Wednesday, 8 January 2014

The New Era of Cryptocurrency

Needless to say, in this cyber-culture era there are massive wave of virtual transactions. Borders are slightly vague, but the foreign-exchange rate difference still can be a barrier, not forget to mention the financial crisis possibility that would affect the exchange rate. What if we have our own universal currency for solely digital transactions? No dollar, no euro, etc-- just one kind of virtual cash.

Digital currency is similar with conventional currency yet it is involving electronic or virtual money that endorsed by non-government central banks as alternative currency. The concept is simple, virtual economies supported by virtual money however the transactions are all real.

Cryptocurrency will be down as our main focus. Cryptocurrency is one of digital currency types that using cryptographic algorithms in order to avoid counterfeiting, to keep it as secure and reliable as possible. Cryptocurrency has the same function as fiat money; it can be used as a medium of exchange for goods and services.

So why cryptocurrency is so tempting? Initially because of its independence, any government cannot intervene or manipulate. Second, the direct party-to-party fund transfer without processing fees from banks or for-profit company payment systems such as PayPal and Visa makes it cheaper and simpler. Third, the peer-to-peer network ensures all of the users’ anonymity.

So how many exactly cryptocurrency types are? Until now, January 2014, there are 70 types on the cryptocurrency market capitalization. The “gold” in this market is Bitcoin, the first emerging virtual money that firstly came out in 2009 created by Satoshi Nakamoto. Wait, but why there are so many networks? So many “coins”? Personally I can ensure you that the current amount of the network types is temporary, it will keep on growing. The explanation of the numerous imitators is because Bitcoin is an open-source project, it can be easily modified by literally anyone, in short, Bitcoin is some kind of “template” for the other imitator currencies. All you have to do to make your own network like Bitcoin is just modify the software by take and recreate the source code, give your own network a new brand, and voila!

While the fiat money is issued by the government, Bitcoin comes from a process called mining. It is not involving real mining process of course, Bitcoin mining is again, can be done by anyone who purchases the mining contract but it is not easy, it is a super competitive business. The mining process is using particular mining software and even a Bitcoin mining hardware where you have to solve the Bitcoin algorithm in order to issue the Bitcoin by the miners. The miners who can solve the code are being given certain amount of Bitcoin as incentive; it also motivates other miners to solve the code. If you think that these whole mining processes can lead into Bitcoin inflation, the chance is low since the more miners creating the harder algorithm especially for individual miner. The trend is the miners join together and work as a team therefore they can solve the code. The miners also helped to approve all the transactions, so once again, the more miners involved, the safer it would be.

Another reason why there are a lot of different virtual currencies, because it is easier to start a new one instead of modifies Bitcoin’s imperfection. The other virtual currencies claimed to have an improved mining process compared to Bitcoin. Litecoin claimed that it has harder acceleration with dedicated hardware for its mining process so it makes Litecoin mining to be more democratic compared to Bitcoin.

In the Bitcoin principle when miners with more computing power can earn more Bitcoins is known as “proof of work”, other currencies such as Nextcoin and Peercoin are adapting “proof of stake” alternative principle which is where miners with the most virtual cash earn the most due to eliminate the excessive incentive leading to virtual inflation.

Despite of the large number of virtual currencies, they are all ranked by the amount of its circulation on the market. By January 8th 2014, Bitcoin took the first place by its circulation that worth around for almost $10.5 billion with $ 848 per coin, on second place there is Ripples with $ 2.4 billion with $0.024 per coin, third place is Litecoin with $ 613 million with $ 24.87 per coin, and the rest of the list can be seen in here.

This cryptocurrency thing is so hype but what the governments think? Did they love it or hate it?  Apparently the answers are various. Singapore has decided not to intervene Bitcoin and other virtual currencies, their circulations are allowed, the same as Germany. You can also buy sandwiches using Bitcoin in Netherlands. The United Kingdom has decided not to regulate virtual money yet the tax rules are applied, and so did Japan and Norway. The United States has issued exchange and tax guidance while Canada has maintained a low regulatory environment and open posture, and apparently the first Bitcoin ATM is located in Canada. China, India, and Indonesia did not inhibit their people to participate at their own risks however virtual currencies are not considered as a legitimate currency. Even though the amount of Bitcoin investments and transactions are so high in Beijing, China’s government constantly warn and try to ban the virtual currencies. China’s ban in December 2013 has led Bitcoin exchange rate to a fall for more than 60% even though the rate is able to rise again now.

Surely there are some weaknesses from virtual currencies. The governments don’t recommend its using because there is no specific law to protect all of the participants just in case their virtual wallets are being hacked. The exchange rate of virtual currencies is extremely fluctuant. The government also concerning about virtual money misuse for money laundering and illegal transactions such as pornography, prostitution, fire arms, drugs, body parts, and so on since virtual money using is untraceable and anonymous.

What we can conclude is from now on, we have to be proactive in order to adapt to this cryptocurrency trend. Nowadays, if you make transactions on the internet, don’t be surprised if your payment method will be offered in two ways, by Bitcoin and (or) other coin or by the conventional method via PayPal or Visa. Bitcoin, Dodgecoin, and other coins may be come and go, but the cryptocurrency breakthrough will be standing still whether you like it or not. 

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