The role and future of cryptocurrency

By Nicole Miskelly | 18 August 2014

The financial sector can no longer escape the impact of digital currency. Since the introduction of Bitcoin in 2009, other cryptocurrencies have emerged from the internet and have increased regional independence. Kingdoms and independent ethnicities have gained a sense of identity from using digital currencies, as seen in cases such as MazaCoin which has been adopted by the Lakota people, and Scotcoin which further demonstrations Scotland’s desire to be independent from Great Britain.

According to the Chancellor of the Exchequer, George Osbourne, cryptocurrencies including Bitcoin, are now being studied by officials to become officially traded in the UK. Osbourne announced the government’s plans during the launch of Innovate Finance (a new industry body established to promote the interests of the UK’s rapidly growing financial technology sector) at the beginning of August and highlighted a number of initiatives that he hopes will help fintech companies prosper. “It’s only by harnessing innovations in finance, alongside our existing world class knowledge and skills in financial services, that we’ll ensure Britain’s financial sector continues to meet the diverse needs of businesses and consumers, here and around the globe, and create the jobs and growth we all want to see in the future,” Osborne said.

The study, due in autumn, will explain the role that cryptocurrencies could play in business and is part of the government’s plan to encourage innovation in the financial technology (fintech) sector. As a part of the review, unregulated digital currencies will be studied by officials to understand the benefits and threats these currencies would bring to the economy. Osborne revealed the Treasury want to turn the UK into a centre for virtual currency trade and confirmed that with the introduction of new government legislation, banks will be required to refer small and medium-sized businesses to alternative lenders (a major part of the fintech sector) if they are turned down for finance which he believes will encourage growth and benefit the economy. 

The introduction of digital currency trading in the UK is great news for avid cryptocurrency traders but new entrants onto the cryptocurrency field may be confused by the plethora of coin options and will often adopt the most popular favoured by investors or developers. Certain coins are usually favoured due to either their superior technical abilities, greater liquidity or for simply being the cryptocurrency of a large nation. Liquidity is by far the greatest reason for favouritism amongst coins because a more liquid currency suggests that there are potentially more partners to trade with. Liquidity can also lead to volatility and an illiquid currency with a large trading volume will experience volatility (prices will rise and fall dramatically).

Cryptocurrencies explained

Crytocurrencies (also known as digital currencies) are untraceable, digitally created methods of payment that are peer-to-peer (P2P) and designed to exist outside of centralised banking and economic systems. Unlike traditional forms of money, cryptocurrencies are ‘mined’ using powerful computers and encrypted through ‘blocks’. The decentralised nature of cryptocurrencies means that technically anyone can participate in their creation and use. Some of the most popular cryptocurrencies in circulation are Bitcoin, Litecoin and Dogecoin.

Bitcoin

Bitcoin was created by Satoshi Nakamoto in 2008 and introduced as open-source software in 2009. Bitcoin will only ever have 21 million Bitcoins in circulation and provides P2P payments that don’t require a central repository or single administrator. Transactions are permanently recorded in a public distributed ledger called the block chain and approximately six times per hour (every 10 minutes) a group of accepted transactions (a block) is added to the block chain and quickly published.Bitcoin logo

Bitcoin is the leading digital currency choice and in bobsguide’s interview with Simon Hamblin, CEO of Netagio (a leading Bitcon trading platform) he said that the landscape for Bitcoin is developing quickly within the B2C sector. “The B2C community is already investing in Bitcoin, with 65,000 known retailers already accepting it and 100,000 predicted to accept it by the end of 2014.”

Bitcoin is also the most liquid digital currency and dominates market capitalisation (the market value of a company's outstanding shares) in comparison to other coins. In the eyes of investors this implies that the future of cryptocurrency adoption will continue to be Bitcoin-based until its expiry date in 2140.

Litecoin

Litecoin was launched in 2011 and is the second-largest P2P cryptocurrency by market capitalisation. Litecoin is inspired by and technically almost identical to Litecoin logoBitcoin. Based on an open-source protocol and not managed by any central authority, Litecoin is intended by its developers to improve Bitcoin.

The three main differences to Bitcoin are:

  • Litecoin network aims to process a block every 2.5 minutes, compared to Bitcoin’s 10 minutes.
  • Litecoin uses script in its proof-of-work algorithm, which offers more memory than an algorithm which is not memory-hard.
  • The Litecoin network will produce 84 million Litecoins which is four times as many as Bitcoin.

DogecoinDogecoin logo

Dogecoin was introduced in 2013 as a decentralised, P2P digital currency that features a Shibu Inu dog as its logo. Dogecoin was developed by Billy Markus as a fun cryptocurrency designed to reach a broader demographic than Bitcoin. One of the most popular uses for Dogecoin is ‘tipping’ fellow internet users who create or share content. Compared to other cryptocurrencies, Dogecoin has a fast initial coin production schedule: 100 billion coins in circulation by end of 2014 and 5.2 billion coins every year thereafter.

Cryptocurrencies threaten to disrupt banking because transactions can be authorised without having to use banks. However, after the initial panic surrounding cryptocurrency, some banking experts are seeing the positives that virtual currency could bring to the banking sector. Digital currencies could provide banks the chance to be pro-active and promote their capacity to offer a secure service in comparison to the often unsecure technology used by cryptocurrencies.

Although the future of cryptocurrencies may not be certain, one thing is clear, cryptocurrencies are changing the way we use money. With the possibility of more liquid digital currencies on the horizon, we are likely to see greater effects on the financial sector and although cryptocurrencies may not be in circulation forever, at the moment their influence on the financial sector looks set to continue.


By Nicole Miskelly, bobsguide Lead Journalist