Recently we have often come across the terms “cryptocurrency” and “bitcoin”. Impetuous discussions concerning the spread of the cryptocurrency and the change in its price still continue.
After all, what is it, the cryptocurrency, and how is it made?
Cryptocurrency is a means of payment, the accounting of which is decentralized. It is an encrypted piece of information, which is impossible to copy (hence the term “crypto” is used in the name). The term “cryptocurrency” came into circulation after the article concerning the bitcoin- virtual currency and payment system. The concept was introduced by Satoshi Nakamoto. Till now his identity is not clear. It is more likely that Satoshi Nakamoto is an individual or a group of individuals who use the given pseudonym. Nakamoto introduced the concept on 31 October, 2008 and it has begun to spread since 2009. A year after the creation of the project Nakamoto left it and passed his authorities to Gavin Andresen.
Bitcoin came into circulation with the price of only 1, however, after a short time it established a record price, surpassing the amount of 000.
Cryptocurrencies are based upon the technology of blockchain.
A blockchain is a decentralized, digitized, public ledger of all transactions[i]. The records about the transactions made in the ledger are constantly added in chronological order, which allows the participants of the transaction to follow the process without centralized registration as each participant receives a copy of the blockchain, which is uploaded automatically.
Presently, this technology is mainly applied for following and controlling the operations made by cryptocurrencies, which is actualized by a so called Distributed Ledger Technology (DLT). At the same time it is possible to encode and include any kind of document in the bloclchain. It is impossible to make changes in the downloaded unit, and all the participants can checkts fidelity by using the blockchain instead of the centralized registration system.
A block is the ongoing part of the blockchain, which registrates some or all the transactions. After finishing the process of registration of a block , it is connected to the chain which is a permanent data registration base. Once a block is over, a new one is created which is chronologically connected to the chain. Each block contains the hash (hash- a cryptographic function of 256 bits[ii]) of the previous block. As a result the blockchain contains the data of its users and the information about transactions they made from the initial block to the most recently made one.
Blockchain is made in a way that the recorded data cannot be changed, and the information is not copied but distributed in the chain.
Thus, the technology of blockchain is based upon the following main principles[iii].
The Description of Transactions
In his article Satoshi Nakamoto defines electronic currency or coin as a chain of digital signatures [iv]. Each user makes additions to the chain via the function of encoding the previous transaction (hash function) and adds the public key of the next user by appending to the end of the chain. The receiver of the deal can check the electronic signatures for identifying the participants of the deal[v].
The cryptocurrency created by a blockchain is kept in special electronic wallets. The process of getting a currency is called mining. The process is available to everyone. Anyone can begin searching for cryptocurrencies. Only a special security software program must be installed in a computer.
In case of wide use, cryptocurrencies can bring significant changes into the financial system. Due to the implementation of this innovation the transactions will become rather easy, their fees will be reduced, and the time spent on them will be shortened, as well. Though Eugene Kaspersky thinks that the cryptocurrencies will work well only00 yearsvi.
One of the advantages of the cryptocurrencies, as it has been mentioned, is the low price of transaction. Those transactions imply rather low fees, comprising 0-1% of the transaction. For comparison we can mention that in case of online payment systems the above mentioned fee comprises 2-4% of the money transacted, and in case of using the services of money transfer companies – 8-9%.
The transactions of virtual cryptocyrrency take place faster than those of real ones. In case of the bitcoins the deal may last 10-60 minutes. We should also mention that payment by cryptocurrencies is made twenty-four-hour, without any time restrictions.
Another advantage is the controllable risk of the inflation. Unlike the cryptocurrencies, the real currencies are greatly influenced by the governments and central banks, which can also influence the money supply. In case of virtual currencies inflation may occur when in a given condition of fixed supply some cases of decrease of demand or growth of the supply of the offered bitcoin are observed.
Perhaps one of the greatest advantages is the fact that the deals do not require personal data. A bitcoin user may protect their money via encryption. Unlike the other means of payment, hidden charge of money by traders is not a possibility.
- The prices canhanged dastically, and those changes are impossible to predict.
|From January to October, 2017||During last 12 months||Average annual change since 2013|
The change in the price of the cryptocurrencies in comparison with the change in the prices of the American S&P index fund and the price of gold
- As there is no control, the cryptocurrencies can be used for criminal purposes, such as money laundering, tax evasion, frauds like Ponzi scheme. Ponzi scheme is a fraudulent investment operation: the investors are promised high returns in low-risk conditions. Because of the lack of control, many can fall into the “trap”.
- There is a great probability of tax avoidance.
- The ubiquitous use of bitcoin will lead to a condition when demand exceeds supply, as a consequence of which its price will consistently grow.
The prices of services and goods will decrease, and such a deflation in its turn will have a negative effect on the economic growth.
- As any currency, bitcoin is also naturally attractive for thieves. Some cases, though few, have been recorded anyway. In 2011 one of the users announced that 25000 bitcoins had been stolen from his “wallet”. And in 2015 it became known that 50000 bitcoins, nearly 230000 US dollars, had been stolen from the Webhost Company.
The Central Bank in Armenia exhorts to abstain from the usage of cryptocurrencies, until the introduction of respective regulations[viii].
In the Russian Federation they work on introducing of specific mechanisms of control. The President of the Russian Federation states that the creation of the specific mechanisms of control is essential for minimizing tax evasion, dirty money laundering, funding of terrorism and counterfeit. It is a grave danger in a state of absence of control.
The former chief economist of the International Monetary Fund, Kenneth Rogoff predicts the downfall of bitcoin in the near future.
The President of the European Central Bank Mario Draghi has announced that only one currency can be circulated in the Eurozone, and the Eurozone countries cannot issue national currencies [ix].
But, in Japan, for instance, bitcoin and the other cryptocurrencies are officially considered means of payment.
We should mention that virtual currencies, including bitcoin, are not considered electronic money in Armenia.
Despite the noise it has made, cryptocurrency has many advantages that can be used for economic and business development. Naturally, it is too early to speak about the spread of bitcoin in Armenia. But as in other countries, in Armenia, too, the implementation of bitcoin will contribute to the economic growth. The absence of control and shady deals are of considerable danger. The best way to secure the users from the risks is the increase of the role of the knowledge and the abolishment of information asymmetry. If during a deal one party is more informed than the other, there is a great probability of cheating. On the other hand, the possession of the respective information will prevent from the loss of means of payment.
[iv]«Bitcoin: A Peer-to-Peer Electronic Cash System» Satoshi Nakamoto 2008
[v]Dotted line – identification, broken line – signature, thick line – encoding (hashing)
Authors: Lilit Ovsyan and Hakob Hakobyan. © All rights are reserved.
Translator: Lilit Maghakyan