The pandemic has accelerated the rise of a cashless economy. While the years leading up to it saw customers adopting new digital payment habits, such as an increasing preference for contactless payments and online card payments. For example, less than one in five Singaporeans now prefer using cash to electronic payment options in Singapore.
The benefits of digital payment systems are aplenty, such as instant payments and increased security. Still, they can spell trouble for those without a bank account or the elderly population, most of whom rely on cash for everyday payments.
Regardless, for better or worse, there is an abundance of evidence indicating that the world is moving closer to a near-universal uptake of e-wallets and electronic payments, with some reports claiming that 50 percent of the world's population will be using mobile wallets by 2025.
This growth in cashless payments is also paving the way for increased use of cryptocurrency, with the number of crypto users worldwide crossing 300 million in 2021.
At this point, many cryptocurrencies, such as Bitcoin, have become almost mainstream and are household names. Crypto can be traded from practically any place in the world.
What exactly is cryptocurrency?
Cryptocurrency is a decentralized, peer-to-peer digital payment system that does not rely on banks to verify transactions. Unlike fiat currencies regulated by a central monetary authority such as a government or bank, cryptocurrencies are decentralized and remain free of third-party oversight. This also means that cryptocurrency transactions are virtually untraceable - a boon to anyone who wants their financial transactions to remain completely private.
Unlike fiat currencies, which use physical money, those who own cryptocurrencies do not hold anything tangible, like a dollar bill or a coin. They own a digital key that allows a record or a unit of measure to be moved from one person to another.
Is cryptocurrency secure?
Instead of guarantees offered by a third party, cryptocurrencies are underpinned by a distributed public ledger called the blockchain. This is essentially a record of transactions. Units of cryptocurrency are created through mining, which involves using computers to solve complicated mathematical problems that validate transactions and generate tokens. Users can also buy cryptocurrencies using fiat money then store and spend them using cryptographic wallets.
Cryptocurrencies use complex cryptographic protocols that encrypt sensitive data transfers. These are difficult to duplicate or counterfeit due to the advanced coding and mathematical principles that serve as the backbone of the aforementioned protocols. These same protocols also conceal the identities of cryptocurrency users, which makes it challenging to attribute transactions to specific individuals or groups. Further, these transactions are vetted by a technology called a blockchain.
When you transfer cryptocurrency funds from your digital wallet, the transactions are recorded in a public ledger.
What is blockchain technology, and how does it work?
Cryptocurrency is underpinned by blockchain technology. It records and stores all transactions and activity, thereby validating the units of the currency. Decentralization is the core principle of a blockchain. Without a centralized authority, a network of peers uses a consensus method to validate transactions.
Imagine one of the world's largest banks storing all of their client data across a couple of servers at a single location. The chances of a single point of failure are highly possible here. What if its Internet connection is severed? What if the electricity at that location goes out? Data could be lost.
Here, a blockchain spreads the data held in that database among various network nodes at different locations.
Nodes can be any device, such as computers or servers, and form the backbone of a blockchain. Nodes exchange blockchain data with each other. This is where the transaction history of the blockchain is stored.
Once a request for a transaction is made, a 'block' representing the transaction is created and sent to every node on the network. The nodes then compete to validate the transaction. This is done using complex algorithms. Once validated, the block is added to the existing blocks, forming a chain. The process of authenticating and completing a block is known as "mining."
Once the update is transmitted across the network, the transaction is completed. All transactions on the blockchain are secured using a cryptographic technique called hashing. This uses complex algorithms to convert data into a string of characters (called the "hash"). In cryptocurrency, each time a hash is mined and a block is added to the ledger. The "miner" also earns a token, or part of a token, such as a Bitcoin.
A cryptocurrency transaction needs to be added to the blockchain to be finalized. The process, which occurs within minutes, is usually irreversible.
Blockchains attempt to be an alternative to traditional centralized financial companies - where all the power and decisions rest in the hands of a few. Entities like DAOs (Decentralized Autonomous Organizations) and concepts such as On-Chain Governance make it more democratic; it is not just the developers and the miners who make decisions anymore; the users get their say. However, a significant portion of cryptocurrency holders see it as an investment. More on this later.
But before we proceed further, here's a dime-sized history lesson.
Tracing the history
In 1982, American computer scientist David Chaum developed a "blind signature" system. This is a way of separating a person's identity from their financial transaction to create an untraceable payment system. His anonymous cryptographic electronic money was called eCash. Years later, in 1995, he implemented it through Digicash, an early cryptographic electronic payment.
Forward to 1996. The National Security Agency published a paper titled How to Make a Mint: the Cryptography of Anonymous Electronic Cash, which described a cryptocurrency system. Two years later, in 1998, computer engineer Wei Dai published a description of "b-money," an anonymous, distributed electronic cash system. That same year, computer scientist and cryptographer Nicholas Szabo designed Bit Gold, a decentralized digital currency.
Years later, in 2007, Satoshi Nakamoto, the pseudonym for the person or group who developed Bitcoin, stated that work on writing the code for Bitcoin began. In 2008, Nakamoto published a white paper describing digital cryptography, Bitcoin: A Peer-to-Peer Electronic Cash System. In early January 2009, Nakamoto released version 0.1 of the Bitcoin software and launched the network by defining the genesis block of bitcoin (block number 0), which had a reward of 50 bitcoins.
Nakamoto continued to work with other developers on the Bitcoin software. In 2011, Nakamoto handed over control of the source code repository and network alert key to developer Gavin Andresen, who became the project lead.
How does cryptocurrency get its value?
Cryptocurrencies gain value based on user demand, the coin's utility, or scarcity. Cryptocurrencies in high demand tend to surge and push prices up. Also, some factors of crypto value stem from the image and efficiency of private blockchain-related corporations that issue digital coins.
Some cryptocurrencies have a maximum supply: no new coins will be mined or produced once this supply is exhausted. For example, Bitcoin has a maximum supply of 21 million coins, which means no one can mine, create, print or issue more coins once this threshold has been reached.
How do I invest in cryptocurrency?
It can be tempting to buy a few coins just because your friends are loading up on the hottest new crypto. However, fad buying comes with risks, as prices could plummet the next day. As a result, it pays to research before you invest and find your fit among the hundreds of cryptocurrencies.
Beginner cryptocurrency investors should make the wise choice to stick to the well-established cryptocurrencies out there, Bitcoin and Ethereum. Bitcoin, followed by Ethereum, is the most popular cryptocurrency with an overall track record of increasing value over time.
You'll also come across cryptocurrencies that have little or no value, known as meme coins. Memes and internet jokes inspire these cryptocurrencies. The Dogecoin is a popular meme coin, which was inspired by the Doge meme created from a viral photo of a Shiba Inu dog. Once meme coins get popular, retail investors can boost the currency further.
Celebrities and prominent figures can also accelerate the popularity of the coin. For example, Elon Musk's tweets and posts often move markets and drive up the demand for various cryptocurrencies.
Some cryptocurrencies have been created to scam people out of money. A Squid Game-based token arrived on the market shortly after the Netflix series became popular. It increased in value to a peak of over USD 2,800 per coin before the creators sold off their units and disappeared with everyone's money. Crypto investors call this kind of scam a "rug pull."
Choosing an exchange
Once you've decided on a cryptocurrency, you need to open an account with a cryptocurrency exchange.
They are platforms of cryptocurrency exchanges that facilitate the trading of cryptocurrencies for assets that include digital and fiat currencies. Some cryptocurrency exchanges include Coinbase, Bittrex, Binance, and Kraken.
Coinbase, perhaps the most reputable platform, enables Bitcoin, Ethereum, Litecoin, and Bitcoin Cash trades. The exchange is secure and ideal for beginners. However, it has very few cryptocurrencies, and advanced traders may not find it flexible enough. Bittrex has 200 trading pairs and is suitable for big trades. China-based exchange Binance charges very low transaction fees, offers varieties of coins, and has advanced interfaces that are user-friendly for both beginners and advanced traders. However, there is uncertainty on how changing regulations in China could impact it. Kraken, too offers a lot of varieties like Zcash and Ripple. The platform allows the user to trade between Bitcoin and USD, Euros, Canadian Dollars, British Pounds, and Japanese Yen. However, it is less user-friendly when compared to other popular platforms.
In an interview with Forbes, Stephen McKeon, an associate professor of finance at the University of Oregon, said, "Important features to consider are fees, security, and whether they list the assets that you are interested in buying."
Cryptocurrency is stored in digital wallets.
Crypto wallets are software that store the private keys to your cryptocurrencies securely. Some exchanges provide wallet services, making it easy to keep your cryptocurrencies securely.
The wallet works by a random number being generated. It is used with the length of the algorithm size of the cryptocurrency's technology requirements. This number is then converted to a private key as per the requirements of the cryptography algorithm requirement. A public key is then generated from the private key.
The owner utilizes this private key to access and send cryptocurrency. While the private key remains personal to the user, the public key is shared during the cryptocurrency transaction.
You need to ensure that the exchange and wallet you want to use also supports the cryptocurrency you want to buy.
Funding your account and placing orders
Once you've chosen your platform, you need to fund your account. Most crypto exchanges allow users to purchase cryptocurrency using fiat currencies.
Once you've sufficient fiat currency in your account, you can place your order to buy cryptocurrency. Your buy order will be matched to someone making a sell order at the same price. The exchange will then make the trade, held in the wallet.
You can also use payment services like PayPal and Venmo to invest in crypto.
However, crypto is volatile, and you need to be prepared for it. Price fluctuations within a few hours are highly common.
What is crypto mining?
In the most basic sense, Crypto mining is a way of creating new coins. However, it also involves authenticating cryptocurrency transactions on a blockchain network and adding them to a distributed ledger.
The digital ledger automatically updates when someone spends cryptocurrency by crediting one account and debiting the other. Distributed ledgers like that of Bitcoin only allow verified miners to update transactions. New coins are generated to such miners, known as "block reward". A proof-of-work (PoW) consensus protocol ensures that only verified crypto miners can mine and validate transactions.
And now, the most critical question. What can you buy with cryptocurrency?
As we mentioned earlier, though cryptocurrency was intended to purchase goods and services, such transactions are rare, and most people use it as an investment. Still, it is possible to buy various goods from e-commerce websites using crypto. Here are a few examples.
Technology and E-commerce sites
Several companies like AT&T, Microsoft, Twitch, and newegg.com sell tech products that accept crypto. Shopify and Home Depot also accept crypto. E-commerce platform Overstock was one of the first sites to accept Bitcoin.
Last April, Swiss insurer AXA announced that it had begun accepting Bitcoin. Premier Shield Insurance, which sells home and auto insurance policies in the US, also accepts Bitcoin for premium payments.
Restaurants and supermarkets
Some Subway, Burger King, and Whole Foods outlets accept cryptocurrency. Need we say more?
Some luxury retailers accept crypto. For example, crypto-only luxury retailers sell Rolex and Patek Philippe.
Some car dealers like AutoCoinCars and BitCars sell cars and list their prices in Bitcoin.
Sounds great but wait. Is it legal in our countries?
The outlook of countries and regulators has varied over the years; while some have declared a total ban, many have allowed them to operate with some regulations, and a few have permitted trading in the absence of any framework. While El Salvador has approved Bitcoin as legal tender, China has imposed stringent regulations on cryptocurrencies and their service providers. In the USA, the definitions and rules vary according to the state. However, the federal government does not recognize them as legal tender. Other countries, like India, are working on policies to regulate cryptos.
As per the latest news, the Russian government has decided to integrate the circulation of cryptocurrencies into Russia's financial system,
Okay... It's environment-friendly, though. Right?
Not quite. Bitcoin's decentralized structure is the marker of its vast carbon emissions footprint. The reason? Bitcoin uses computers to solve its complex math problems, the backbone referred to as a "proof-of-work" system. "In the case of Bitcoin, this is done by having many different competitors all conduct a race to see how quickly they can package the transactions and solve a small mathematical problem," Paul Brody, Global Blockchain Leader at EY, told Forbes. This will only accelerate with more people entering the fray. All of this computing comes at a considerable energy cost.
Can this be combated? As per this Forbes article, an estimated 39 percent of proof-of-work mining is done using renewable energy. Innumerable startups like Genesis Mining in Iceland have begun to increase that figure.
"However, unless cryptocurrencies move from proof-of-work systems to "proof of stake" systems that don't require 'this same mad dash to solve puzzles,' the former verification technology is wasteful," says Simon Peters, eToro cryptocurrency market analyst.
Proof-of-stake (PoS) requires miners to put a small amount of cryptocurrency to be entered into a lottery for the opportunity to verify transactions. "Because proof-of-stake systems remove the competitive computational element of proof-of-work, it saves energy and allows each machine in a PoS to work on one problem at a time, as opposed to a PoW system, in which an array of machines are rushing to solve the same problem (thus wasting energy)," said Peters.
Some cryptos have also introduced pre-mining to avoid the computing involved in solving math puzzles to earn digital currencies. "Several other crypto-assets like XRP [also popularly referred to as Ripple] weren't mined at all but were instead produced algorithmically," said Peters. "This eliminates the need for dedicated high-speed mining equipment."
Is investing in cryptocurrency for everyone? Well, there's a considerable risk involved, considering its volatile nature, and your daily dose of crypto news can be nerve-racking. Even small ripples such as a tweet can see their values soar and dip. So, if you're a conservative investor, you may not want to lay your hands on this. But it sure looks like the way ahead.