Cryptocurrency is the future of money. In this post I will try to explain what is cryptocurrency and what is bitcoin, how it is revolutionizing the global financial system, how anyone can have and use it as money.
What is Cryptocurrency?
To put it in a layman’s term, cryptocurrency is money. Simple, what you can do to your money, you can do also with cryptocurrency.
Cryptocurrency can be used to buy goods, can be traded to other type of cryptocurrency, can be saved or invested, cryptocurrency is simply the online version of money. It is the soft copy of money.
Every cryptocurrency also needs wallet, just electronically. Other terms used for cryptocurrency are, electronic money, digital cash, one website called it the 21st century unicorn or the future of money. To give a clear example it’s like this.
|Before Digital Age
These are just few examples, I know you could think of many others, but as you see, all of the things listed before the digital age exist physically, you can touch and feel them.
Today, their counterparts are all digital, it means they are just millions of codes which are read and followed by the computers. We humans call them, software, apps or document.
We have seen how those technologies changed our way of life. Got the idea? I personally think, if the current upward trend of interest with cryptocurrency will continue, it will really revolutionize current financial system of every country in the world and it will have an effect for everyone.
We will use Bitcoin as an example of cryptocurrency.
What is Bitcoin?
Bitcoin is a type of cryptocurrency. It also has the highest value of all cryptocurrency. It is the first digital money and can be send thru the internet, it can be transferred online from person to person.
Today, it can be used to buy goods like the way you use ordinary money. Though there are companies now that accept it as payment, still, Bitcoin is in its early development stage, so we cannot still have a credible prediction what will be future of Bitcoin.
Well, I think it is working. There may be other currencies like it that may be even better. But in the meantime, there’s a big industry around Bitcoin. — People have made fortunes off Bitcoin, some have lost money. It is volatile, but people make money off of volatility too.
Richard Branson – Founder of Virgin Galactic, and 400+ businesses Source : [Bitcoin.com]
What is the Technology Behind Bitcoin?
The backbone of every cryptocurrency today is called Blockchain. It was created in the year 2009 by the name Satoshi Nakamoto, nobody knows who he really is. Blockchain is a revolutionary invention.
It’s hard not to be fascinated by something so transformative. This technology is being used in ways that have implications for central banking that span all the functions that we have (p.294).
Carolyn Wilkins – Senior Deputy Governor of the Bank of Canada : [forbes.com]
It can be applied not only to currency but to most things that has value. It is a new system which allows digital information to be distributed but not copied. With every transaction a person makes, using Bitcoin, he creates a block containing that unique transaction.
These blocks contain all the needed information of the transaction. Also, every user has an encrypted account, hence crypto-currency. The block of transaction when completed and verified is attached to other blocks of all other transaction forming the chain, – blockchain.
This forms as a public ledger available for any transaction to verify. Which is an important feature in digital money because it resolve the problem of reusing the digital money that is already used.
How it can Revolutionize the Current Global Financial System?
To answer this question, we need to have a simple idea what is our current financial system.
You can’t stop things like Bitcoin. It will be everywhere and the world will have to readjust. World governments will have to readjust.
John McAfee, Founder of McAfee. Source : [intelligenthq]
How the current banking system keep the depositors account?
In today’s financial system, we have bank wherein we can deposit money for safekeeping or for savings. Before anyone can transact to the bank, you need to open an account with them.
This system is time consuming and has lots of requirement, plus, registration forms that you need to filled up. Bank keep and update these records of their depositor’s balances in the database. Every time the client wants to access their account to deposit, withdraw or any transaction, the bank is accessing their database for the records.
This kind of recording is called centralized database. Which is often targeted by computer hackers.
How Records of Cryptocurrency is Kept?
The recording of cryptocurrency is way different than that of traditional banking method. With Bitcoin, for example, if you want to use it, you just need a Bitcoin wallet. You can try to register with this one to see how you can have an online wallet – this is also called cryptowallet / cryptocurrency wallet.
I will discuss what is cryptowallet later in this article.
Unlike the traditional bank which require lots of form and tedious verification processes, cryptocurrency needs only your username, plus a quick photo identification, computer or smartphone and internet connection. One feature also is that you are anonymous because your account is encrypted.
The blockchain functions also as a distributed ledger or decentralized database system, meaning everyone has a copy of all transaction. Different from the bank system which has only one centralized database records. A hacker would also need lots of computing power before he could take over your account.
With decentralize database, every user has a copy of the transaction, so even if somebody tries to hack your account, it can be easily verified to other block foiling the hacker’s intention.
With cryptocurrency, records are encrypted and distributed to all, I think this feature offers a more secure environment compare to the bank system.
How the current banking system works?
This is best discussed in example, so let us have bank transaction example.
- Jayson – The sender of money or the buyer
- Edward – The receiver of money or the seller
Example 1 : Cash payment thru bank.
Let us assume only Edward has account in Bank1. If Jayson needs to pay Edward a certain amount of money, Jayson needs to bring his cash to Bank1 and deposit an amount in the account of Edward. The bank will then accept the money and update the record of Edward’s account in their database, adding the amount deposited by Jayson. Edward can now verify the changes in his account.
Example 2 : Bank to bank payment (Same country, same bank).
Now let us assume, both Jayson and Edward has account in Bank1. Jayson would need to ask Bank1 to transfer a certain amount of money to Edward’s account. What the bank would do is, deduct that amount of money from the account of Jayson and add that amount to the account of Edward.
This would just be easy, since the Bank1 has access to both Jayson and Edward’s account record. Again, this transaction happens by validating and then updating the records of Jayson and Edward with the bank’s database.
Example 3 : Bank to bank payment (Same country, different banks).
Now let us assume Jayson has an account in Bank2 and Edward in Bank1. Jayson would have to ask the Bank2 to transfer a certain amount of money to Bank1 under the account of Edwards.
That would not be technically possible since Bank2 and Bank1 are different company and has different system, therefore they have different databases. And databases can only be accessed by their respective owners. How would the transaction be possible, since both banks are independent entities?
Now this is the solution. What if Bank2 has an account with Bank1 and Bank1 also has an account with Bank2? Sounds interesting, right? Let us go back to the need of Jayson and Edward. Jayson would need to transfer money to Edward. Jayson, using his account, would ask Bank2 to transfer a certain amount to the account of Edward at Bank1.
This is what the banks would do. Bank2 would get the money from Jayson’s account. Then, Bank2 would transfer that money to the Bank1 ‘s account in their database records. On the other end, Bank1 can now check if there are changes in their account to Bank2 . Upon checking, Bank1 would now add the same amount to the account of Edward in their database records. Edward again now can verify the changes in his account.
How Bitcoin Transaction Works?
The explanation of how bitcoin transaction works is pretty straightforward. The only thing Bitcoin or any cryptocurrency need is a cryptowallet, in this case a Bitcoin wallet.
What is cryptocurrency wallet?
Cryptocurrency wallet is a secure (crypto) – digital wallet use to send, receive, store digital currency like Bitcoin. Here in the Philippines coins.ph offers a very good solution for both Pesos and Bitcoin transaction. Registered members can buy Bitcoin and use it to buy goods to anyone who uses coins.ph app. So click here and register your own account, you will need to download the app too.
I suggest reading this article before you put large amount of money with Bitcoin.
- Things you need to know before investing in Bitcoin.
- Why Is Bitcoin’s Value So Volatile?
- How to keep your Bitcoin secure?
For our transaction example, let us again have Jayson and Edward.
Jayson would need to send certain amount of money to Edward. What they need to do? It’s just this simple. Edward would just show the public address of his Bitcoin wallet to Jayson. Then Jayson would only just need to scan that public address using also his Bitcoin wallet, enter the amount then send. After a few seconds, transaction is completed even if they are in two different parts of the world.
You see the difference in the requirement of the transaction between actual money and cryptocurrency? Yes, there is a big difference in the transaction requirements. Reason why cryptocurrency is such a hype nowadays.