The price of the virtual currency Bitcoin (BTC) was about 56,533.53 United States Dollar on February 22, 2021. With the announcement of approval of cryptocurrency ETFs (Exchange Traded Funds) and the announcement of Bitcoin purchase by Tesla CEO Elon Musk, interest in cryptocurrencies is increasing.
Cryptocurrencies have the aspect of not only investment but also epoch-making technology that drastically changes the conventional business model.
In this article, I will explain in an easy-to-understand manner, avoiding esoteric technical terms, so that even people who are not familiar with cryptocurrencies can understand the whole picture from the mechanism to investment methods and the latest cases.
What is virtual currency?
Cryptocurrency is a currency that is traded on the Internet, and is also called crypto assets or digital currency. Legal tenders whose value is guaranteed by the government, such as the Japanese yen and the US dollar, have substance such as banknotes and coins, but since virtual currency is electronic data, there is no substance, and official managers of central banks such as the Bank of Japan There is no issuer. (There are also virtual currencies that have some management entities.)
In addition to Bitcoin, which started operation in 2009, there are many derivative virtual currencies such as Ethereum (ETH) and Ripple (XRP), “altcoin”.
In US, the “Revised Funds Settlement Law” that came into effect on April 1, 2017 enacted the law on virtual currencies for the first time. As a result, virtual currencies are officially recognized and regulated by the government, and traders who buy and sell virtual currencies need to be registered as “virtual currency exchange traders”. Then, due to the revision of the law that came into effect on May 1, 2008, the name of the virtual currency was changed to “cryptographic assets”. Currently, cryptocurrency exchange companies are also officially called “cryptographic asset exchange companies”.
How virtual currency works?
I will explain the four components that are indispensable for understanding the mechanism of virtual currency.
Blockchain is a new database in which multiple administrators manage data in a distributed manner. Also called “distributed transaction ledger”. It is called a “blockchain” because “blocks” that store transaction information are connected like a chain.
There are two types of blockchain: “public type” where anyone can participate without an administrator, and “private type” and “consortium type” managed within a specific organization. In the case of the public type, since the user manages and monitors the transaction data published on the network, it is extremely difficult to falsify the data.
Blockchain is a technology invented in the process of developing Bitcoin, and is used in various virtual currencies, and is expected to be applied in a wide range of fields such as IoT and FinTech.
Decentralized trading by P2P
P2P (Peer to Peer) is a network method in which terminals communicate with each other. Terminals called “nodes” form a network like a network without going through a central server, and transaction data is shared and approved in that network.
In a centralized network that uses a central server, there is an increased risk of being unable to trade or being hacked when a server fails. By distributing data such as transaction history by P2P and holding it by each node, the risk can be significantly reduced.
Cryptocurrency is called “Cryptocurrency” in English, but Crypto means cryptography and currency means currency. Cryptocurrencies are based on cryptography, which is essential for secure transactions.
The encryption technology used in Bitcoin is called ” public key cryptography ” and is more widely used than before for digital signatures and encryption of Internet communications. ” Public key (Public Key) ” and ” private key (Private Key) 2 one of the key that” has become the one set in pairs, with the public key that is made from a secret key, indicating the remittance of Bitcoin “Bitcoin Address “is created. Bitcoin remittance information is encrypted with a private key, and the recipient of Bitcoin decrypts the code with a public key.
Mining is the work of adding virtual currency transaction data to the blockchain, and you can receive virtual currency as a reward. Since virtual currencies do not have management institutions such as countries and banks, mining “miners” verify that virtual currency transactions have been carried out correctly.
Mining can require a large amount of electricity to process a huge amount of computation, and it costs a lot of electricity. When Bitcoin began to spread, there were cases where individuals mined on their own PCs, but nowadays, mining is systematically performed in countries where electricity prices are low, and some mining companies are oligopolistic.
Use of virtual currency
Cryptocurrencies have a strong image of investment, but their use is not limited to investment. I will explain five typical uses of virtual currency.
Cryptocurrencies are the target of investment, and you can make a profit by purchasing when the price is low and cashing when the price is high. “FX trading” that allows you to invest more money than you have on hand by leveraging is also possible, and you can aim for profit by entering from selling (short) even when the virtual currency price is falling.
Remittance / settlement
Cryptocurrencies can also be used as a means of remittance and payment. For example, in the case of Bitcoin, it is possible to transfer money between individuals (P2P) without going through a financial institution simply by specifying the Bitcoin address of the other party. You can also shop using virtual currency at physical stores and online shops that support virtual currency payment. Recently, a service that allows you to pay utility bills such as gas bills and electricity bills with Bitcoin has appeared.
Cryptocurrencies are also used as a means of donation. Fees are cheaper than donations made in legal tender, and due to the nature of blockchain, it is easy to understand “who donated to whom” and it is highly transparent. There are already cases of accepting donations in virtual currency at the Red Cross.
Cryptocurrencies are also used as a means of raising funds by companies. The financing method in which a company that wants to raise funds issues its own virtual currency and investors purchase it is called “ICO (Initial Coin Offering)”. There is also “STO (Security Token Offering)”, which issues stocks and corporate bonds as tokens on the blockchain to raise funds. Companies will be able to raise funds faster than initial public offerings (IPOs).