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Cryptocurrencies  - the Future of Payment?

Digital money - also called cryptocurrency - has arrived in the offline world. In Germany the trade acceptance of digital money is growing steadily. Japan has been officially recognizing online currencies as a payment method since April. In the "Bitcoin City" of Arnhem in the Netherlands, the alternative currency is already used in most shops. But where does this invention come from and what does it mean for the future of the payment business?

Creation by pioneer Bitcoin

The cryptocurrency Bitcoin is one of the most exciting technological developments of recent years. In 1998, for the first time, the basic idea of a digital currency emerged. The computer scientist Wei Dai formulated the concept and publicized it via the Cyberpunk mailing list. Satoshi Nakamato picked up the idea - it is to this day unclear whether this is a person or a group. In 2008, the paper “A Peer-to-Peer Electronic Cash System” (P2P) was published. The cryptography-based Bitcoin protocol was created. In early 2009, the currency bitcoin was officially introduced. The price has fluctuated since then - but at the beginning of March 2016 the cryptocurrency Bitcoin reached a new record value and was worth more than an ounce of gold. Bitcoin has a market share of over 40 percent and is thus by far the market leader.

Specifics of Bitcoin and cryptocurrencies in general

Bitcoin is considered to be the bedrock of the cryptocurrencies, with many of them acting similarly (see below). The system works from person to person, without a bank or a intermediary interposing. The currency is therefore not country-bound and all transactions are recorded in a decentralized database. This system is very typical of cryptocurrencies. The number of currency units is usually predetermined for a certain quantity and no further ones are generated. At Bitcoin, the limit is 21 million. In addition, the currency cannot be copied infinitely and is therefore protected against inflation.
Bitcoin golden coin

How do cryptocurrencies develop?

Contrary to traditional cash, cryptocurrencies cannot be printed. They must therefore grow in other ways. In the case of Bitcoin and most other digital currencies, the search is performed for the units. This is called "Mining". Here cryptographic tasks have to be solved and the system rewards correct results with Bitcoins. In the meantime, these tasks are extremely difficult and users can form pools to get to the target faster. Since the area is not yet legally fully developed, it is still operating in gray areas. For example, the Mining feature is hidden in free apps for tablets and smartphones. Newer cryptocurrencies have, however, revised this system so that everyone has a chance and that not only the computer performance counts. In the best case, the units are to be allocated on a random basis.

Danger from cryptocurrencies

The value of a single unit results only from the fluctuation of supply and demand. In the past, this had the advantage that bitcoins have gained in value due to the high demand. However, it is still a manageable market. In other words, as quickly as the currency gains in value, it can also drop again. This is a constant threat: the market is still very volatile and unpredictable. Two-digit price changes within a few days are not uncommon. Therefore, cryptocurrencies, especially bitcoin, are sometimes subjected to speculators and criminals.

Variety of cryptocurrencies

Bitcoin is far from being the only cryptocurrency. More than 700 different digital currencies exist online. Some have a similar structure, others use different approaches. We have listed the most famous ones for you.

Ethereum

After Bitcoin, Ethereum is the second largest and most-used cryptocurrency internationally, with a market share of about 27%. Specifically, Ethereum is not a cryptocurrency, but a platform for processing smart contracts, i.e. computer protocols representing contracts. However, Ethereum also includes a cryptocurrency called Ether. Upon entering the market, Ether was a lot more expensive than Bitcoin, at a cost of 8.40 €. Currently the value is around 200 €. Ethereum is based on the blockchain technology, like Bitcoin.

Ripple

The world’s 3rd largest cryptocurrency, Ripple, is a combined trading platform and payment network. The currency-neutral network has its own cryptocurrency, under the abbreviation XRP. The concept of Ripple consists of the verification of promissory notes. Within the network, account balances and debtor-creditor relationships are visible for everyone. This procedure ensures that money that is deposited with a bank can also be repaid. Unlike bitcoin, the "production" of Ripple currency is not possible by mining. Money can only be circulated by Ripple Labs itself. This currency is also limited in quantity. The limit was set at 100 billion. 99 have already been generated, 55 of which were distributed to users. Basically, the Ripple Labs is a digital bank. The company maintain full control, the users have no power. The value of ripple is currently 0.20 €, which is very low compared to Bitcoin and Ether.

Litecoin

The open-source project Litecoin is very similar to the Bitcoin currency. Its value is similar to the Euro value. Therefore, not gaining value as fast as Bitcoin. At the start, in early 2016, a unit of Litecoin cost about 3€. Nowadays, it is worth around 41€. The production of new Litecoins takes place via mining. The currency can be exchanged against Bitcoins, or any other "normal" currency. Litecoin is managed like Bitcoin decentralized over a P2P network. Unlike the industry leader, Litecoin Blockchain creates new blocks every 2.5 – compared to every 10 minutes. In addition, the system "Scrypt" is used. This way, the makers want to prevent an excessive centralization of mining.

Other often used cryptos are Dash, Monero, NEM, Zcash and Factom.

What does the future hold?

Experts believe that Bitcoin and similar cryptocurrencies have no chance of spreading as real currency alternatives as long as speculators and criminals cannot be kept at bay. This would require a regulating central authority. But, blockchain currencies cannot work with such a control mechanism. Cryptocurrency providers will face difficulties in the long run due to the problematics mentioned, such as speculators, criminals, etc. Blockchain technology could, however, revolutionize the entire industry. Some countries are even considering organizing their land registers this way. The German stock market and the Bundesbank are currently investigating how blockchains can also be used in bonds trading. A similar reflection is underway in Wall Street. Could this perhaps be the beginning of a revolutionized payment future?

Sources:

Euro CIS – Cryptocurrencies
Internet World – Business
Kreditkarte.net – Digital currencies
t3n digital pioneers - Bitcoin
Welt N24 – Opinion Bitcoin

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