The means of exchanging goods have evolved significantly over the course of history. Long ago, bartering was the primary trade system until metal coins and banknotes replaced it. Fast forward to today, and you’ll notice that even paper money is becoming obsolete. According to several reports, ATM withdrawals in Australia are at an all time low because of the widespread adoption of credit cards, e-payments, and the increasing popularity of virtual cash known as cryptocurrency.
In 2009, an anonymous software developer going under the alias Satoshi Nakamoto developed the first and most widely-known cryptocurrency, Bitcoin. In the decade since its inception, more and more establishments are accepting cryptocurrencies — one Bitcoin is now valued around $3,580 (AUD) — and many investors say it will continue to revolutionise paying for goods and services.
What is cryptocurrency?
Cryptocurrency is a virtual currency traded exclusively online and shouldn’t be confused with payment systems like PayPal or Apple Pay. It is money, but instead of exchanging dollars for physical goods, you trade with bits of code that have monetary value.
Unlike the dollar, yen, or euro, cryptocurrency is decentralised, which means banks and regulatory bodies like the Reserve Bank of Australia cannot interfere with the supply and value of the currency. In fact, Bitcoin is capped at 21 million digital tokens to limit inflation, an all too common problem with the fiat currencies we exchange around the world today.
Also, cryptocurrencies are extremely fast when it comes to wire transfers. For example, sending $500 from one traditional bank to another — let’s say Commonwealth Bank to ANZ — takes hours. Cryptocurrency cuts out the banks entirely, transferring from one individual to another.
The backbone of all cryptocurrency is the blockchain, a distributed database that secures and tracks each transaction, known as blocks. Each time a new transaction is generated, that information is shared with a vast network of computers, adding one block of data to an ever-growing chain of recorded transactions.
By design, blockchains prevent the modification of data. Should someone attempt to alter the data within a block already stored in the chain? Each computer in the network checks whether the information is consistent with their ledgers. If not, the blockchain recognises the data as fake and rejects the alteration. In other words, transaction histories in a blockchain can’t be corrupted or changed unless every computer in the network is hacked simultaneously.
Privacy and anonymity are chief concerns for businesses conducting transactions online, especially for those that use traditional payment systems. In addition to tamper-proof ledgers, what makes cryptocurrencies more secure is that they are fully encrypted, which makes them virtually impossible to corrupt, duplicate, or counterfeit. Encryption protocols also secure the processes involved in conducting and recording transactions within a blockchain, making it difficult for attackers to find out who made a transaction and what was purchased.
Earning and storing cryptocurrency
There are two methods to obtain cryptocurrency. The first is to “mine” it by acting as one of the computers in the network, storing encrypted data chains and cross-checking alterations to archived blocks. The second way is to purchase it from websites like CoinSpot or Coinbase.
To store their digital tokens, cryptocurrency users need a digital wallet. The wallet also generates private and public keys that authenticate users’ identities and allows only them to make transactions. From there, users can simply purchase items online as they would with PayPal or a credit card.
Benefits of cryptocurrency
As mentioned, banking institutions can take hours, sometimes days to move money from one account to another and charge extra fees. With cryptocurrency, however; funds are quickly validated by the network in a blockchain and are moved to the correct account almost instantly. Transactions can also be performed at any time, including public holidays, as long as there’s an internet connection.
Another benefit to cryptocurrencies is businesses can avoid chargebacks. Once a purchase is made with Bitcoin, it is final — retailers are not obligated to entertain fraud claims telling them to return funds to the buyer.
Cryptocurrencies also aren’t bound to the rules of any government’s currency, exchange rates, and country-to-country transaction fees; which helps business owners save money and time on international transactions.
Precautions to consider
Although cryptocurrency offers many opportunities for businesses, there are some things to keep in mind. Because of the anonymity cryptocurrency provides, it encourages black market activity and helps to fund malware production. A recent study found that the rate of ransomware attacks have increased dramatically due to the untraceable nature of Bitcoin. This means that as Bitcoin becomes more mainstream, ransomware attacks will become more common.
Cryptocurrencies are also purely based on the supply and demand curve; meaning their value when exchanged with traditional currencies can fluctuate dramatically.
The future of cryptocurrency
Cryptocurrency is changing the world of finance as we know it. Ever since the creation of Bitcoin, even more cryptocurrencies have been developed, and today; consumers and businesses have a few to choose from such as Litecoin, Ethereum, and Dogecoin.
As you can tell, the processes and technologies behind cryptocurrencies can be complex. If you want to stay on top of the latest cryptocurrency developments, give us a call today.