Cryptocurrency

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ryptocurrency is a class of digital assets in which encryption techniques regulate the generation of units of currency and verify transactions. A defining feature of these assets is that they operate independently of a central authority. Cryptocurrencies are designed to address problems with the banking industry, and they seek to attain certain characteristics: security, immutability, speed, low cost, fungibility, and global accessibility. They are able to achieve these characteristics by utilizing blockchain technology, which is a public distributed ledger that stores transaction data. Cryptocurrency presents a number of ethical issues: trading, money laundering, and the dark web.

Origins

In 2008, an anonymous person under the pseudonym, Satoshi Nakomoto, published a paper titled "Bitcoin: A Peer to Peer Electronic Cash System". On January 3rd, 2009, Satoshi mined the genesis block of the Bitcoin blockchain. The Bitcoin protocol is open source code and has received contributions from numerous developers including, most notably, Hal Finney, Nick Szabo, and Gavin Andresen. In the years since, many other projects have been released that utilize Bitcoin's source code, as well as many other cryptocurrencies that have developed their own blockchain. These are known as altcoins.

Examples of Cryptocurrencies

Bitcoin

In 2008 Satoshi Nakamoto released a paper through metzdowd.com called Bitcoin: A Peer to Peer Electronic Cash System. In the paper, Satoshi discusses a solution to the double-spending problem. The double spending problem refers to the ability for individuals to copy tokens and re-use them if security measures are not present. In the paper Satoshi also describes a decentralized system for transactions, eliminating the need for third party involvement. Bitcoin allows for pseudo-anonymous transactions to take place and relies on a computer network of miners who perform algorithms to approve transactions.

Bitcoin is unregulated by the government, and has grown since it first opened to the public in 2009: there are 12,000 transactions per/hour, 18.5 million blockchain.info wallets, and 715,000 active addresses in the last 24 hours..

Altcoins

Altcoins are prolific alternative cryptocurrencies that were released after Bitcoin. They are often created in an attempt to improve on the existing blockchain technology.

Litecoin (LTC)

Another proof-of-work cryptocurrency, similar to Bitcoin.

Ethereum (ETH)

An extensible crypto platform that allows for smart contracting

Zcash (ZEC)

An pseudonymous cryptocurrency which is more private and has less transparency in transactions. The parent company, ZcashCo is only a link in the chain and cant see transactions without being provided the appropriate view key. This is the main premise of Zcash becoming one of the only privacy-first, decentralized cryptocurrencies. ZcashCo's role instead is to help provide updates to Zcash which users can choose to utilize or ignore.

Dash

Originally known as Darkcoin. Dash allows improved anonymity to users.

Ripple (XRP)

A cryptocurrency with a goal for easy international payments.

Monero (XMR)

Cryptocurrency deemphasizing traceability and emphasizing privacy.

Technology

Blockchain

Most cryptocurrencies use a blockchain to secure their network. A blockchain is a public distributed ledger that uses cryptography to achieve security without the need for a trusted third party. All transactions are stored in blocks that are linked to each other through cryptographic hashes. Each new block contains the hash of the previous block, data of the transactions it contains, and a timestamp. The design of the system makes it impossible to change the data in any given block without changing the data of all the blocks that precede it. Blockchain allows two unverified users to make secure transactions without the need for a third party verification system. Applications range from payment platforms to data exchanges.

Proof-of-work vs. Proof-of-stake

A common differentiator between cryptocurrencies is the difference in paradigm they use to validate the public network and ensure that transactions are immutable and verified without the use of a third party. Bitcoin, the first prolific cryptocurrency used a proof-of-work validation technology which required large amounts of computational power in order to create new blocks and alter the public ledger . Proof-of-stake is a paradigm which uses the amount of currency the validator has, and how long that currency has been in their possession as the main factor which determines who will validate a block . There are many debates on which paradigm is better, but at the current cost of mining hardware, it is likely more expensive to alter a mature proof-of-work network than a mature proof-of-stake network.

Use Cases

A majority of cryptocurrencies have been developed to solve problems in the financial industry. There are many other industries that blockchain technology is hoping to disrupt. These include identity protection, social networking, privacy, supply chain, IoT, etc... There are hopes that the blockchain will be able to serve these purposes without the need for a trusted third party. This would lead to greater security and significantly less fraud. Consider an autonomous vehicle. There is a massive amount of data being sent between sensors of the vehicle. This data must be securely transferred between all parts of the car. Someone could potentially hack into the car and make it drive into a wall by compromising the data being exchanged between the car. Blockchain technology is considerably harder to hack from outside parties and would prove valuable in a situation like this.

Cryptocurrency Markets

Exchanges

Coinbase is the largest and most widely know cryptocurrency exchange. It is used primarily to exchange fiat money for cryptocurrency and vice versa. Other popular exchanges include Bitfinex, Binance, Bittrex, Kucoin, among others. They allow users to exchange different cryptocurrencies for one another. These exchanges mainly use Bitcoin as a medium of exchanges rather than fiat money. A user can deposit Bitcoin onto the exchange and then trade that Bitcoin for the altcoins of their choice.

On January 25, 2018, mobile trading application Robinhood announced plans to facilitate the trading of Bitcoin and Ethereum. Although trading access is given eligible to Robinhood users in eligible states, all Robinhood users may still view market information data on Bitcoin, Ethereum, Bitcoin Cash, Bitcoin Gold, Dash, Dogecoin, Ethereum Classic, Lisk, Litecoin, Monero, NEO, OmiseGO, Qtum, Ripple, Stellar, and Zcash. Robinhood claims that over one million users are in line to receive cryptocurrency trading access. Additionally, Robinhood is gradually rolling out a social platform for cryptocurrency discussion known as Robinhood Feed. To prevent the use of unlawfully obtained funds on the app, Robinhood currently does not support the withdrawal of cryptocurrencies to external wallets, or cryptocurrency deposits into Robinhood accounts from external wallets.

Technical Analysis

Technical analysis, which occurs when analyzing chart patterns and volume spikes, is a strategy commonly used when trading cryptocurrencies. When analyzing chart patterns, the most commonly used is the candlestick chart, which show the entire movement of an asset within a certain period of time. A green candlestick means that the asset price went up from the opening price during that period of time. While a red candlestick means that the asset price went down from the opening price during that period of time. By analyzing these charts, technical analysts are able to determine the general trend of the asset and make a decision to either buy or sell at that given time. Two terms commonly used by technical analysts are "support" and "resistance". "Support" refers to a price level that seems to hold itself and acts as a fence that prevents the price of an asset to go below it. The reason that this price level holds is due to the high demand. When the support level holds, it means that demand is greater than supply and therefore the price will not go any lower. As such, traders will usually buy the asset in this area since the odds of going back up from the support level will be in their favor. "Resistance" refers to a price level that seems to hold itself and acts as a fence that prevents the price of an asset to go above it. The reason that this price level can not break higher is due to a large number of sellers. When the resistance level holds, it means that the supply is greater than demand and therefore the price will not go any higher. As a result, traders usually sell the asset in this area since the probability that the price will go down from the resistance is high.

Fundamental Analysis

Fundamental analysis is a strategy used to measure the value of an asset. Fundamental analysis mainly revolves around examining the economic and financial status of an asset. In addition, fundamental analysis takes into account the general state of the economy as well as any political changes that make impact the future value of an asset. When evaluating stocks, fundamental analyst look at return on equity, revenues, and earnings to determine the intrinsic value of the stock. However cryptocurrency lacks this data and focuses on relevant news.

Ethical Issues

Scholars compare the exploitation of Bitcoin to James Moor's theory that the social impact and ethical problems will increase as technological revolutions popularize . Critics argue that Bitcoin will continue to be exploited for illegal activity, and more people will be affected as a result of the widespread use of the electronic currency.

Cryptocurrency Trading

Cryptocurrency markets are small compared to traditional securities and forex markets, however, there is still ample volume and liquidity which allows for constant trading. People trade cryptocurrencies due to its high volatility and room for making a profit. Just like how there are expensive stocks and penny stocks, there are also high-value cryptocurrencies and low-value cryptocurrencies. The high-value cryptocurrencies such as Bitcoin, Ethereum, and Litecoin have large market capitalizations making it very difficult to manipulate the price. However, the low-value cryptocurrencies have small market capitalizations and are therefore susceptible to having their prices manipulated. One of the most common ways of manipulating the price of an asset is a pump-and-dump. Pump-and-dump is a strategy used by people who have a large widespread influence socially or economically. They can use certain techniques such as making false claims on social media to mislead their followers into buying a worthless asset, thereby increasing its price. They can then sell at the inflated price for a profit and the people that bought during the price increase are left with an overpriced asset that they will most likely lose money on. Another technique used to manipulate prices is purposely buying a lot of shares at an inflated price in order to trick the general public into thinking that there was a news leak. This technique is usually most effective on technical traders due to the fact that they focus on volume and chart patterns. The sudden volume increase and chart breakout will result in the asset popping up on technical trader's scanners and therefore lead to more buying and an even higher price. Another ethical concern derives from Initial Coin Offerings (ICO's). Initial Coin Offerings are when a coin launches itself to the public for sale. However, there has been fraudulent activity regarding some ICO's, and some experts label contributing money to ICO's as donations, rather than investments.

Used in Money Laundering

Cryptocurrencies have been used for money laundering purposes because of the ability to anonymously store monetary value and make transactions to anywhere in the world. Scholars compare the exploitation of Bitcoin to a theory by James Moor, a computer ethicist. He proposed that social impact and ethical problems will increase as technological revolutions popularize. Critics argue that Bitcoin will continue to be exploited for illegal activity, and more people will be affected as a result of the widespread use of the electronic currency. Since Bitcoin is pseudo-anonymous, rather than completely anonymous, there are methods of deanonymizing users. This could be through finding the amount sent to tracking the platform used to trade the currency.

BlackRock CEO Larry Fink states that he believes that the increased interest in cryptocurrency shows the demand for money laundering in the world. He has also called Bitcoin an index for money laundering.

The Dark Web

The Silk Road first opened in 2011 and was an anonymous online market for drugs and other illegal items. Transactions were carried out using Bitcoin because the electronic currency affords anonymity and can be transferred to anyone with a wallet. Bitcoin is no longer the currency of choice for anonymity. Monero has become the primary coin used for transactions that desire to emphasize privacy. With daily volumes of Bitcoin being sold on the Dark Web ranging around $650,000 daily, it is one of the most important methods of exchanging money for transactions on the Dark Web. Mentioned above, Bitcoin was also responsible for $1.2bn in sales on the Silk Road between 2011 and 2013. Bitcoin continues to play an important role in the Dark Web's sustained success. The Dark Web connects users to buy and sell illegal things. It creates a black market where users can buy and sell by the push of a button. Many different illegal things can be purchased on the dark web. These things range from guns and drugs to sex slaves. Bitcoin and other cryptocurrencies are the preferred method of payment.