For the layman, cryptocurrencies, especially the most prominent example, Bitcoin, are famous for two things: Those huge price rises that made instant wealth for anyone shrewd enough to get on the bandwagon; and, the fact that most of us don’t really know exactly what a cryptocurrency is and why it can have such value.
It’s a habit of the mainstream media to focus on the headline aspects – the huge rises in price, the volatility, the instant wealth – and not reflect upon what’s going on at the fundamental level with cryptocurrencies. Sure, you can easily buy and trade cryptocurrency online these days, but cryptocurrencies are more than just digital currencies or a way to make money.
Take, for example, the fundamental concept behind almost every cryptocurrency – decentralization. While each cryptocurrency will have different functions and aims, the idea of decentralization remains fundamental. By this we mean the ability to make transactions without third party involvement.
Decentralization is key to understanding cryptocurrencies
In terms of money, these third parties are essentially banks. We often don’t think about it, but money flow has always required banks to facilitate it. Indeed, even when you hold a wad of notes in your hand (Dollar bills, Rupees, and so on), it’s not really money, but a promissory note ‘payable to the bearer on demand’.
Many cryptocurrencies, at their fundamental level, have been designed to remove the need for a bank to host a transaction. The idea is that money is moved to-and-fro at a peer-to-peer level, without the need for a central bank.
But, far from being just a fashionable way to use money, the practical applications are manifold. Moreover, it seems like we have just scratched the surface of how these cryptocurrencies can provide solutions to problems across the world.
Just last year it was estimated that 1.7 billion adults across the globe do not have access to a bank account. Even China, with its rapid development and massive economy, is said to have over 200 million without a bank account.
A revolution in payment solutions
It’s a mistake to believe that not having access to a bank is simply due to a lack of technology. In Sub-Saharan Africa, the use of, for example, mobile phones to facilitate cash payments has mass-market adoption. However, there is still a third party involved here, i.e. the mobile money providers. The use of cryptocurrencies as a means of payment, which is gaining more popularity in the region, can provide faster, cheaper and more secure payments for the ‘unbanked’ across the globe.
It is this the uninhibited flow of money that makes cryptocurrencies so interesting to investors. Take the example of Ripple, a cryptocurrency network that is designed to challenge the likes of SWIFT for supremacy in the cross-border transactions market.
Financial institutions have been using costly, outmoded methods of moving money from one country to another for decades, but they are now keen to get on board with the blockchain-based technology of Ripple to meet these challenges. The implications, especially for cost-effective, small money transfers could be huge.
Moreover, there is the idea of smart contracts, most notably intertwined with the cryptocurrency Ethereum. This method of digital verification for transactions (even non-financial ones) could revolutionize small business across the globe.
It is the irony of cryptocurrencies that the huge profits in real money grab the headlines, yet it is their practical applications – many more than have been listed here – that make them worthy for investors’ attentions in the future. It’s not about the quick profit, but investing in something revolutionary.