BITCOIN— a familiar name nowadays getting in the spotlight more and more with each passing year. If you have heard of it before, you know this much that bitcoin is a digital currency. But how does a digital currency work? Or what is the use of it when we already have digital banking? In today's blog I'm going to explain the basics in the simplest term possible.
First things first— we need to know how currency works to understand how it can be so much in an abstract form i.e. digital form. Let's look at the history of transaction.
At the beginning of civilization, people would exchange goods for goods in return and thus obtain what was necessary for them. This system had its limitations, so later in the history people moved onto using metal coins (gold, silver) to buy stuffs. Since these materials are precious to people's standard and can't be obtained easily, they worked well as currency. However, carrying a good amount of coins everywhere was troublesome and so the currency had to be updated once more. This time came our ever-familiar bank note. But come to think of it— bank note is a mere piece of paper. How did it survive as a currency? Well, the government was able to convince people that bank note has value. Everyone accepts that piece of paper in exchange of their goods. That's why bank note works as currency even though it's not made of precious material. If sellers would sell goods in exchange of tree leaves, then leaves would be a currency. But leaves don't qualify as currency because of it's 'abundance'.
That means— 'anything' can be currency as long as everyone agrees to accept it in exchange of their goods and services. But the authority has to make sure that this 'anything' doesn't become available as air (cuz otherwise, inflation will be an issue). In case of bank note, the authority is the Central Bank and this bank maintains the availability of this paper note by giving it a unique identity and controlling how much of it will flow in the economic system.
To sum up, currency can be anything, in any form. The latest addition to the transaction system- digital banking makes it even more clear. You can buy stuffs using you debit card. No physical form of money is needed here. Spending means the number of your account balance decreases and earning means the number increases. Now when you hear that money can be in digital form, it makes sense, right? The world's already been introduced to digital currency and it is— cryptocurrency. Bitcoin is 'one' kind of cryptocurrency. Yes, there are lot more cryptocurrencies out there. Bitcoin is the first ever cryptocurrency which made its debut in 2009. (The creator of bitcoin is Satoshi Nakamoto but that's a pseudonym and no one is sure even to this day who is/are behind that name.)
Now the most important question— what is the necessity of cryptocurrency? Well, the biggest perk of this currency is that it's decentralized. Think of the conventional economic system. One's money is saved in a bank. All transactions happen through a bank. This is a centralized system. But with cryptocurrency, no such middleman is needed. Saves a ton of paperwork, time and money! Also, international transactions take very little time with this peer-to-peer exchange.
But if there is no central organization, how does the system run and where is the security? To get this question's answer, let's take a look at how a cryptocurrency works. I'll use the example of bitcoin only.
Like data is added to a spreadsheet, every transaction made in bitcoin around the world is recorded in a ledger. This huge ledger is something called 'blockchain'. Each transaction is recorded as a 'block' in the blockchain. Everytime a new transaction happens or a block is added, this ledger gets updated. However, adding a block to the chain is not so easy. It requires solving a cryptographic puzzle and verification of the network. Tampering with a transaction is extremely difficult crossing this intricate system. Also there's a copy of this ledger in every user's computer and it gets updated with every change made. That's another reason why fraudulence is extremely difficult with so many eyes tracking the same system. This makes bitcoin and all other cryptocurrency transactions very secured in a decentralized system.
Bitcoin has some disadvantages like its value can fluctuate like crazy over a short period of time and other stuffs. Although cryptocurrency is still not a part of the mainstream economy, it's advantages make it the potential currency of the future. With more and more people realizing it, bitcoin and other cryptocurrencies are becoming a decent field of investment day by day. When bitcoin first appeared, it attracted little to no attention. In 2009 one bitcoin's value was $0. In 2011 the value reached to $1. And guess what? When I'm writing this, one bitcoin's value is around $33,000 (28 lakh in taka)!
Cryptocurrency is giving us a sneak peek preview of what future transactions might look like. Future sounds pretty far away. But how long it will take it to arrive— well, only time will tell.