The term ‘cryptocurrency’ can conjure up some arresting images.For some, it symbolises the modern day Holy Grail that will provide special powers, happiness and eternal youth to the holder. For others, the term is more likely to evoke images of the lynx, the keeper of secrets, hidden behind impenetrable layers of security.
The reality is a little bit more involved, but no less fascinating. Cryptocurrency is a form of exchange. Only, instead of exchanging, say, ‘dollars’ for physical goods, you exchange similarly-named units that are best described as lines of code with monetary value, the most ready example being bitcoins. If cryptocurrencies are the indie craft beers of the world of sovereign moneys, bitcoins are Brew Dogs.
Cryptocurrency veers from other forms of digital currency (like Google wallet or Paypal) because there is no centralised bank or government body overseeing the transactions. And in any case, those services are just moving around the same AUDs and USDs that we all use when we transfer our kids money over internet banking until they ‘get paid’.
There are just two other points that are important to grasp. The first is that, through the mysterious magic of mathematics, for any cryptocurrency there is only a finite amount of monetary units that it’s possible to mine. The second is that, every single crypto-transaction is, well, encrypted. And those two points are a big part of why cryptocurrencies might be very important in the future.
So where do we get these lines of code from? Well, there are a few ways.
You buy them
Buying cryptocurrency works just the same as when you pop your debit card into an ATM overseas and buy 75 US cents for your one Australian dollar, except you’d do it online yourself rather than letting the machine or someone else punch the numbers out for you. To give you a sense of its value, at the moment 1 bitcoin equals $837 Australian dollars, but if you look at the history, you’ll see that it tends to fluctuate wildly.
You mine them
Yep, grab your pick, your sack and your burning torch, go delving into a hollowed-out cave and chip away until you’ve found your very own new line of code, then go mine another one.
You chip away for your units of cryptocurrency, your lines of code, by using a computer (actually a very powerful computer, a bit of mining hardware and a willingness to spend a lot on your electricity bill) to take advantage of its considerable electronic muscle in working through humongous mathematical equations.
Cryptocurrency is different. As a type of money, only finite amount are created, like gold or silver, meaning there’s no way to create more and more units of it out of thin air, unlike the currencies we already use thanks to the modern practices of fractional reserve banking and quantitative easing.
You earn them
As a business, you can accept cryptocurrency as a form of payment. If you think that those businesses are in the minority, you’d actually be surprised how many do already use it. From cafes to breweries, to software companies and even news agencies recognise the value of cryptocurrency and not just for novelty's sake.
Why consider a cryptocurrency?
While it has been slow to take off in Australia, we are now starting to see businesses offer cryptocurrency as a form of payment. There are many positives to trading in cryptocurrency. Bitcoin may have started as a novelty for the V cafe in Canberra, but bitcoin transactions have become a viable alternative to other currency.
‘Bitcoin allows us to cut out the middle man and save on credit card transactions fees. There’s a relatively small cost to set it up too, less than what it cost us to set up our EFTPOS system.’
Not only are cryptocurrencies cheaper to operate, but they offer more security in a number of ways.
Firstly there is no middle-man handling your ‘money’. As CoinDesk points out. When you are dealing with a bank or a third party processor, they require highly sensitive information from you. With a cryptocurrency, the only person who has access to your private key is you.
This also means that when you are conducting a transaction, there is also no need to fill out the traditional forms giving your pin number, card number etc to the vendor, leaving yourself vulnerable to fraud. You just merge your private key with your public key and that’s it.
There are also no chargebacks, which means that the sender cannot reclaim their coins without the receiver's consent. As CoinDesk says:
‘This makes it difficult to commit the kind of fraud that we often see with credit cards, in which people make a purchase and then contact the credit card company to make a chargeback, effectively reversing the transaction.’
Another important aspect to cryptocurrency is that their value doesn’t change at the whims of inflation. Because there are only a certain number of the currency (for example only 21 million bitcoins exist) then the value of things won’t go up.
What are the drawbacks?
However there are some limitations to using cryptocurrency.
While some countries have shown positivity towards cryptocurrency, countries like India and Vietnam have outlawed it, fearing widespread use of the currency by criminals and shoddy investors. And while China hasn’t made it illegal exactly, its government has attempted to restrict it, as government officials and banking employees are forbidden in trading in bitcoin.
Another issue is that the use of cryptocurrencies are not widely spread in Australia at the moment. With only a handful of businesses and services offering it up and having a cryptocurrency as a universal currency at this stage would be nearly impossible, because the vast majority of businesses don’t accept it, meaning that you’d need to convert the currency anyway. As CS Stanford points out:
‘Since Bitcoins do not have a physical form, it cannot be used in physical stores. It would always have to be converted to other currencies. Cards with Bitcoin wallet information stored in them have been proposed, but there is no consensus on a particular system. Since there would be multiple competing systems, merchants would find it unfeasible to support all Bitcoin cards, and therefore users would be forced to convert Bitcoins anyway.’
However these issues shouldn’t detract from the potential of a safer, quicker system that allows the user to have complete control over their money. Given that cryptocurrency is really in its infancy, it will be fascinating to see what part it will play in the economic system of the future.
Would you like to know more about business trends? Then you need to download the CeBIT 2016 SME Summary Report today.