The word ‘cryptocurrency’ has become ubiquitous and it seems everyone wants to know what it is. There is a budding cryptocurrency ecosystem in African countries (e.g. South Africa, Ghana, Nigeria, Uganda, Kenya and Zimbabwe), although it is usually associated with either a scam or Bitcoin. Globally, cryptocurrency is also regarded as an ‘hype or a bubble’ versus the ‘Future’. What then is a cryptocurrency?
One must understand what money is in order to understand what cryptocurrency is. Money came about in response to the inefficiency in the barter system- the lack of transferability and divisibility of goods. Unlike the Barter system which posed a lot of difficulty in transactions, money solved the transferability and divisibility problem. Money is an instrument or an item that is generally acceptable as payment for goods and services. It has four functions; medium of exchange, unit of account, store of value and a standard of deferred payment. In order to serve the aforementioned functions, it must also possess certain important features; portability, divisibility, uniformity, limited supply, and acceptability. To serve as a legal tender, money must be backed by a Central Authority.
Three types of money are recognised by Economists-representative money, commodity money and fiat money. Representative money is an item that represents something of value and is used as a medium of exchange but it has no intrinsic value. In the past, most financial systems were based on commodity money such as gold, silver and cowries. Fiat money is largely recognised in modern economies. This type of money has been declared a legal tender by a Central Authority and serves as a generally acceptable form of payment for goods and services. There has been a lot of controversies as to whether cryptocurrency is allowed to fall under the money category, simply because it doesn’t entirely follow the rules of money or completely follow the properties of money.
A cryptocurrency is more than just Bitcoin. Think about money in a digital form. However, one of the main differences between fiat money and cryptocurrency is that cryptocurrency is not backed by a central authority and cannot be used as a legal tender while fiat money can. With a fiat currency, the government decides the amount of money to be in circulation by setting reserves requirements, adjusting interest rates or by buying and selling government securities.
Cryptocurrencies have no Central authority producing and managing it; just a virtual coin created by a decentralized system. Cryptocurrencies are decentralized with everyone having equal rights. It involves a peer to peer exchange which makes it easier to transfer funds between individuals in a transaction. The middlemen- financial institutions are totally removed from the equation which results in minimal transaction fees. Cryptocurrency is regarded as a safer form of exchange that uses cryptography (The use of hidden messages such as codes, hashing or digital signatures) for security.
The question as to whether cryptocurrency is more like money is controversial. Cryptocurrency share similarities with regular currency-fiat money. Fiat money has no intrinsic value. It derives value from being declared as a legal tender by central authorities of the issuing country. Fiat money is not like commodity money which is backed by gold, it is based on full faith and credit of the issuing government. Cryptocurrency likewise has no intrinsic value. It derives value from trust and adoption. An important feature of money is limited supply.
The Central bank of a nation controls the supply of money, to maintain stable prices. Printing too much money may result in inflation and cause the value of a currency to decrease. In order to maintain its value, money must be in limited supply. Most, but not all cryptocurrencies (Litecoin, Ripple, Dash, IOTA and Eos) have a capped supply-limited supply, which is said to be an advantage. No central authority controls the supply of cryptocurrencies. The number of units in circulation for the future is included in a source code.
The first known cryptocurrency is Bitcoin. It was created by an individual or a group of individuals under the pseudonym Satoshi Nakamato in 2009. Bitcoin was designed as a peer to peer version of electronic cash which allows online payments to be sent directly from one party to the other without the need for a middleman. It is produced by using computer software to solve mathematical problems- A process known as mining. Most cryptocurrencies have a precise number of the units of their currency that would ever exist or be created which is outlined in their source codes.
For bitcoins, the total supply is limited to 21 million bitcoins with 80% of the total supply already mined in 2018. Currently, there are over 1500 cryptocurrencies in the world, with more created each day. Many of them are similar to and derived from Bitcoin which is the first fully implemented and decentralised cryptocurrency. The second most popular cryptocurrency Ethereum (Ether) proposed by Vitalik Buterin. Ether is built on the Ethereum blockchain platform- an open software platform that allows developers build decentralized applications without third party interference. Other examples of cryptocurrencies are; Litecoin, Monero, IOTA, Ripple Coin, Dash.
Cryptocurrencies are used outside regulated markets and mostly exchanged online. A few companies and online retailer platforms – overstock.com and shopify stores accept cryptocurrencies as payment for goods and services. Cryptocurrencies can also be exchanged for fiat currencies through cryptocurrency exchanges. Cryptocurrencies like Litecoin and Bitcoin cash are used to send and receive payments at little or no costs and at a very high speed compared to other payments platform that charge higher fees at a very slow speed due to their dependence on financial intermediaries.
Cryptocurrencies can be used to invest in innovative tech start-ups through a form of fundraising known as Initial Coin offerings (ICOs). ICOs offerings provide tech start-ups with the opportunity to raise capital by selling their newly created digital tokens for other established coins such as Bitcoin cash (BTC), Litecoin (LTC) or Ether (ETH).
Cryptocurrencies can also be used to make secured private transfers. Monero and dash are top cryptocurrencies primarily concerned with protecting users’ identities and improving their levels of privacy.
Although the African continent currently plays a minor role, there are some cryptocurrencies connected to the African continent such as SSureremit Token, Kobocoin, Nurucoin and Kurecoin.
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