The Emergence of Digital Currency
By Jones William & D. S. Mitchell
“Cryptocurrency is a digital or ‘virtual’ currency that uses cryptography for security,” Wikipedia
Who is Satoshi Nakamoto?
The first of two milestones in the development of cryptocurrency took place in 2008 and 2009. The domain name bitcoin.org was registered on August 18th, 2008. In 2009, a programmer/inventor known only by the pseudonym, Satoshi Nakamoto announced he had found a way to build a decentralized digital cash system. The mysterious “Satoshi Nakamoto” published a paper “Bitcoin: A peer-to-peer Electronic Cash System”. In his paper Nakamoto described a totally decentralized digital currency, with no server or central authority, thus setting the ball rolling for the emergence of digital currency.
Minimizing Duplication
Digital currencies use extremely complex encrypt sensitive data transfers to secure the units of exchange. In this regard, digital currency developers build complex code systems based on advanced computer engineering and mathematics principles. This approach renders them almost impossible to break, thus minimizing chances of duplication. The adopted protocols for digital currencies also help mask the identities of cryptocurrency users, thus making it difficult to attribute fund flows and transactions to specific people.
Bitcoin Software
The first digital currency transaction occurred on Jan 12th, 2009 when Nakamoto sent ten bitcoin to Hal Finney, legendary cryptocurrency pioneer computer programmer. Bitcoin was valued for the first time in 2010. The valuation came specifically after a person swapped 10,000 bitcoin for two pizzas. Following the successful transaction, bitcoin began to increase in popularity. Altcoin, the first alternative to Bitcoin appeared in 2011. Altcoin improved on the original Bitcoin design by offering greater anonymity and speed. Other digital currencies emerged during this period including Litecoin and Namecoin. *As a side note, eight years after the sale of two pizza’s for 10,000 bitcoin those same 10,000 bitcoin are worth $82 million*.
Money for Services
In 2009 the bitcoin software was made available to the public. The bitcoin software allowed people to follow a digital currency transaction. A cryptocurrency “miner” is responsible for ensuring the authenticity of information and updating the blockchain with the transaction. The mining process involves competing with other cryptominers to solve complicated mathematical problems with cryptographic hash functions that are associated with a block containing the transaction data,” according to Blockgeeks.com. The first digital currency miner to crack the code is rewarded by being able to authorize the transaction, and in return for the service provided, cryptominers earn small amounts of cryptocurrency for themselves. In order to be competitive with other cryptominers, though, a cryptocurrency miner needs specialized computer hardware. Through the mining process, new digital currencies were created, and the transactions recorded and verified on the blockchain.
Stolen Bitcoins
Nothing new goes smoothly. 2014 became the year of scandals, scams, fraud and theft for digital currency. At the beginning of 2014 Mt. Gox was the world’s largest bitcoin exchange, controlling over 70% of all world-wide bitcoin transactions. On February 28, 2014 Japan based Mt. Gox suspended trading, closed its website and exchange service and filed for protection from creditors. By April Mt. Gox began liquidation.
Reported Liabilities
Mt. Gox reported that it had liabilities of 6.5 billion yen and only 3.84 billion yen in assets. Mt. Gox had “lost” or had “stolen” nearly 750,000 of its customers’ bitcoin, and 100,000 of its own bitcoin, totaling around 7% of all bitcoin, worth $473 million at the time of the filing. Mt. Gox released a statement saying, “The company believes there is a high possibility that the bitcoin were stolen”. Blaming hackers, CEO Mark Karpeles said technical issues “opened up the way for fraudulent withdrawals”.
Ex-CEO Faces 10 years in Prison
Injured clients quickly sued Mt. Gox. Japanese authorities arrested Karpeles in August 2015 and charged him with fraud, embezzlement and manipulating the Mt. Gox computer system to increase the balance in an account—this charge was not related to the missing 850,000 bitcoins. Prosecutors charged him of misappropriating 315 million yen ($2.6M) in bitcoin. Specifically prosecutors accused Karpeles of depositing client’s bitcoins into Mt. Gox trading accounts and then moving Bitcoin into an account he controlled about six months before Mt. Gox failed in early 2014. By May 2016, creditors of Mt. Gox had claimed they lost $2.4 trillion when Mt. Gox went bankrupt, for which they asked reimbursement. The Japanese trustee in March 2018 said that enough bitcoin has been sold to cover all creditor claims.
Blockchain Technology
In 2016, Ethereum and other ICO (Initial Coin Offerings) entered the market. Unlike Bitcoin, Ethereum used Ether to facilitate blockchain-based smart contracts and apps. Blockchain is a form of distributed ledger technology (DLT). This means that it maintains records of all digital currency transactions on a distributed network of computers, but has no central ledger. Digital currencies continued to grow in 2018. For instance, the increasing popularity of Bitcoin in the cryptocurrency markets led its price to hit a remarkable $10,000. Its value has since fallen off dramatically and is currently in the $3,800 range.
Digital Currency Trends
Since Satoshi Nakamoto published the code of the first digital currency new cryptocurrencies emerged rapidly. For the past ten years, a lot has happened to the crypto community, manifested by acceptance growth, price roller coasters, exchange hacks, fraud and more. Observers saw 2018 as mostly a year of maturation and correction. 2019 promises to bring several trends together to increase digital currency share of monetary transactions worldwide.
Up, Up, and Away
Over the last eight years more users of digital currencies have emerged. Since it’s introduction Bitcoin has become the most well-known and most widely used cryptocurrency. According to CoiMarketCap, there are more than 1,600 other active cryptocurrency models, including Litecoin, Ethereum, Zcash, Ripple, and many more. It is expected that more and more money will flow into Bitcoin and the crypto coin ecosystem. Notably, the market cap of all crypto coins during this period rose from $11 billion to over $300 billion.
Banks Show Interest
As a result, banks such as Deutsche Bank, Citi Bank, Barclay’s and BNP Paribas have shown an interest in working with bitcoin. Meanwhile, blockchain, the technology behind Bitcoin and other digital currencies sparked a revolution in the fintech industry. “Fintech helps companies and consumers better manage their financial operations by using specialized software and algorithms on computers and smartphones” according to Wikipedia.
Exchange Traded Fund
As of this writing there are no bitcoin ETF’s trading in the United States. The use of ETF’s will dramatically widen the bitcoin market base. Soon large investors and traditional institutions will feel more comfortable about entering the digital currency market with lessened risk. An Exchange Traded Fund is a “marketable security that tracks a stock index, a commodity, bonds, or a basket of assets,” according to Wikipedia. This process allows investors to buy into the ETF without going through the complicated process of trading bitcoin itself. This approach will help tamper down the fears of bubbles and Ponzi schemes as institutional investors and enterprises join the crypto community.
Rise of DEXs
Decentralized digital currencies require appropriate marketplaces. Even though there are many decentralized exchanges (DEXs), they are limited. It is for this reason that a rise in decentralized systems is expected in 2019 whereby users will be able to make deals using their private bitcoin wallets without involving third parties.
How Digital Currency And Monetary Policies
The proliferation of digital currencies prompts the need to look at their impact on the established monetary policy by governments. Many people believe that the large-scale adoption of cryptocurrency could have a negative effect on the economy regarding monetary instability. However, digital currencies constitute a minuscule part of the global financial assets. As the popular cryptocurrency, bitcoins market capitalization accounts for 1.3% of $7.6 trillion global banknotes and coins. Further, it accounts for 0.11% of the $90.4 trillion global money supply. This implies that digital currencies have an insignificant impact on government monetary policies. However, the vice chair of the U.S. Federal Reserve Bank, Randal Quarles believes that the wide-scale usage of digital currencies is likely to result in severe financial stability issues.
Sources:
https://coincenter.org/entry/how-do-cryptocurrencies-affect-monetary-policy
https://coincheckup.com/blog/cryptocurrency-trends-for-2019/
https://www.moneycrashers.com/cryptocurrency-history-bitcoin-alternatives/
https://successresources.com/cryptocurrency-history/
https://www.telegraph.co.uk/technology/digital-money/the-history-of-cryptocurrency/
https://login.bluehost.com/hosting/webmail?_ga=2.101173697.1924484223.1530299101-957915194.1530299101
https://en.wikipedia.org/wiki/fintech_in_India
https://www.bookgeek.in/
