The rise in popularity of cryptocurrencies in recent years has significantly disrupted the global economy in various ways. New cryptocurrencies such as the Bitcoin, Litecoin, Ripple, Ether, Dogecoin, and Dash among others have transformed the financial services sector as a result of the adoption of block chain technology (Olsen, 2018). A Cryptocurrency can be defined as tradable digital asset or money that has been built on block chain technology that is only available on online platforms (Pagliery, 2014). The cryptocurrencies use technologies such as cryptograph to secure financial transactions. As a result, many people view this new phenomenon as the lynchpin towards creating a fairer economy in the future.
The Bitcoin is the most popular Cryptocurrency in the world today. It is a decentralized digital currency that operates without the intervention of any central bank or any intermediaries (Olsen, 2018). However, inasmuch as the cryptocurrencies provide a secure and fair financial system, they have been unstable in the market in recent times (Raval, 2016). The fluctuations in the prices of leading cryptocurrencies have raised doubts amongst many investors as to the future of these technologies (Pagliery, 2014). Nevertheless, the rise and fall of the cryptocurrencies has been processioned by several factors including various aspects of information technology (Szmigielski, 2016).
Information technology plays a crucial role in securing the digital currencies. For instance, cryptocurrencies rely on technologies such as network nodes and cryptography to make the systems more secure (Pagliery, 2014). These technologies ensure that adversaries or third parties do not have access to the transactions taking place between the individuals transferring the digital currencies between themselves (Olsen, 2018). As such, this ensures that issues such as non-repudiation, data confidentiality, authentication, and data integrity are all enhanced in the systems. In this, way, technology helps to promote cryptocurrencies as being more secure forms of financial transactions as compared to conventional money (Olsen, 2018). As a result, people develop a stronger sense of trust and belief in the cryptocurrencies thereby increasing the demand for the digital currencies (Pagliery, 2014). Thus, the more the demand increases for the cryptocurrencies, the more they rise in their prices.
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Similarly, the block chain technology also facilitates the rise of the cryptocurrencies. Block chain technology can be understood simply as a public ledger where records of the transactions involving the cryptocurrencies take place (Szmigielski, 2016). The block chain technology is usually implemented as a chain of blocks where each block contains a record or harsh of a previous block all the way back to the first or genesis block within the chain (Pagliery, 2014). The block chain technology is a network communicating nodes that run the software for maintaining most cryptocurrencies (Raval, 2016). This system helps to ensure efficiency in the management of financial transactions involving the cryptocurrencies.
The three most important challenges that the Cryptocurrencies faces include integrating emerging technologies, competition from other sources of finance, and emerging banking alternatives for customers. For example, the banking industry is grappling with the challenge of dealing with new technologies that keep coming up every other day to improve business operations (Raval, 2016). Technologies such as cloud computing, the internet, and mobile applications have digitalized business operations in many industries (Pagliery, 2014).
The challenge for Cryptocurrencies is how to integrate these digital platforms to improve its operations (Szmigielski, 2016). The other important challenge the bank faces is competition from other sources of finance such as crowdfunding and Peer-to-peer (P2P) lenders. These other sources offer cheaper and better alternatives than what most banks offer, including the cryptocurrencies (Pagliery, 2014). Therefore, the challenge for the banks is how to remain relevant and find fin a competitive edge in the midst of this new challenge.
Information technology is also instrumental in the rise and fall of cryptocurrencies in various ways. For instance, communication technologies such as social media networks help to spread the news and information about cryptocurrencies (Raval, 2016). This helps to spread speculations about the prices of the various cryptocurrencies, thereby contributing to the rise and fall of their valuation and pricing.
Given the volatile nature of the cryptocurrencies in terms of their rise and fall in valuation, it is important for one to carefully determine and evaluate the suitability of investing ion the digital currencies. As such, it is critical for one to understand the benefits and costs or positives and negatives of switching to the Cryptocurrency environment such as the Bitcoin (Raval, 2016). Switching to the Bitcoin environment offers many advantages or positives to an individual. For example, the Bitcoin is a digital currency, which implies that it cannot be counterfeited. This shows that the Bitcoin can help prevent financial fraud unlike the traditional money that can be counterfeited (Raval, 2016). Furthermore, it is not easy to reverse Bitcoins arbitrarily as in the case of credit card chargebacks. This shows that the Bitcoin offers a more secure environment to conduct financial transactions.
Secondly, switching to the Bitcoin environment guarantees the safety of the financial transaction because there cannot be cases of identity theft. This is important for online transactions because the holder of the currency can only send the exact amount of money to the merchant without having to provide any further information to them (Raval, 2016). This is possible due to the ‘push’ technology that the cryptocurrencies use, unlike the pull approach that norm credit card use.
Thirdly, when using Bitcoins, there are usually no transaction fees. This is largely because the miners are usually compensated by the network, hence no extra or additional costs to added to the transactions (Raval, 2016). This shows that the Bitcoin is much cheaper to transact with as compared other forms of money.
On the other hand, there are also a wide range of negatives that one can encounter whenever they switch to the Bitcoin environment. For instance, the degree of awareness of the Bitcoin around the world is still quite low. There are not many people in the world who know about the Bitcoin (Raval, 2016). This can make it difficult to transact as not everyone can accept payments in Bitcoin. In addition, the volatility of the Bitcoin can also be a negative when switching to this environment because the prices often rise and fall on a regular basis (Szmigielski, 2016). Thus, while it is easier to make profits, it is also risky in that one can easily incur losses.
In conclusion, the Bitcoin and other cryptocurrencies can be very advantageous to the economy due to the fact that they are non-inflationary in nature. However, the deflationary aspect of the cryptocurrencies opens up more room for speculation, which harms their prices as the changes in demand and supply can be drastic based on the speculations.
References
- Olsen, K. A. (2018). A cash-free society: Whether we like it or not. Lanham, Maryland : Rowman & Littlefield.
- Pagliery, J. (2014). Bitcoin and the future of money. Chicago, Illinois: Triumph Books LLC.
- Raval, S. (2016). Decentralized applications: Harnessing Bitcoin’s blockchain technology. Beijing ; Boston : O’Reilly.
- Szmigielski, A. (2016). Bitcoin Essentials: Gain insights into Bitcoin, a cryptocurrency and a powerful technology, to optimize your Bitcoin mining techniques. Birmingham: Packt Publishing Ltd.
