To know and understand the emergence of cryptocurrency, first we need to go through the history of currency and money.
First came the Barter System in the stone age era, where barter was considered the original form of trade. It was a system of exchange where people in a transaction exchange goods or services without using a medium of exchange, such as money. Barter was a simple exchange of goods or services , however, with certain limitations.
- To make the transactions possible you need a person to have a need for the goods or services that you have. Which is called a ‘double coincidence’.
You might not always find a person in need of the goods or services that you have while at the same time holding the goods or services that you require.
- Another point where the Barter system was failing was that due to lack of information about how much value various goods hold, you might end up trading unfairly with others.
- The subdivision of goods was not always possible, which often resulted in quantity conflict between the involved parties
Then around the time of 1000 BC coins were invented, which were the easiest form of metal money. It was created by the Zhou dynasty, which ruled over modern India and China. A medium of exchange such as this was a huge accomplishment, as it came with several benefits.
- It was widely accepted.
- It was easy to carry i.e portable.
- It could withstand wear and tear.
- It introduced uniformity into the exchange
- It had a stable value.
The gold coins of the western world came into existence around the 7th century BC in Lydia (modern-day Turkey). As the greek culture spread across the European region, and the middle east, they took the concept of gold coins as money with them.
During the year 600-700, the Chinese came up with another new medium as money, which was not metal, it was paper. This made several problems disappear like the storage of value and the process of executing a trade, with no need to carry around bags of heavy coins. Over time, the paper money principle kept on evolving with banks and government involvement and we came to the modern-day money, which consists of different regions’ currency, their respective value in comparison with each other, debit cards, credit cards, and cheques.
In the year 1990 with the birth of the internet, the concept of digital money was also born. And with that online payments became popular and took control over the traditional money orders and cheques.
The modern money transactions were good but still had some flaws
- A technical issue with the third party or bank exposed the user data / money to security concerns
- The user’s account could be hacked thereby risking his life savings.
- Identity Theft.
- Limitations imposed on the quantum of transfers
In 1983 David Chaum came up with electronic money called ecash. He implemented a technique by which he can perform a transfer of money without any bank involvement and a third party. This method gave rise to cryptography which later became the base for cryptocurrency. The first decentralized cryptocurrency released as open-source software in 2009 was Bitcoin. Since the release of bitcoin, over 7,000 altcoins (other cryptocurrencies) have been created.
A cryptocurrency is a digital or virtual currency that is created to be used as a medium of exchange. Following are some of its few features –
- There’s a limit to how many units can exist, with Bitcoin the limit is 21 million.
- Cryptocurrency’s hashing algorithm makes it absolutely easy and convenient to verify the transfer of funds
- Operating independent of any bank or central authority, they work in a decentralized manner.
- New units can be added only after certain conditions set by the system are met. With Bitcoin only after the block is added in the blockchain can new Bitcoins be made.
What makes Cryptocurrency special?
- Little to no transaction cost.
- 24/7 access to money.
- No limit on purchases and withdrawals.
- Freedom of use for everyone
- Fastest method of International transactions.
What is cryptography?
Cryptography is a method of using encryption and decryption to secure communication in the presence of third parties with ill intent. Cryptography usually requires a computational algorithm (like SHA256), a public key, and a private key. Cryptography covers itself with four objectives –
- Confidentiality – The data cannot be understood by anyone.
- Integrity – The data cannot be interfered with or altered in between.
- Non-repudiation – The sender/receiver cannot deny data at a later stage.
- Authentication – Both transactional parties can confirm each other’s identity.
Cryptocurrency a place to invest
Just like you can invest your money in currencies like dollars, pounds you can invest in cryptocurrency as well. But one must know the following –
- No guarantee for profits: Just like any traditional investment, cryptocurrency does not guarantee profits. If one promises the same, it is possibly a scam.
- For each, its own value: Not all cryptocurrencies available in the market have the same value.
Paying with Cryptocurrency
Cryptocurrency can be used to make a payment However, One must understand properly the differences between paying with cryptocurrency and paying by traditional methods.
- Different legal protections
Traditions methods like credit and debit card payment possess
legal protection. Cryptocurrency transactions are only reversible if the seller willingly pays you back.
- Know your seller
Before you make a purchase with cryptocurrency, know a seller’s background, where the seller is located, and how to contact the seller if there is a problem.
- Fluctuations in the value of refunds
The value of cryptocurrency fluctuates more wildly than your traditional currencies. Learn how refunds work. Will the refund be in currency or cryptocurrency itself? If cryptocurrency, is there a way to secure your value against the fluctuation?
- Public information
The transactions are anonymous, but they can still be part of the public record. Like Bitcoin’s Blockchain is a public record of transactions. The public record could consist of sender’s, receiver’s identity and transaction details, location and maybe more.
With each passing day, scammers are finding more ways to make money out of people’s ignorance. A cryptocurrency exchange in Japan, suffered one of the biggest scams this year, losing ₹206 crores in July. Have a special eye out for people who-
- Offer investment opportunities, for instance – Scammers will insist you to invest in a particular currency claiming its value to go high soon.
- Guarantee more money by investing in currencies or companies which favours them and not you.
- Promise free dollar payouts as reward for a simple quiz or some form of lucky draw schemes
- “Big payouts” that will increase your money by an exponential rate.
- Make a statement about and from an organisation which does not exist but the mere reference of the organisation makes the person trust the scammer and does result in theft.
For example – A website shows up a fake graph that shows loads of profit if you invest in that cryptocurrency or a company claiming to convert your cryptocurrency into digital currency (real money) which they will send to your referred bank.
Even if the site looks identical to the one you think you’re visiting, you may find yourself directed to another platform for payment.
- Cryptojacking (A very common issue)
Cryptojacking is used by scammers to ‘mine’ cryptocurrency by using the person’s computer or smartphone without the person’s permission.
Here is how you can avoid it –
- Use certified authentic apps and websites.
- Always use Verified antivirus applications.
- You can also opt for several Browser extension tools to avoid cryptojacking.
Why governments are against cryptocurrency
The world has experienced exponential growth in people’s interest in cryptocurrencies since Bitcoin made its appearance. And with companies like Facebook creating its own cryptocurrency, Ether, and many more such currencies touching the surface of the world economy, governments started watching their development very closely as it challenged their status quo, their monopoly over issuing money.
Cryptocurrency is not issued by a government. The authorities have complete functional control over the Money created by them and supplied to the market by banks,, unlike cryptocurrency which is completely decentralized and eliminates the work of third parties or banks.
While some governments have recognized the potential of the technology underlying cryptocurrencies, most remain skeptical and several have even banned them. RBI fears that Bitcoin and similar cryptocurrencies could be used to circumvent capital controls or increasing instances of money laundering as it cannot be traced to the root of its existence. Moreover, they can be used for illegal purchases or other criminal activity. There were reports which said that cryptocurrency is widely used by terrorist organizations for buying weaponry and much more. Cryptocurrency thus could destabilize or undermine the control of central banks on their respective economies.
Cryptocurrencies are not government-insured, unlike bank deposits. The online deposited cryptocurrencies do not have the same security as cash in a bank account. If you store your cryptocurrency in a company’s digital wallet, and it goes out of business or is compromised, the government will not be able to step forward to help get your money back as it does for money deposited in banks or credit unions.
In a circular in 2018, the RBI had banned banks from dealing with virtual currency exchanges and individual holders on the ground that these currencies had no underlying fiat. RBI held that it was necessary for the large public interest, to avoid all the scams, cheating, and befooling of people. The government took the “proportionality test of Article (19)1(g)” which the cryptocurrency failed.
RBI was adamant about banning the cryptocurrency because it had lots of risks and concerns about data security and consumer protection and far-reaching potential impact on the effectiveness of monetary policy itself. It was declared as not a legal tender. Cryptocurrency value fluctuates daily and that makes it very rigid and difficult to be used as a commodity.
RBI’s ban was challenged by IAMA (Internet and mobile association of India) stating that –
- The ban was a direct impact on fundamental rights.
- this currency is not under RBI’s jurisdiction so they cannot decide on this matter.
- The larger public interest and freedom must be ensured before taking such a decision.
- They also stated it would not be harmful to the general public.
Finally they advised the central bank that they could take any other strict decision over it to help regulate it in the favour of the general public, rather than banning it all together.
The ban was revoked by the order of the supreme court in March 2020, and the RBI was instructed to find a way to regularize cryptocurrency and to cut down its falls. Instead of a ban, India needs a regulatory framework to protect uninformed retail consumers “to ensure adequate oversight of the government and the RBI over cryptocurrency businesses,”. On account of the court verdict, even after the world experienced significant economic slowdown due to COVID-19, Bitcoin witnessed a growth of about 883% in India.
Cryptocurrency system came to improve the way we execute financial transactions in today’s world. And like all the previous systems of the past This system too does have some limitations of its own. But that hasn’t stopped the world from experimenting with investment and transactions in these. It is actively used by various successful businessmen including the likes of Barry Silbert, Dan Morehead, Tyler and Cameron Winklevoss with net worth over ₹1000 crores. Cryptocurrencies thus have a lot of potential in them. Probably in time we will see them evolving into a new form of transactions overcoming the limitations of the current system.
The market is full of people trying to make it big in the game. And with a ton of competition out there you would want yourself to be ahead of others. That is why research and read as much as you can and take informed decisions
We at insellers, have been doing a lot of research and carrying out implementation projects with our clients. We tell you the not so often talked about inspiring reverie to real stories of SMEs and startups, to inspire the Entrepreneur in you. Check out our website for more amazing blogs like this