Cryptocurrencies and Blockchain Technologies: Bitcoin and Ripple (XRP)

Introduction

Cryptocurrency is a digital currency that is transacted based on cryptography (Parsons, Rkaina and Curtis). Cryptography simply means data encryption. This concept was developed during and after the world, wars to encrypt information while communicating it (Acheson, n.p). The purpose of this was to prevent the enemy from getting wind of your plans. The technological explosion era enabled humans to perform many physical functions on digital platforms. Cryptography was one of them. In the case of cryptocurrencies, cryptography is used to conceal the transactional information as well as the ones taking part in it. It, therefore, introduces a whole new way of carrying out transactions outside the conventional norms. First, it offers anonymity to the participants of the transactions (McGoogan & Titcomb, n.p). Second, it doesnt involve the conventional channels like banks (Cara & Field, n.p).

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Digital currencies are instead based on a blockchain technology (McGoogan &Titcomb, n.p). This technology personifies the true power of decentralization. In the digital currency world, a blockchain is a distributed public database with no specific location. It exists on every computer with an internet connection. The database acts as a ledger that records all financial transactions and other valuables in the digital space (McGoogan &Titcomb, n.p). This ledger is harmoniously updated such that it looks the same to every concerned user around the world. The information in the ledger is easily examined by any person and its omnipresence makes it unhackable. This offers both security and anonymity for cryptocurrency transactions.

Bitcoin

The first digital currency to be created was Bitcoin. It is said that it was developed by an anonymous entity going by the name Satoshi Nakamoto in 2008 and introduced in 2009 online (Cara & Field, n.p). The creator has not been identified to date. Perhaps this shows how committed the developer(s) was in attaining anonymity. The first purpose of Bitcoin was, therefore, to jealously guard the identity of the people making the transactions. The blockchain technology on which it runs on added another purpose of guaranteed security of transactions. It also eliminated the control of transactions by a central entity like the way banks act as conduits of conventional transactions. In essence, Bitcoin was developed to guarantee undisputable and anonymous transactions at the same time.

Bitcoin is owned via two ways. One is by purchasing it from its current holders using conventional currencies (Acheson, n.p). It is more like a forex exchange type of transaction, except that in this case, Bitcoin acts as just another currency which is bought and sold. These types of trades occur in digital markets called bitcoin exchanges. These types of markets are numerous on the online platform. The famous ones include Coinbase, Bitfinex, and Bitstamp. While transactions involving bitcoins are secure, the digital markets are not. A good example is the hacking of Bitfinex two years ago where many bitcoins disappeared.

Another way of owning Bitcoin currency is through mining (Acheson, n.p). This process involves solving difficult math problems using computers where one gets rewarded at a certain rate (Acheson, n.p). This process is synonymous with working in the real world to earn your wages. Pooling of many computer servers together increases the mining chances of the users because they will be more efficient in solving the problems. After earning you Bitcoins, you store them in a digital wallet which is simply like a bank account. The wallet facilitates all manner of transactions involving Bitcoin in the virtual space.

It is no secret that Bitcoin has gained tremendous fame all over the world in digital platforms. It has even gained the attention of the mainstream media and is slowly creeping in into normal conversations. This is because it is a secure means of making online transactions while retaining anonymity. This makes it fertile ground for the activities of illegal businesses such as drug trafficking (Cara & Field, n.p). This is in contrast to the conventional banking system where the paper trail is easily traced back to the user. It does not mean that everyone using Bitcoin is engaging in criminal transactions. Some people just prefer to have their identity concealed even when doing legal business. There is also the aspect of safe transactions as opposed to using hard cash or other banking services. Bitcoin is also a less tedious currency to deal with when making international transactions. It is a harmonious currency that can be dealt in anywhere in the world without stressing about conversion rates as in other conventional currencies. Regular international transactions are also heavily regulated with numerous administration bottlenecks depending on the country involved. Bitcoin transactions get rid of these obstacles in international transactions.

The other reason why Bitcoin is gaining popularity is also due to its value. Many people have considered transacting Bitcoins as an investment strategy. The aim is simple. Buy the currencies at a low price, hold on to them and sell them when they have appreciated in value. Bitcoin was valued at around $10,000 in January 2018 (McGoogan & Titcomb, n.p). Despite it being a dip from the previous year, it is a whopping 100000 times increase in value compared to 2010 (McGoogan & Titcomb, n.p). This is indeed a viable investment option. The downside is that the currency is volatile but if the trends over the past decade are anything to go by, it is steadily increasing its value.

Ripple

Another type of cryptocurrency that came into the scene was Ripple. It was introduced in 2012 (Kaufman, n.p). It was however not a complete copy of Bitcoin. In fact, it exhibits a departure from Bitcoin in terms of modes of operation. The differences started right from its creation. The developers of the currency are known, Ripple Labs (Kaufman, n.p). This currency is therefore centrally owned by the company as opposed to Bitcoin which is owned by anyone who can mine or purchase it. Ripple is also not an exact currency. It is transacted via tokens called XRP tokens which are representations of the actual currency (Samani, n.p). The reason behind the development of Ripple was the problem of international money transfers. Ripple acts as a conduit between various financial institutions all over the globe who have chosen to use it. It facilitates the speedy transfer of funds across the globe with minimal interruptions. This gives it a plus over the conventional international money transfer channels which tend to be slow and tedious.

The currency was not originally intended to act as digital legal tender in its pure form. In fact, the tokens offered by Ripple are tightly regulated at a specific value and then subjected to demand-supply forces (Samani, n.p). The distinct nature of Ripple made it attract criticism mainly because most people had trouble with coming to terms with its operations and purpose. Most enthusiasts thought that Ripple would provide an alternative currency to Bitcoin albeit with similar intentions. The shock, however, is that Ripple is just a money transfer network that was specifically aimed at solving international money transfers hitches (Kaufman, n.p). The network uses tightly controlled XPS tokens as a means of exchange. The nature of Ripple cryptocurrency makes some investors doubt its potential to increase in value because of limited liquidity compared to Bitcoin.

The fears have not slowed down investors, however. In terms of market share, Ripple XPS takes the third position in the ranking of cryptocurrencies CITATION Kau17 \l 2057 (Kaufman). The reason behind the growing investor confidence in the currency network solely lies on speculation (Kaufman, n.p). Word has been going around that Ripple XPS tokens will soon be traded at Coinbase (Kaufman, n.p). This has fuelled more willing buyers of the currency as they intend to make a killing when it shows up in the digital markets. The forces of demand and supply dictate that its value must go up thus making it look more lucrative than it should be. The security of Ripple transactions is top notch though some people argue that it may be less secure than Bitcoin (Samani, n.p).

Cryptocurrencies in Modern Life

Cryptocurrencies are still a controversial means of exchange. Different financial experts have opposing views on the future of the currencies. Those with a moral standpoint fault the system for facilitating criminal transactions (Bloomberg, n.p). It is thought that cryptocurrencies could be a potential contributing factor to the entrenchment of illegal transactions such as drug trafficking. There are even cases where hackers blackmail victims in exchange for money in form of digital currencies. This makes it difficult to track them down (Roger, n.p). Another criticism against digital currency is that its value is solely based on speculation. Others argue that the currencies cannot be applied in making real-life transactions extensively (Bloomberg, n.p). Those who support the currency cite the impact of blockchain technology in financial markets (Roger, n.p). They also argue that cryptocurrency transactions are the most effective channels of carrying out secure international transactions. Other experts even challenge governments to make digital versions of their own native currencies (Bloomberg, n.p).

Traditional banks may not be under immediate threat from digital currencies but they have been challenged to adopt the innovative blockchain technology employed by Bitcoin. Four banks are contemplating the possibility of launching their own standardized digital currency. They also hope to successfully pitch the idea to other central banks of the world. They believe that the technology can indeed be utilized by banks to ease the efficiency of financial transactions which are currently plagued by time constraints and other administrative bottlenecks (Arnold, n.p).

Conclusion

In my opinion, cryptocurrencies have a future that is dependent on two factors. The first factor is whether people will keep on believing its viability and value. When people are confident enough to keep transacting in digital currencies, they will have a lifeline. The second factor is whether traditional banks will embrace it and facilitate digital currency transactions. The entry of traditional banks will perhaps solve the volatility issues of digital currencies by applying necessary controls.

Works Cited

Acheson, Noelle. What is Bitcoin? 26 January 2018. article. 7 February 2018.

Arnold, Martin. Big banks plan to coin new digital currency. 23 August 2016. article. 7 February 2018.

Bloomberg. Bitcoin Bulls and Bears. 7 February 2018. article. 7 February 2018.

Cara, McGoogan. and Matthew Field. What is cryptocurrency, how does it work and why do we use it? 6 February 2018. digital. 7 February 2018.

Kaufman, Mark. Ripple is suddenly the hottest cryptocurrency-here's what you need to know. 30 December 2017. article. 7 February 2018.

McGoogan, Cara and James Titcomb. What is bitcoin, how does it work and what affects its price? 6 February 2018. article. 7 February 2018.

Parsons, Jeff, Sam Rkaina and Sophie Curtis. What is Bitcoin? Everything you need to know about the booming 'cryptocurrency' that's all the rage. 26 January 2018. article. 7 February 2018.

Roger. Criticisms and Concerns Regarding Cryptocurrency Bitcoin. 5 January 2018. article. 7 February 2018.

Samani, Kyle. The Bear Case for XRP: Bitcoin Futures Edition. 10 December 2017. article. 7 February 2018.