Understanding Cryptocurrency: The Future of Digital Finance

Since the launch of Bitcoin in 2009, cryptocurrencies have taken the world by storm. With unparalleled features of security, anonymity, and accessibility, both specialists and the wider public alike have invested copious amounts of money in the digital assets, as evidenced by the value of existing cryptocurrencies reaching close to $2.4 trillion. This number is only increasing, and the cryptocurrency market is only growing. With possibly unfamiliar terminology like “mining” and “decentralized” appearing in newspapers and television more often, it is vital to understand what cryptocurrencies are and, more importantly, if they are here to stay.

First, let’s understand the terminology used when discussing cryptocurrencies. Cryptocurrencies are digital tokens of value managed by a decentralized system. This means that there’s no central authority, like a bank or government, regulating the currencies’ trade flow. Instead, most cryptocurrencies use blockchain technology, a secure system of computers called nodes that stores transactions in blocks. This system relies on the theory that it’s almost impossible to hack each copy of the widely available public ledger, which each node has a copy of. When there’s a discrepancy in information on one computer, others will be able to spot and fix it quickly. 

Another important aspect of cryptocurrencies is mining, which is how new cryptocurrency tokens are created and transactions are verified. Even though cryptocurrencies are decentralized, they first need to be verified by people. These people are called “miners,” and they run complex algorithms to verify transactions in exchange for new cryptocurrency tokens. It's like solving a very complex puzzle; the first one to solve it gets a reward in the form of new cryptocurrency tokens. These miners are also in charge of the digital ledger mentioned earlier, ensuring that cryptocurrencies are secure.

The most notable characteristics of cryptocurrencies, security, anonymity, and accessibility, stem from their decentralized nature. Now that we understand how decentralized systems like blockchain ensure security for cryptocurrency users, we can see how anonymity works and its benefits. All cryptocurrency transactions are anonymous; for example, even transactions listed in blocks don’t have the identities of the individuals performing the monetary exchange. As long as the sender has the receiver's details, they can send however much cryptocurrency they want. This feature does have drawbacks, such as the increased ability to perform illegal transactions. However, the benefits of increased privacy and security for users far outweigh these concerns, providing a sense of reassurance and confidence in the system.

Though controversial, anonymity is an essential part of cryptocurrencies. Accessibility, on the other hand, isn’t as contentious. According to the World Bank, over 1.7 billion people worldwide cannot access traditional banking systems. Cryptocurrencies have increased access to financial transactions for people worldwide, including those who are unbanked. They can be easily accessed online, where transacting and handling cryptocurrencies cost much less than their counterparts. This has allowed individuals in countries worldwide to send and receive money for practically free, fostering a sense of empathy and inclusivity in the financial world. For example, in Kenya, the rise of platforms like M-Pesa has made transacting Bitcoins much easier and more popular among Kenyan citizens. 

Cryptocurrencies have become more widely used worldwide due to their valuable characteristics of security, anonymity, and accessibility. The spike in the price of many popular cryptocurrencies, such as Bitcoin, Ethereum, and Litecoin, coupled with the fact that there are over 300 million crypto-users in the world, is clear evidence of this massive change. However, there are still many concerns for the public as cryptocurrencies are relatively new and aren’t as reliable as traditional currencies.

One of the most significant concerns for the public and governments alike is the negative impact that cryptocurrency mining, the process through which decentralized systems verify transactions, has on the environment. Mining takes a lot of computational power, consumes a lot of energy, and releases a lot of fossil fuels. This is because over 60% of the energy used for mining comes from fossil fuels, which release a massive amount of carbon dioxide and related greenhouse gases into the atmosphere. This increases temperatures around the world and causes climate change, causing significant damage to the environment.

Another significant concern is security, as many governments are apprehensive about allowing their citizens to use cryptocurrencies. This is because the use of cryptocurrencies not only makes financial activity harder to track but also makes traditional systems like banks less relevant. This fear is further accentuated by the high risk of fraud and scams, like “pump and dump” schemes where the price of cryptocurrencies is abnormally inflated from false advertising and exaggerated claims. Most frauds and scams stem from the controversial characteristic of anonymity, which gives people a layer of protection and confidence to do something wrong. 

All in all, cryptocurrencies have entirely changed how people view modern financial transactions. Many people are suspicious of cryptocurrencies due to their negative environmental impact and concern about fraud and scams. However, cryptocurrencies are here to stay as they provide security and anonymity for users and are also less costly and more accessible. In the future, we will see the continued rise of cryptocurrencies and solutions to our current concerns. The potential of cryptocurrencies to change global finance for years to come is a topic that will continue to intrigue and engage us. Until then, we can be sure that cryptocurrencies are here to stay and will continue to change global finance for years to come.

Bibliography:

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3.⁠ ⁠"What Is Blockchain Technology?" IBM Blockchain, IBM, www.ibm.com/blockchain/what-is-blockchain.

4.⁠ ⁠"World Bank Report: The Unbanked." The World Bank, 2017, www.worldbank.org/en/news/infographic/2017/12/01/the-unbanked.

5.⁠ ⁠"The Environmental Impact of Cryptocurrency Mining." Cambridge Centre for Alternative Finance, University of Cambridge, 2022, www.jbs.cam.ac.uk/faculty-research/centres/alternative-finance/publications/the-environmental-impact-of-cryptocurrency-mining.

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