Ethereum, Ripple, Tether and of course the famous Bitcoin: cryptocurrencies have been in the news since the beginning of 2010. They promise their users reliability and security and use cryptographic principles to secure transactions.
Nowadays, if you want to pay via the internet, you either have to use your credit card or use a special platform such as Paypal. But you can also use cryptocurrencies. They make it possible to make purchases in the real economy both via an online platform and via a physical store.
Below is an explanation of these new virtual currencies that are filling more and more digital wallets around the world.
Definition of Cryptocurrency
A cryptocurrency is a digital currency that is exchanged peer-to-peer (digital asset) and can be used through a decentralized computer network. It uses cryptographic technologies and associates the user with the process of issuance and settlement of transactions.
A cryptocurrency is an electronic or virtual currency that operates independently of banks and governments. It is exchanged on the internet on a decentralized computer system and uses cryptographic algorithms and a protocol called Blockchain (which we saw in a previous article: The Blockchain and its applications). Constantly updated and deemed inviolable to ensure the reliability and traceability of transactions.
It can be exchanged and traded like any physical currency (or Fiat currency) making it possible to purchase goods or services.
Cryptocurrencies are considered virtual due to the absence of physical media (coins, notes, checks and credit cards). It has no physical form and can be stored in a digital wallet protected by a secret code belonging to its owner. Exchange platforms (Binance, Coinbase, Bitstamp, etc.) are used to buy and resell cryptocurrencies online.
Cryptocurrencies are not dependent on a Central Bank and are in no way official monetary units comparable to the Dollar or the Euro. These are alternative currencies that are not legal tender in any country in the world. Their value is not indexed to the price of gold or conventional currencies. Nor are they regulated by any central body or financial institutions.
There are no central banks in charge and yet security and transparency are their main assets! Indeed, cryptography secures transactions that are all verified and registered in a public domain. Therefore, both confidentiality and authenticity are guaranteed thanks to Blockchain technology.
They have a real existence because they are used on the “web”. The most famous are Bitcoin, Ethereum, Ripple, EOS and Litecoin etc.
As of June 14, 2021, according to CoinMarketCap, 15,617 cryptocurrencies are worth EUR 2.031 billion.
History
The idea of cryptocurrency first emerged in the late 80s. The idea was to create a currency that could be sent untraceably and worked without the centralized entities (i.e. banks).
In 1995, American cryptographer David Chaum created a cryptographic electronic currency he called Digicash. Often referred to as a direct predecessor to Bitcoin, Bit Gold was designed in 1998 by Nick Szabo.
Only ten years later, on October 31, 2008, when a mysterious person under the pseudonym “Satoshi Nakamoto” published a white paper called Bitcoin – A Peer to Peer Electronic Cash System, did the history of Bitcoin and the resulting cryptocurrency begin. This booklet described the characteristics of Bitcoin.
Satoshi Nakamoto created the first decentralized virtual currency: the Bitcoin, on January 3, 2009. During the first months of its existence, the Bitcoin had almost no value but in April 2010 the value of one Bitcoin was $0.14 . By early November, Bitcoin’s price had actively risen to $0.36.
On May 22, 2010, a Florida developer, Laszlo Hanyecz, spent 10,000 BTC for 2 pizzas. The first use of “virtual currency” in the “real” world.
In February 2011, Bitcoin’s price rose to $1.06 before falling back to $0.87 cents. Between the end of April and the beginning of May, the price of a Bitcoin had risen from $0.87 to $8.89.
On June 1 of this year, Bitcoin’s price tripled within a week to around $27. By September 2011, its value had fallen to around $4.77. In October 2011, Litecoin was born, along with other concepts, which were previously derived from Bitcoin.
In September 2012, the Bitcoin Foundation was established to promote the development and adoption of Bitcoin. There was also the launch of the Ripple. A transaction network that also contains a new cryptocurrency namely Ripples (XRP).
In July 2013, Mastercoin launched the first ICO (Initial Coin Offering or fundraising) in cryptocurrency. That same year, Bitcoin’s price rose steadily before finally collapsing. On November 19, Bitcoin hit a price of $755 before falling back to $378 that same day. But by November 30, it had risen again to $1,163. This date marks the start of another crash that would eventually see Bitcoin’s price drop to $152 in January 2015.
Bitcoin’s price rose again in 2016, rising steadily from $434 in January 2016 to $998 in January 2017. In July 2017, Bitcoin was trading at around $2,700 and reached an all-time high on December 17, 2017. An astronomical history just under $20,000.
In 2018, two countries adopted a state cryptocurrency: the Marshall Islands and Venezuela.
El Salvador will become the first country in 2021 to convert Bitcoin into legal tender to enable the financial inclusion of the entire population.
On Wednesday, October 20, 2021, it was announced on France 24 that the Bitcoin price had risen to more than $66,000. Driven by the launch of a financial product on Wall Street linked to cryptocurrencies. The cryptocurrency, which traded for less than a dollar 12 years ago, peaked in trading today at $66,273 around 2 p.m. GMT.
Working Principles of Cryptocurrency
Cryptocurrency was invented to allow users to transact over the internet. It works over a very secure peer-to-peer network (of computers) thanks to a cryptographic system. Cryptocurrency markets are decentralized which means that these currencies are not issued and controlled by any central authority (banks, companies or governments).
Since the vast majority of cryptocurrencies escape the control of states and central banks, the Blockchain acts as a central bank in this ecosystem. This is used to display all transactions performed in a cryptocurrency on a ledger or ledger.
This register is open and can be consulted by anyone on the internet. It contains the constituent elements of each transaction carried out: the amount of the transaction, the address of the issuer, the address of the recipient and a cryptographic fingerprint. But every cryptocurrency has its own way of working.
Cryptocurrencies pass through a network of computers and can be bought and sold on exchange platforms (a kind of virtual stock market) and held in special wallets. And to make a purchase with cryptocurrencies you need this wallet to keep your cryptocurrencies safe.
Each wallet contains public and private keys that are used to issue and receive currency. The public key is a code that everyone in a system knows. The private key is known only to the user and allows him to validate his transactions.
When a user wants to sell cryptocurrency units to another user, all he needs is a special application (such as Coinbase, Zengo or Binance etc.) and send it to the latter’s virtual wallet. The transaction is not considered complete until it has been verified and added to the Blockchain through a mining process.
To collect your bills in crypto or pay yours, all you need is a special application such as Coinbase, Zengo or Binance.
A Blockchain is a digital register used for sending and storing data. In the context of cryptocurrencies, it stores the history of transactions performed and thus tracks the change in ownership over time. The Blockchain records transactions in blocks and the most recent ones are placed at the front of the chain.
Blockchain transactions are accessible to everyone and are not stored in one place but hosted by millions of computers simultaneously. All movements are registered in the form of numbers by thousands of different servers simultaneously. The executed transactions are then recorded and decentralized within a network.
This makes the Blockchain both transparent and resistant to change and tampering with transactions is almost impossible leaving no weaknesses exposed to human or computer errors.
Advantages and disadvantages of cryptocurrencies
The advantages:
Everyone is attracted to crypto for different reasons. Here are some reasons:
• No Fees: The relative absence of fees is partly key to cryptocurrency’s success. Compared to traditional bank charges, cryptocurrency charges are lower because there is no central authority to manage the transactions.
• Inflation Protection: Inflation has caused many currencies to fall in price over time. Almost every cryptocurrency is launched with a fixed fee at the time of launch. So due to the increasing demand the price will rise. This so that it keeps pace with the market and in the long run you avoid inflation.
• Efficiency: The availability and speed of transactions contribute to this attraction. Transactions can be completed in just minutes. There are no restrictions on disclosure or processing by third parties. They are therefore easy to use and very accessible.
• High volatility that allows for significant profits: cryptocurrencies can generate profits. The price of virtual currencies can double overnight allowing you to earn a lot. The cryptocurrency market is very active.
• Security: Blockchain technology is a system that spends a lot of cryptocurrencies and makes it difficult to change transaction data entered into the system. Without human intervention, the risk of errors decreases. This is because the network of computers approves the information sent in the database.
The cons:
If crypto gains and returns can be very significant, the potential risks will be just as much on the other side… it’s a matter of balance.
• Value volatility: what is an advantage may be a disadvantage. Indeed, the fluctuation of cryptocurrency prices can cause a lot of money to be lost. Prizes can evolve differently than you expected, and this is the hardest rule of the game to accept.
• The risk of hacking: Despite the security provided by the Blockchain system, theft through hacking is still possible.
Mediatrix NKURUNZIZA
