In our last Target Tech Bytes, we dipped our toe into the world of Blockchain technology. The digital ledger that allows the exchange of units of value, digitally! In this month’s edition, let’s dive a little deeper and explore the upsurge in cryptocurrency and why it’s a topic that firms can’t afford to ignore.
The rise of crypto
To add a little perspective before we continue, the first real-world trade of cryptocurrency in 2010 was 10,000 Bitcoin (BTC) for two pizzas. A day known famously as ‘Bitcoin Pizza Day’. If Laszlo Hanyecz had kept hold of his 10,000 BTC at the peak of the cryptocurrency’s pricing in 2021, it would be worth an eye-watering $630 million. The most expensive Papa John's pizzas of all time!
It’s revolutionising how we use money; its popularity is skyrocketing and even the Bank of England are considering introducing a new digital currency to meet evolving needs of businesses and consumers.
Unless you’ve been living under a rock, I’m sure you’ve heard all about the boom that is Bitcoin and, more recently, the very public crash of crypto exchange FTX, causing a tidal wave of uncertainty in the crypto world. There’s no doubt about it, cryptocurrency is here to stay and if anything, the recent events with FTX seem to have shone an even brighter spotlight on the future of crypto.
Over to the Oxford English dictionary for their definition.
- a digital currency in which transactions are verified and records maintained by a decentralized system using cryptography, rather than by a centralized authority.
"decentralized cryptocurrencies such as bitcoin now provide an outlet for personal wealth that is beyond restriction and confiscation"
The techy bit! What does it mean?
Cryptocurrencies are digital currencies that use cryptographic technologies, such as Blockchain, to store and keep secure. Unlike fiat currency, physical money that can be exchanged in the real world, cryptocurrency exist online, and transactions are recorded in a public digital ledger. Cryptocurrency is stored in a digital wallet.
The name cryptocurrency is born from the cryptographic procedures that allow the currencies to be bought, sold, and exchanged. They are decentralised, and they don’t have a third party, such as a government, issuing them or verifying transactions.
Without the power of the underpinning technology, Blockchain, the crypto world wouldn’t be where it is today. Forbes reports that as of February 2023, globally 21,910 cryptocurrencies exist, with a market capitalisation totalling a colossal £697 billion.
Units of cryptocurrency, often referred to as coins or tokens, are created by a process called mining. A community of people worldwide known as miners solve complex cryptographic hash puzzles to verify each transaction, which is then added to the Blockchain database. The units are stored in digital wallets, spent, or sold via exchanges.
The term cryptocurrency is used as a bit if a catch all, however, there are several different types as follows:
- Utility: They serve specific functions on their blockchain. An example is Ethereum
- Transactional: Tokens designed to be used as a payment method. An example is Bitcoin
- Governance: Tokens represent voting or other rights on a blockchain. An example is Uniswap
- Platform: These tokens support applications built to use a blockchain. An example is Solana
- Security tokens: Similar to traditional securities, security tokens represent digital ownership of an asset. An example is Blockchain Capital.
So, Bitcoin was the first successful crypto, but was it the first created?
When we think of cryptocurrency, we immediately think of Bitcoin. Yet several predated the popular crypto, except the older currencies didn’t attract public attention until after Bitcoin was launched. The first concept of cryptocurrency was developed in 1983 by a cryptographer called David Chaum, this paved the way for the first called eCash. Many attempts were made to create a viable cryptocurrency following this concept, but these were unsuccessful. The world’s first successful cryptocurrency was Bitcoin. It’s remains to this day the largest in value and most popular.
A White Paper published by a person (or group of people) known as Satoshi Nakamoto in October 2008, introduced the functionality of Bitcoin on a Blockchain network.
The first 50 Bitcoins were mined on the Bitcoin network in January 2009 and held virtually no value at the time. Throughout 2009 Bitcoin grew in popularity and continued to be mined. In 2010 the first ever exchange of Bitcoin took place to purchase those now infamous Papa John’s pizzas.
The ripple effect of Bitcoin
Following the first Bitcoin exchange in 2010, the number of people exploring cryptocurrency grew. With the demand increasing rapidly, so did its value. The Bitcoin exchange was and remains, extremely volatile. As quickly as the price per BTC can skyrocket, it can just as quickly come crashing down. This hasn’t deterred others from creating new cryptocurrencies, since Bitcoin thousands of new cryptocurrencies have been established and are actively exchanged to date. The top five cryptocurrencies as of February 2023 are:
Binance Coin (BNB)
US Dollar Coin (USDC)
Do the advantages outweigh the disadvantages of cryptocurrency?
The advantages and disadvantages of cryptocurrency very much cross over with those of the Blockchain technology it relies on.
Some advantages include:
- Speed – a cryptocurrency transaction is faster than standard money transfers as it doesn’t involve a trusted third party such as a bank
- No single point of failure – the decentralised nature of the technology used, means that they do not collapse at a single point of failure
- Traceability – each transaction is recorded on a blockchain and is immutable
- Popularity – cryptocurrency popularity is growing at speed and is now a widely accepted form of payment in industries such as fashion.
Some disadvantages include:
- High energy consumption – the amount of computer power needed to mine cryptocurrency is considerably high, making it environmentally unfriendly
- Volatility – the price of cryptocurrency is highly volatile; it could peak or crash at any given time
- Lack of regulation – cryptocurrency is relatively new and whilst the FCA have oversight to check that crypto asset firms have effective anti-money laundering and terrorist financing procedures in place, generally the industry is not currently regulated
- Attract illegal activity – whilst the advantage of the blockchain technology means that transactions are difficult to hack, a user’s digital wallet are sometimes targeted.
Who is using cryptocurrency
Cryptocurrency is no longer the future; it’s the present, and consumer demand for online digital payments is growing. Many businesses have already accepted that they need to roll with the times and keep up with their customer’s needs. Large retail companies such as ASDA and Marks & Spencer now accept Bitcoin as a form of payment for gift cards (through a cryptocurrency platform).
The Bank of England is also considering the launch of a digital pound, a new digital currency for the UK that will revolutionise our day to day lives. Unlike cryptocurrency, the digital pound would be equivalent to the value of cash for example, ten digital pounds would be worth ten pounds in fiat currency.
How can your business prepare for crypto?
Several Banks are leading the way in exploring crypto, a sure sign that they see it as a big part of their future growth strategies and offering to businesses and consumers. Adapting rapidly to prevailing market conditions and keeping innovators in your sight is key. Wholesale change isn't realistic but small incremental investments can reap big rewards. The key enablers for accepting crypto payments include compliant payment gateways, Open Banking and API's, three themes we'll explore in future tech bytes articles. Conducting an audit and assessment of your existing infrastructure and tech stack is a great start to identifying enablers and blockers for future crypto readiness.
Cryptocurrency buzz words
Some buzz words used when talking about cryptocurrency:
- Altcoin – any cryptocurrency that is not Bitcoin
- Fiat currency – legal tender issued by government that is not backed by a commodity such as gold. The pound, the euro and US dollar are all examples of fiat currency.
- Mining – crypto mining is the process of verifying cryptocurrency transactions using computer hardware.
- Crypto exchange – a website or app that allows users to buy and sell crypto assets