Cryptocurrency and Blockchain
The first transaction of bitcoin(a type of cryptocurrency) happened in May 2010 when a person named Laszlo transacted 10,000 bitcoins for two pizzas worth $30. But, today one bitcoin is worth $10,759, and in Indian rupee its worth Rs.7,90,000. Investing in Cryptocurrency has become a trend in 2017 the users of cryptocurrency were less than 5.8 million but today more than 36.5 million people in the United States alone have invested their money on Cryptocurrency[1]. Now the question arises is it a wise decision to invest in Cryptocurrency? To answer the question one needs to understand what a Cryptocurrency is and how does it work.
Cryptocurrency
In simple terms, it is a digital or virtual asset that is secured by a technology known as cryptography which makes it impossible to counterfeit. The idea behind creating a cryptocurrency was in the wake of the 2008 financial crisis when banks failed to repay and people lost their money. So there was a need for a way for people to control their money themselves without relying on banks and governments. But now the question was how can transactions be conducted without the help of a bank? Because a medium was required to record all the transactions without which the cryptocurrency cannot be transferred. This issue was solved by a person named Satoshi Nakamoto when he invented the blockchain.
Blockchain
Blockchain technology is a decentralized way of record-keeping of all the transactions that are made. Blockchain acts as a bank for carrying out transactions for cryptocurrency. For instance, in a bank, the record of all the transactions is accessible only to the person who holds the account and the delegates of the bank. But in a blockchain, all the cryptocurrency transactions are made public. But, this leads to the question of what will happen to a person’s privacy? To answer the question think of a scenario where u enter a room and you find many transparent boxes that are locked and a unique number is assigned to each box. The public can see from which block the cryptocurrency has been send or received but the identity of the person remains a secret.
Figure 1
The address in Figure 1 is the unique identification number of a person who remains anonymous and Figure 2 describes the record of the transactions made by that person. Blockchain.com gives us the record of every transaction that has been made to-date while maintaining the privacy of the person. It is almost impossible to hack into a person’s account and change the data unless the hacker doesn’t have the physical access to the owner’s computer. It is because it is built on a technology called hashing which prevents immutability which means the record or the data of transaction which is stored in a block cannot be tampered with.
Figure 2
Investing in Cryptocurrency
Unlike different currencies like the dollar, rupees there are various types of cryptocurrency out of which Bitcoin and Ethereum are the most commonly used[2]. Whenever we invest our money on an asset there are several factors we consider before investing like the returns on investment, credibility, tax benefits, and the risks involved. But unfortunately, Bitcoin doesn’t have any of these. The return on investment cannot be predicted or calculated because the value of bitcoin depends on the following factors
- Supply of bitcoin and its market demand
- The number of competing cryptocurrencies.
- The cost of producing bitcoin through the mining process.[3]
- Regulations governing its sales.
Bitcoin’s value also depends on its number of users. The value of Bitcoin is highly volatile and predicting the return on investment as of now is very difficult. The chart below depicts the variability in the price of Bitcoin over the years[4].
Secondly, investing in Bitcoin or any other cryptocurrency does not give any tax benefit and in most countries, it is not recognized as a legal currency[5]. But countries like the USA, Canada Australia, and Finland have started accepting Cryptocurrency for trading. Companies like Microsoft, AT&T, Burger King in some specific countries welcome the payment in form of cryptocurrency[6].
So, now coming to the question will cryptocurrency and blockchain replace currency and banks, in my opinion, it is not possible to replace the currency with cryptocurrency and blockchain with banks because cryptocurrency it is not accepted in many countries but it can be used as a parallel currency in the future years. And another reason is there is a limit in creating a cryptocurrency. For instance, there will be only 21 million Bitcoin that will ever be created because Bitcoin is like digital gold. Like gold, bitcoin cannot be created easily as gold has to be mined from physical earth, bitcoin must be mined by computational means.
And Blockchain technology cannot replace banks because it has many limitations but it could be a technology that can be adapted by financial institutes because it has some unique features like it cannot be hacked, data stored in a block cannot be changed or tampered it can only be updated and traceability is another feature which can put an end to money laundering.
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