Everything you need to know about Cryptocurrency

Although it would be unwise – and probably illegal – for us to offer advice one way or the other about whether businesses should invest any time or money in cryptocurrencies, it’s certainly a subject whose basics is worth learning about.

This is particularly true if you look at the underlying technology of cryptocurrencies – blockchain, which has much wider applications than providing a basis for cryptocurrencies.

Blockchain has gained tremendous momentum over the past few years for one main reason – it’s all about security.

But security is boring so let’s talk about cryptocurrencies.

What is cryptocurrency and why should it be of interest to business development managers?

The definition of cryptocurrency, and whether it’s different to digital currency or virtual currency is something that people discuss from time to time.

But maybe it’s better to start with a simplified description of the traditional, real-world financial system, because that is complicated enough for now.

So, you’ve got nation states, such as the US, China, Russia and and so on. Each one of those countries has a central bank, which issues the state currency.

So, for the US, its currency is the dollar, for China it’s the renminbi – sometimes called the yuan, and in Russia, it’s the rouble.

In the case of Europe, some countries in the European Union – Germany, Italy, France and so on – have decided to replace their national currencies with a regional currency, called the euro.

The euro, too, is backed, underpinned, or guaranteed by a central bank, the central bank of the EU, officially called the European Central Bank.

The reason why this is important is because if any of the above real world, national or regional currencies were to start losing its value or fall victim to currency speculators or face any other dangers, not only would the central bank which backs that currency take action to protect it, it’s likely that the government of that nation would also take supportive action too.

Cryptocurrencies, meanwhile, are not backed by any central bank or government. In fact, and as a consequence, cryptocurrencies are viewed by governments and central banks with a mixture of trepidation, scepticism and intrigue. Cryptocurrencies are seen as being outside the traditional governmental-central bank currency framework, though not outside the economy, nor illegal.

bitcoin and motherboard

What is it then?

A simple definition of a cryptocurrency might be: a currency that is directly underpinned by computer cryptography and stored on a public ledger on the internet using a system of recording transactions called blockchain.

What is blockchain? What’s the difference between a cryptocurrency and a digital or virtual currency? What’s a public ledger? Who are you anyway?

Let’s first try answering the one that some people might know about, or can imagine more easily: What’s the difference between a cryptocurrency and a digital or virtual currency?

A cryptocurrency, as explained above, is a currency that is directly the result of a system of storing encrypted information on the internet.

It’s different from the digital or virtual currency that you might get inside an online computer game.

The digital or virtual currency you might get inside a computer game is not considered a cryptocurrency because it’s not directly the result of the same cryptographic system, or perhaps any cryptographic system directly – maybe indirectly as part of the overall game or the way it’s distributed over the internet, but not necessarily directly.

It’s just like a voucher or gift for use within that game, and doesn’t necessarily have any special watermarks or anything.

For example, you may use your credit card or your PayPal account to buy the currency used in the game Second Life, called Linden dollars.

Those Linden dollars can be used in Second Life but they can’t be used elsewhere for a number of reasons.

They’re not secure enough for a start. Plus, there may be laws about passing off false currencies, although if it’s described as barter, anything can be exchanged for anything else if the people involved in the transaction freely agree.

A game currency can perhaps be likened to a store voucher, a gift token, which can only be used inside that store or another branch of that store.

No other store will accept that token since you gave some other company the money to buy it and a different store will get nothing out of it.

Such game currencies are obviously not backed by any central bank, which is one similarity they have with cryptocurrencies.

And, of course, real-world currencies – like the US dollar, euro and so on – do take digital form, and a whole world of encryption technology is used to protect them, but, as suggested above, they are backed by central banks, the government, and, ultimately, military force.

Cryptocurrencies, ultimately, do not have that sort of power – or brute force in the literal sense – behind them.

The words “virtual” or “digital”, then, are – arguably – not the key distinction between the real-world currencies backed by central banks and the cryptocurrencies that are now becoming globally popular, leading to this article.

Think of it this way: the notes and coins we use every day started out as just paper and metal, and only had layers of protection – watermarks and so on – incorporated into them over time; cryptocurrencies emerged from the other direction – they were borne out of cryptography.

What is blockchain?

It’s lucky that this article is an overview, rather than a deep-dive into the technicalities and computing jargon, because it can get very complicated down there.

But essentially, blockchain is the root of all evil, or cryptocurrencies – depending on your point of view.

Blockchain is the encryption system which has given rise to cryptocurrencies.

A lot of people may not know what packet technology is. It’s where something is separated into packets, and those packets are separately transmitted through the internet, perhaps along separate routes, only to be pieced together at the end into its original form.

So, for example, you may send a message: I am giving you some money.

Each letter, space, and punctuation mark in your message could be separated into individual packets and travel through the internet in the form of individual packets, each of which could be encrypted using a different encryption system, and then put together again at the end, in the right order.

Each packet could travel through the internet at a different speed, and through a diverse range of geographies, so anyone intercepting a portion of it would not be able to make anything of it.

Blockchain is even more complicated than that, which is why it’s seen as ideal for communicating information of many kinds, including currency transactions.

The first currency based on blockchain was bitcoin, which was launched eight years ago and is still the most widely used, most valuable cryptocurrency today.

The record of a blockchain transaction is kept in something called a public ledger.

What is the public ledger?

This was the most important invention of the bitcoin blockchain – the facility to enable a wide variety of computers to record transactions without the need of a central database.

So, each node in a peer-to-peer network, combined with a distributed time-stamp server, is said to play a role in recording transactions. And because it’s public, anyone can look up a transaction and verify it if they have the necessary technical skills to do so.

While this decentralised, public aspect is seen as a strength of the blockchain system of cryptocurrency transactions, the lack of privacy is one of the key concerns that traditional banks and governments have reservations about.

How can businesses implement cryptocurrency with the technology they have?

For enterprises, there are many ways to implement blockchain into their business.

The simplest way is to join any of the cryptocurrency platforms on the web, and then offer the service as an alternative form of payment for your goods and services.

According to Investopedia, these are the six most important cryptocurrencies – not including bitcoin, which the website says “inspired” the others, referring to them as “altcoins”:
Litecoin
Ethereum
Zcash
Dash
Ripple
Monero
Other cryptocurrencies include:
Steem;
NXT; and of course
Bitcoin

There are cryptocurrencies being launched all the time – usually referred to as “initial coin offerings”, as though they were shares in companies.

That might be one option for some businesses to raise money, and investors to see high returns, especially as recent news reports suggest that a $100 investment in bitcoin could have returned as much as $75 million in seven years.

Ethereum has also skyrocketed in value several thousand per cent in the past couple of years, so it’s up to you as an investor.

But aside from investing in the cryptocurrencies themselves, enterprise can use them for a variety of things such as payment. It might be a way of avoiding disruption to the business later on.

Think of it like incorporating PayPal into your website or e-commerce business as a way for your customers to pay you.

But with PayPal, you can directly transfer funds from your PayPal account to your bank account.

With bitcoin, or other cryptocurrencies, you would need to first go to a bitcoin or cryptocurrency exchange, and first sell your bitcoins or whatever for US dollars, euros or whatever real-world currency you want, and then, of course, you can transfer that real-world currency into your bank account.

An increasing number of banks are supporting bitcoin and maybe other currencies as well, but without the ultimate backing of the central bank – which sets all rules for banks – they would somehow have to exchange it into recognised real-world currencies before making the money available to their customers.

Basically, they can’t just accept bitcoin and pay you in bitcoin, and do the whole transaction in bitcoin.

But it’s worth keeping tabs on this as the situation is developing all the time.

Other uses of blockchain, which remember is the cryptographic basis for cryptocurrencies, include security.

Top automakers are using blockchain to secure the communications of connected cars. As they become more like computers, road-going vehicles are becoming more vulnerable to hacking, so it’s becoming a pressing concern.

Security is, of course, applicable to most if not all industries, since everything is computer-based, so that may be a good place to start applying blockchain to your business.

Most of the leading tech companies offer blockchain services, and here is a list of some that offer “blockchain as a service”:

IBM
Microsoft
Oracle

Amazon, Google, and the other incorporate blockchain into many of their own products, services and processes. Google has even invested $25 million into a company called CurrencyCloud, a cross-border payments provider which the search giant could incorporate into a cryptocurrency payment system of its own.

Many observers often wonder if large companies like Google and the others should launch their own cryptocurrency. These companies are so massive, multinational and conduct business almost entirely online, it may be a viable option.

Similarly, other companies could launch their own cryptocurrency, but adopting an existing one might be a good starting point, as Microsoft has done with etheruem, in partnership with JPMorgan.

JPMorgan is, of course, one of the world’s largest financial institutions, and it’s one of many which are exploring the opportunities that cryptocurrencies might offer them.

Goldman Sachs, for example, has gone so far as to patent a cryptocurrency of its own, which it calls “setlcoin”, presumably pronounced “settle coin”.

But while it might seem inevitable that cryptocurrencies will one day be accepted as widely as traditional, real-world currencies backed by central banks and governments, it might be worth being cautious.

Blockchain looks like the thing to learn about and adopt as part of the enterprise. That would seem a safer investment, since it has many applications beyond or separate from cryptocurrencies.

Developing from that starting point, perhaps cryptocurrencies would be a natural next step.