chain — the genesis block. The chain, therefore, remains protected as no party can overwrite any record.

Rise in popularity

Whenever something revolutionary is introduced, it takes time for people to accept it. However, Bitcoin has risen to popularity very fast. The rise in popularity of this cryptocurrency can be attributed to its new approach towards currency distribution.

Most governments of the world have been in denial about the rise and popularity of cryptocurrencies. This is because cryptocurrencies take away power from the state. Right now, the government has a formal authorization powers, i.e., they can create as much money as they want. In case of cryptocurrencies like Bitcoin, the government will also have to earn money like everyone else. This puts them at a significant disadvantage. However, the popularity of the Bitcoin has surged so much that even the governments cannot ignore it.

Here are a few reasons that made Bitcoin very popular and continue to attract new investors: –

Decentralized nature:

There is no regulating authority. Each participant computer or individual contributes to the maintenance of the Blockchain and hence, no financial policy or fraud can ever take away the value of Bitcoin.

Anonymity:

Another beauty of using the bitcoins or being a part of the blockchain is that you do not need to confirm your identity. You can be anonymous and still control or use bitcoin and trade with them.

Easy to set up and transact:

Bitcoin system is fairly easy to adapt and set up. No questions are asked of any authority and you can become a part of the network within a few minutes or even seconds. Another advantage that attracted a lot of investors, as well as individuals, is that Bitcoin has negligible transfer fees. This means that all international transfers are easy and cheaper to conduct through Bitcoin.

Transparent, and fast:

The Bitcoin ledger is an open record, that maintains the record of all transactions held till now, accessible to all members of the network. Also, the transactions are quite fast.

The Reason for Sudden Boom!!

Bitcoin is the most widely used decentralized digital currency, and its value is influenced by a variety of factors. The bitcoin price is not usually regulated by any organization, group, or government due to the decentralized nature of this currency.

For years now, there was the constant belief that Bitcoin, and cryptocurrencies in general, will eventually replace fiat currency. Investors, big and small, are banking on the idea that the Dollar, Pound, Yen and all other “regular” currencies will become obsolete.

Holding:

Most bitcoin investors hold or channel a huge part of their bitcoin to private speculation reserves or investment funds. This adds to the apparent shortage of bitcoin, adequately keeps bitcoins unavailable for general use, and prompts cost gratefulness as expanding interest for a constrained flexibly of bitcoin raises costs per unit. Investors may accumulate bitcoins before its price rises. Investors withdraw coins from the exchanges and hold them when they expect the price to rise.

Supply and Demand of Bitcoins:

The sum of Bitcoin traded on exchanges represents a small percentage of the total supply in circulation. Since most Bitcoin is held as savings, it isn’t always available for purchase. The acceptance of Bitcoin by users is one aspect that can affect its price. The popularity of a currency will raise prices, while a low demand for the currency will lower the value. The increased demand and reduced supply drive up the price of bitcoin. Many people, corporations, and investors have begun to use Bitcoin as a means of conducting online transactions. Given the widespread acceptance of Bitcoin, it is fair to expect Bitcoin prices to increase in the foreseeable future.

Media Hype:

Media hype can generate increased purchasing pressure and increase bitcoin price. While media coverage tends to push up the price, if the rise too fast, it causes a bubble which eventually bursts and crashes the market.

Challenges with Centralized Systems:

Before Bitcoin and BitTorrent, everyone used centralized services. In centralized systems, all the data is stored in one place, and everyone has to interact solely with that data center. One example of such a system is Google.

When we do a Google search, we send a query to the server, reverting us with the relevant information. Another example is banks that store all our money and when we have to pay someone, we have to contact the bank or go to the bank.

Centralized systems are easy targets for hackers to exploit. If a centralized data center has to go through a software upgrade, the whole system must be stopped. It is also possible that the data center gets corrupted or malicious; in this case, all the data inside will be compromised. If the centralized entity shuts down, no one will be able to access the information till it’s functional again.

The Road Ahead………….

Blockchain Technology in cryptocurrency has the potential to revolutionize numerous industries. It makes the history of digital assets unalterable and transparent using decentralization and cryptographic hashing. Cryptocurrency and Blockchain Technology are interconnected. The best part of cryptocurrency is that it is independent of one central entity or person.

Blockchain technology was first applied to Bitcoin in 2008.Bitcoin seems to have established itself as an asset worth holding for many investors and the interest is growing exponentially year on year. To say bitcoin is a bubble is most likely not accurate. Will the price come down from its recent highs when the market takes a downturn? Sure.

With new emerging cryptocurrencies like Ethereum, developers are now able to deploy smart contracts and build decentralized applications (dapps) without any downtime, fraud, control or interference from a third party. Ethereum comes complete with its own programming language which runs on a blockchain, enabling developers to build and run distributed applications.

History shows that Bitcoin’s value has been very volatile and continues to fluctuate throughout. Its rising popularity and the revolutionary Blockchain technology has already promoted several firms to embrace the change. However, it is too early to say whether Bitcoin will remain and prevail as the universal digital currency. Like any other venture, it needs time to mature. But one thing is for sure — our financial system and the economy are never going to be the same.