“Virtual currencies, perhaps most notably Bitcoin, have captured the imagination of some, struck fear among others, and confused the heck out of the rest of us.” (Thomas Carper, US-Senator)
The market capitalization for the approximately 800 existing cryptocurrencies has recently exceeded 100 billion. The Central Banks of Germany and China have been exploring the possibility of digitizing money, while IBM plans to open a digital trade platform hosted on their cloud. Even the International Monetary Fund expressed an opinion on the matter: “Rapid advances in digital technology are transforming the financial services landscape, creating opportunities and challenges for consumers, service providers and regulators alike.” Business owners, managers and economy professionals that are not already familiar with cryptocurrencies should catch up with the news.
What are cryptocurrencies?
The creator of the first successful digital coin, Satoshi Nakamoto, intended to establish “A Peer-to-Peer Electronic Cash System,” which gradually evolved into a currency. There have been previous attempts of creating digital money, but what made Bitcoin functional was the peer-to-peer network that solved the problem of double spending.
What makes virtual money trustworthy?
Transparency and safety. Digital currencies work with information on a shared database called blockchain. The data is stored on the computers of all users simultaneously, so everybody can check it and receive updates at the same time. As it is hosted everywhere at once, this data is not vulnerable to hacking. Also, because the information is encrypted, it cannot be falsified.
But what made cryptocurrency revolutionary?
Freedom. Based on algorithms, the digital coin is completely independent of governments and financial authorities, who don’t have the power to regulate it. Basically, digital money is a deal between citizens of the world, not between officials. Exchanges happen between peers and are approved in a public ledger. Transfers are anonymous, worldwide-fast and equally accessible to everybody. Also, the inflation grows at a very slow rate in most digital currency systems, because each of them is designed to allow limited admissions in a database. However, there are also inflationary currencies, like Ripple.
Why is cryptocurrency gaining ground?
Despite the numerous advantages of decentralized digital money, their market value is volatile and the possibility to use them is still very limited in most parts of the world. However, cryptocurrency might become the safer option, taking into account the turmoiled global political context and its effects on the evolution of the financial system. The US is exchanging war threats with North Korea, while the insecurity of Brexit terms caused a major drop of the pound in currency trading. The immigration crisis determined radical European left-wing parties to rise in popularity while the stability of the European union depends not only on the Brexit negotiations but also on the elections happening this year across the old continent. Euro might become weak or even disappear in case of an EU fragmentation. All these factors make FX traders, businessmen, and regular citizens worry about the future value of their money.
How can cryptocurrencies help future start-ups?
As Paul Vigna once said: “Just consider this: control of a currency is one of the most powerful tools a government wields; ask anybody in Ireland, Portugal, Greece, or Cyprus who lived through those countries’ recent financial crises. Bitcoin promises to take at least some of that power away from governments and hand it to people.” In the current context of international affairs, escaping the regulations of governments and Central Banks by using virtual currency can lower the impact of an expected economic crisis. So companies of the future could be less dependent on the socio-political context of their country. But cryptocurrency is also shifting the nature of the economic expert, who must know become a tech-savvy person with a good understanding of the digital medium. Nevertheless, there are some easy to understand advantages to using digital money for emerging businesses, including:
- easy access to international markets for businesses of all sizes, without bank regulations or currency exchange costs;
- increased safety from multiple threats such as fraud, identity theft or modification of bank charges and operations;
- elimination of transaction and legal costs determined by intermediaries.
People are starting to become more and more fond of virtual currencies and even big names such as Microsoft and Tesla accept virtual money now. Business enthusiasts already know that innovation is the key of successful entrepreneurship, so understanding and effectively implementing this latest technology can only help to outgrow competitors.
Author: Philip Piletic is a freelancer, writer and traveler who loves to share his experience about business, marketing and tech. Thanks to Costa Pinchuk from Praktika.