Many people wonder what the term "cryptocurrencies" means. The prototype - eMoney - was proposed already in the eighties of the last century. His assumptions were used to create Bitcoin, which is widely recognized as the first of cryptocurrency. Although it is the most popular, it does not mean that it is the only one - according to the latest estimates, there are currently more than 1,500 of them in the world.
According to the most popular definition, cryptocurrencies are an electronic system that meets six conditions:
- does not require central authority, which manages and controls it;
- enables public access to information on how many users have cryptocurrency units and review the history of its incoming and outgoing transactions;
- a system that autonomously decides whether a new unit of cryptocurrencies can be (or not) created and which defines the conditions for its creation and determines to which user belongs to. This process may take place, for example, by the so-called digging or using specialized algorithms;
- the owner of a given unit of cryptocurrencies can be confirmed only by using secure cryptographic tools;
- makes it possible to make transactions during which the owner of a given unit of cryptocurrency changes; transactions can only be carried out by a user who is able to confirm that he is the owner of a given unit of cryptocurrency;
- if at the same time he receives more than one transfer order of the same unit of cryptocurrency, he will execute only one of them.
The above definition sounds quite enigmatically. For the sake of simplicity, it can be assumed that cryptocurrency is a type of electronic money that is completely independent of external institutions and allows each person to view the balance of each portfolio and the history of its transactions. It is very secure due to the use of complex cryptographic security, and the transfer of funds can only be made by the owner of a given unit of cryptocurrency.
Cryptocurrencies and standard currencies
Cryptocurrencies and ordinary currencies, such as the Polish zloty, have many common features in spite of the differences between them. Cryptocurrencies are stored in the so-called electronic wallets that can be compared to a bank account with very limited functionality, allowing only to view the account balance, make a transfer and check the history of the portfolio. Knowing his electronic address, you can transfer funds can be made.
You can pay in more and more places in the world with cryptocurrencies, especially with Bitcoin. Microsoft accepts its as payment for its products, and in our own yard accepts them LOT, issuing an airline ticket instead. There are also institutions offering payment cards, attached to a cryptocurrency portfolio, allowing withdrawal of funds at ATMs.
They, however, have more in differences than in common features. The most important ones include:
- the lack of a government institution controlling and supervising cryptocurrencies as opposed to standard currencies, the supply of which is influenced by central banks;
- to keep cryptocurrency portfolios or execute transfers no commercial institutions are required. In contrast to the procedures when creating a regular bank account, the procedures for creating a portfolio do not require any personal data, and the process itself costs nothing. The costs of transfers are determined by ourselves - in the case of Bitcoin, we decide on the amount of the commission for the transfer. The higher it is, the faster the transfer will be made;
- each person can check the balance of any portfolio - its address is enough. Comparing to bank accounts - it is as if everyone could check the account balance with only the account number. In addition, it is easy to check the history of outgoing and incoming transactions using transaction numbers. So we have access to every transaction that was made from the very beginning of the cryptocurrency. However, it is not possible to check to whom the portfolio belongs - they are completely anonymous;
- the possibility of affecting the supply of cryptocurrencies, its quantity on the market, through the so-called digging. The investment in the cryptocurrency mine allows you to generate new units of cryptocurrencies, which you can then sell on the stock exchange. Therefore, this is a situation similar to the share in the gold mine - we create assets that can then be exchanged for other, more liquid, eg standard currencies;
- transaction speed - without the participation of the bank, the transfer of funds to any portfolio usually takes place instantly. The distance between the state and the continent is not a limitation. Of course, cryptocurrencies also have disadvantages. The most important is the relatively high volatility of their prices. An example of this was last year, during which the price of the most popular cryptocurrency Bitcoin increased by several hundred percent.
Differences between cryptocurrencies
Currently, there are over 1,500 different cryptocurrencies on the market, although some of them are extinguished. Nevertheless, this market is growing and more and more new ones appear on it.
Typically, cryptocurrencies differ in the assumptions on the basis of which they were created. They share a common feature, which is the use of the so-called blockchain. Simply put, all transactions in a given cryptocurrency form a chain. New transactions are added like links to a chain that is stored in a decentralized form, i.e. there is no one specific place or server on which it would be saved. It is stored on users' computers, which practically prevents hacker attacks on the entire network and data destruction.
Bitcoin is the oldest and the most popular cryptocurrency. Its basic advantage is universal acceptance, manifested in accepting it as a payment for a product or service. Especially in Asia there is a growing number of enterprises that use it for payments. It can be said that it was from Bitcoin that the revolution began and in its context in public space for the first time appeared the concept of "cryptocurrency."
Which, incidentally, is also the most expensive cryptocurrency of all on the market. At the peak moment in 2017, the BTC value exceeded 19 thousand dollars. Interestingly, Bitcoin has a predetermined maximum supply - the number of units in circulation cannot exceed 21 million, which, theoretically, with growing demand, can affect the price increase. It also has disadvantages - the most noticeable is the relatively slow transfers of funds to other users.
Other popular cryptocurrencies are:
- Litecoin - in its assumptions is almost identical to Bitcoin. It is currently the second most popular cryptocurrency, which many companies in the world use in payments. He has a significant advantage over his older "brother" BTC - transfers of funds are much faster.
- Ethereum - is a platform where the currency is called ether. It was based on the intention of using cryptocurrencies and the blockchain for something more than making payments. This intention is so-called smart contracts and their use in the relationships between network users. For example, we can order a contract in which, after a certain time has elapsed, the funds will be transferred to another user. In the assumptions of the conditions determining the action, there may be, of course, more. These contracts are processed using the computing power of computers forming Ethereum networks, so-called excavators. This cryptocurrency seems to give great opportunities to use, for example, in legal or financial contracts. However, it requires dissemination.
- Ripple - a system created by Ripple, used to transfer the tokens representing currencies or raw materials using a network built on a distributed online open source protocol and using blockchain-based solutions. It can be used to make transfers at virtually with no charge, in a very short time. In a sense, it combines classic instruments, like currencies, with a modern blockchain concept. Ripple arouses considerable interest among financial institutions. It is already used by UniCredit, Santander and UBS banks.
The future of cryptocurrencies
The market is developing very dynamically. Two years ago, hardly anyone expected that cryptocurrencies would become such a media subject. At the turn of the past and present year, the main narrative of the media was based on the statements of representatives of government institutions. Many were very critical - there were voices suggesting a ban on the use of cryptocurrencies.
The situation is gradually changing - more and more often we can hear statements prophesying a revolution in the world of finance and the evolution of money to a new, better form. This is confirmed, for example, by the use of Ripple's cryptocurrency by some large international banks and by the Bitcoin entering the payment market as an alternative to fiat currencies.
What will the future be like? Of course, this is impossible to predict. Pessimists prophesize the collapse of cryptocurrencies and the equally spectacular departure to gloom, like appearance in the general consciousness. Optimists, in turn, assume that they will displace classical money from use. As it will be, we will find out in the coming years. At present, the most likely actions seem to be aimed at even partially regulating the cryptocurrency market. Will they prove effective? We do not know this, but it can be assumed that we are witnessing a very interesting evolution of money and the payment system.
Authors: Bartosz Nafalski, Omega Chief Executive Officer, Łukasz Bożek, Chief Financial Officer