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Sunday, November 06, 2016

Cryptocurrency - The End Of Money?

We spend a major part of our life chasing money and accomplish our dreams but its also an instrument of destruction some might say evil driving criminals to lie, steal and even murder. The existing Banking system derives enormous value from society and it is parasitic in nature. Money is the catalyst for the worst and the best of human endeavours.

All civilizations are based on currency, go back to the earliest of the earlier civilizations and you shall find how important a role money plays in the development and running of a civilization. However it has always been a subject of interest just like an unsolved mystery as to how does money runs through the whole world.

Traditionally measure of an individual’s potential was based on the amount of cash he/she used to have in his/her vaults. However time brought an enormous change and no more do we see people carrying loads of cash, in fact people now rely more on the amount they hold in their bank accounts connected via a small yet important interface and a significant invention to the humankind known as an ATM card.

But why do we need the traditional forms of currency like Dollar, Sterling Pound, Yen or Rupee when all we are doing is transferring money online? In Britain as much as 97% of the transactions are done online then why do we need banks? What if technological innovation allowed everyone to carry bank in their pockets to create a currency free from taxes and banking fees?

Bitcoin is a cryptocurrency, now what does a crypto currency means and why did it come into existence, was there really a need for such a currency.

In the ancient civilizations currency existed in the form of a commodity money (Barter system), however soon people realized the need of currency 

There are 5 important characteristics for a currency to be accepted universally

1.It should be relatively scarce
2.Easily recognizable
3.It can be cut into smaller pieces
4.One can substitute one piece with other piece of equal value
5.One can carry it around without too much trouble.

Commodity money are subject to their availability thus decreasing their durability.

Enter physical currency in the form of coins, however coins were subjected to debasement by the central authority that issued them.

Debasement is the practice of lowering the value of currency. It is particularly used in connection with commodity money such as gold or silver coins. A coin is said to be debased if the quantity of gold, silver, copper or nickel is reduced.

Enter currency notes., Currency notes were printed on the promise of an individual to pay a certain amount of gold or silver coins. Over generations the concept of paper money revolutionized and became popular in the present day countries .

In the present day countries currency notes are printed only on the order of the central bank such the Federal reserve in USA or Reserve Bank in India. The central banks are supposed to print money proportionate to the amount of gold in the bank’s reserve however this does not happen anymore. Banks print money way more than the gold reserve on the basis of concept of debt. Suppose you deposited Rs 10 lakh in your bank account. Banks are custodians of your money right? Wrong, this money deposited is now bank’s property on their balance sheets and it can do virtually anything with this money including printing new money. Lets understand this:

You hold 10 lakh ruppes but bank keeps only 1 lakh rupees while lending the other 9 lakh to say Shyam for starting a business on his promise of paying back in a certain time interval. In the bank’s computer you still have 10 lakh rupees but shyam now has 9 lakh worth of virtual money created by the bank. This is called debt.

This process of loaning put money more than the reserve is called fractional reserve banking.Thus entire system is based on trust and debtor’s promise to payback. If only 3% of people demand their money at the same time this run on the banks would reveal the truth however this happens rarely. Thus came the need of cryptocurrency -Bitcoin is the first recognizable promisable cryptocurrency.

A cryptocurrency is a digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of this security feature.

Bitcoin is a a decentralised peer to peer payment network. Since it is decentralized it cannot be controlled by any government. Bitcoin is a shared code that creates a global payment network using internet. Bitcoins are virtual currency, digital money created stored exchanged on network. But unlike virtual currency created by central banks this is created with math. Bitcoin is an open source software protocol thus anyone can use it and no one can control it and every change is transparent. Any shared info can be flawed and corrupted then how do we know that bitcoin is safe.

In finance we rely on third party like banks and other financial institutions. We trust that their digital ledger balance a financial system that cuts out these middlemen could be faster cheaper and most secure. A bitcoin is not a file on a computer, it is an entry in the publicly distributed database called the block chain. Just like a ledger, bitcoin’s ledger is a block chain which keeps track of all the transactions ever performed since its inception.When bitcoin is sent from one digital wallet to other what they are really sending is control over that part of the database code that is unique for the new owner. Every transaction performed is simultaneously updated across all the peers or the bitcoin miners in the block chain.

Each bitcoin miner has a complete and ana identical copy of the ledger and since the block chain is public it cannot be controlled by any single miner in the network. Bitcoins are created by bitcoin miners using special softwares to solve math problem and a re issued a certain number of bitcoins in exchange.This provides a smart way to issue the currency.

Incase of bitcoin math problems act as the gold reserves, the more the number of solved problems the more is the number of bitcoin generated. Bitcoins are created at a decreasing and predictable rate. The number of new bitcoins created each year is automatically halved over time until bitcoin issuance halts completely with a total of 21 million bitcoins in existence thus eliminating the question of not being scarce.

Advantages of bitcoin

Payment freedom
Choose your own fees
Fewer risk for merchants
Security and control
Transparent and neutral

Disadvantages of bitcoin

Degree of acceptance is low as of now 
Ongoing development.

Why do people trust bitcoin?

Much of the trust in Bitcoin comes from the fact that it requires no trust at all.


Coming on to the legality,bitcoin has been reported to be used for illegal purposes like trading drugs like ecstacy and cocaine, however every major currency that we know of has been used by people for illegal purposes. Even credit card systems have been hacked in recent times however the benefits of bitcoin are far beyond its potential drawbacks.

Many companies like Microsoft, Reddit, Subway, Expedia have started accepting bitcoin. Bitcoin seems to be a promising substitute however all the questions need to answered before it gets accepted widely.

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