Cryptocurrency: Introduction, Technological Developments, Disruption, Innovation Theory and Success, Innovation Failure

This article provides an overview of cryptocurrency, including its introduction, technological developments, disruption, innovation theory and success, and innovation failure. It also discusses the challenges faced by cryptocurrency and its potential for the future.

Cyrptocurrency
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1. Introduction to Cryptocurrency
Cryptocurrency is a digital currency that is used as an exchange medium. It is built on top of
cryptography, a technology designed to secure and validate transactions (Narayanan 2016).
This technology also controls the cryptocurrency units created. In other words,
cryptocurrency is limited database entries that cannot be changed.
In the recent past, various cryptocurrencies have emerged and gained popularity. Among
these is Bitcoin, one of the most popular cryptocurrencies that has the largest market share.
These currencies operate in a decentralized network where all participants have to do their
tasks. This is performed through blockchain – a ledger containing all transactions that have
occurred within the network. This ledger is public and can be seen by everyone.
Transactions are files which contains public keys of both the sender and recipient as well as
the number of coins sent (Surowiecki 2011 pp.106). The sender has to sign off a transaction
with his/her private key. This is the basic concept of cryptography. Once a transaction is
signed, it is broadcasted on the network but it has to be confirmed first. This is done by
miners who confirm a transaction by solving a puzzle. They verify transactions and send
them across the decentralized network. These transactions are added to databases of all nodes
within the network. When a transaction is completed, it is irreversible and miners get a
reward.
Cryptocurrency network can only work is all participants agree to the validity of transactions
and balances (Hileman 2017). If any network node does not conform to the others, the
network breaks. However, there are pre-built rules in the network that prevent such scenarios
from occurring. A consensus among participants is guaranteed by the strong cryptography
used in the network which makes third parties completely irrelevant.
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2. Technological developments
Blockchain technology is the drive behind the growth and success of cryptocurrencies.
Essentially, it’s a public database with verified and encrypted entries (Crosby 2016 pp.6). It
provides a secure and effective way of creating hack-proof activity logs. This technology has
come a long way since its entry into the public back in 2005. It was introduced by Wei Dai
who proposed the idea of creating money through puzzle solving and consensus in a
decentralized network. However, the proposal was not effectively implemented. Later, Hal
Finney came up with a centralized cryptocurrency concept based on Wei’s idea and
computational puzzles (Zheng 2016).
Blockchain gained recognition when Satoshi Nakamoto wrote a whitepaper outlining a
protocol for creating a decentralized currency. He emphasized on operating it in a network
based on absolute consensus among participants instead of being controlled by a set of
individuals (Wright 2015). Within a few years, the idea became an economic experiment
attracting many experts. This led to the emergence of cryptocurrencies such as bitcoin whose
value grew rapidly as they gained interest.
While Bitcoin became popular, it had various issues such as wasteful mining hardware which
undermined its effectiveness. In 2012, Vitalik proposed an open platform where developers
could build a distributed application for blockchain (Buterin 2013). This was the start of
Ethereum platform which became wildly popular among entrepreneurs. However, its goals
have been tough to meet as its market cap increased rapidly. However, there are projects
being experimented that could be integrated into the network in the future to overcome
current limitations faced.
In the recent past, newer blockchain technologies have emerged to improve the capabilities of
cryptocurrency networks and overcome hurdles faced. IOTA is one of the new blockchain
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technology that was designed as cryptocurrency platform for the Internet of Things (IoT). It
incorporates massive changes to the fundamental blockchain concepts allowing zero-fee
transactions and supporting a robust verification process that can resolve scalability problems
faced by many cryptocurrency networks. There are some companies that have blockchain
technology for specific purposes. QTUM has leveraged Bitcoin’s and Ethereum’s
infrastructure to craft a business-centric blockchain. Such kind of development has pushed
blockchain technology beyond expectations empowering cryptocurrency.
3. Disruption
Cryptocurrency has disrupted financial services industry as more people used it for buying
goods and investing. When Bitcoin and other cryptocurrency coins first emerged, very few
merchants accepted them. Nowadays, the situation has changed as they’ve become a popular
medium exchange. Currently, there are many merchants that accept Bitcoin. They range from
e-commerce stores to groceries. Many people are using bitcoin to pay for products and even
degrees (Chuen 2015). Other cryptocurrencies such as Ethereum and Ripple aren’t as widely
used as Bitcoin but this could change in the near future as more firms start accepting them.
Apple has led the way by allowing App Store users to pay with different cryptocurrencies.
Also, users have an option to convert their coins for bitcoins. Furthermore, there are websites
that sell gift cards in exchange for cryptocurrencies. With gift cards, people can buy anything
they need with their digital currencies.
Given the massive popularity of cryptocurrencies, merchants have sought to tap into this
opportunity. Many are accepting cryptocurrencies from their customers as a form of payment.
With the rising of crypto-ATMs in different parts of the world, more customers are using
digital currencies for their purchases (Rick 2014). Businesses are leveraging various services
to accept payments. CoinPayments is a great example of one of the services helping
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businesses to process various cryptocurrencies. In some countries, several cryptocurrencies
are legally recognized as convertible virtual currency. This essentially means that payments
in form of cryptocurrencies are the same as cash payments.
In the recent past, cryptocurrencies have become one of the best investment opportunity for
entrepreneurs. With the entry of the digital currencies into the forex trade market, many
people have made investments. Bitcoin is one of the most popular cryptocurrencies whose
value shot from $800 in 2016 to over $10,000 in Late 2017 (Caporale 2018). Ethereum which
is considered to the second most popular digital currency also recorded a significant increase
in value. Since 2016, its value increased by over 2000 percent (Bhosale 2018). The value of
other cryptocurrencies such as Litecoin and Ripple has also increased attracting many people
to the cryptocurrency forex trade market.
It is worth noting that while cryptocurrencies are high-risk investments due to their volatility,
many people are still trading them. They are attractive to many particularly due to few or no
regulations which make them more lucrative than fiat currencies. There are also numerous
exchange sites for trading the cryptocurrencies. This was not the case a few years ago when
acquiring cryptocurrencies was difficult. This situation has changed as major digital currency
exchanges have started selling different cryptocurrencies such as Monero, Litecoin, among
others. There are also other ways of trading coins such as Bitcoin ATM which has made it
possible for more people to acquire and sell cryptocurrencies. Also, all digital currency
exchanges offer wallets which is convenient for many. People can store their assets in the
wallets which are very secure.
4. Innovation theory and success
The reason why cryptocurrency has become popular is mainly due to its’ characteristics.
First, it is decentralized which means there is no central authority to control the currency. All
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machines in the decentralized network work together to mine coins and process transactions.
This implies that no individual can tamper with the transactions or monetary process. Second,
cryptocurrency is easy to set up. Contrary to the traditional bank where account set up can
take a lot of time, cryptocurrency accounts can be created within seconds. Users are not asked
any questions or pay any fees for their accounts.
Anonymity is another key reason that has pushed cryptocurrency further. Given the rise of
online threats, many people prefer being anonymous while using the web to avoid data loss.
With cryptocurrency, users can have multiple addresses which aren’t linked to any personal
information such as names or location addresses (Al Shehi 2014 pp.1443). This allows users
to conduct transactions while being anonymous. This would be impossible with fiat
currencies that require personal information for transactions to be done.
Transparency in cryptocurrency network has played a pivotal role in attracting people to
digital currencies. In such network, entries of all transactions that have ever occurred in the
network are stored in the blockchain. This makes the network tamper-proof as transactions
and account balances can be seen by the public (Vigna 2016). While there are still ways to
make these details opaque, most cryptocurrencies are built on the principle of transparency
which makes them preferable to many as they are unforgeable.
Extremely low transaction fees have made digital currencies an attractive prospect. Unlike
fiat currencies which incur high costs for international transfers, most cryptocurrencies have
minimal charges (Al Shehhi 2014 pp.1443). People can also send money to any part of the
world and the recipient will receive in a relatively short time as soon the cryptocurrency
network confirms the payment.
Additionally, cryptocurrency has succeeded due to its broad applications. Since its innovation
back in 2009, developers and entrepreneurs have sought to apply digital currencies in
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different areas such as wealth management, online marketing, crowdfunding, etc. (Allen 2015
pp.60). Some companies have leveraged cryptocurrency-based tokens to manage wealth and
eliminate restrictions imposed on traditional wealth management. Digital publishers and
advertisers struggling to enhance their relevancy have shifted their attention to
cryptocurrency which offers an opportunity to effectively target audiences while minimizing
costs. Publishers can eliminate traditional banner ads and get paid via digital currency for
valuable ads shown in relevant articles. Also, many startups are using cryptocurrencies to
fund their ideas which have revolutionized the fund-raising process. These applications and
many others in development have influenced many people to leverage cryptocurrency to
unlock new opportunities.
5. Innovation failure
Since its invention, cryptocurrency has gained momentum and disrupted the financial
services industry. However, despite its massive growth, it has failed to revolutionize the
financial services industry as most people expected. The main reasons that have blunted the
success of digital currencies are their lengthy transactions, volatile nature, and strict
regulations.
Transactions on cryptocurrency networks can take longer and cost more (Lansiti 2017
pp.118). For example, people who want to earn bitcoins have to provide computing power to
the decentralized network to confirm transactions. This essentially means that when demand
rises, users can wait for days for payments to be completed or spend more to get a faster
service. When compared to fiat currencies, digital currencies are expensive to be used as a
form of payment. This has extensively undermined their use for payment as most people
prefer the former to transact. High transactions commissions have made it uneconomical to
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purchase low-end items with digital currencies. This has led some platforms to drop
cryptocurrency payments.
Besides hefty transaction costs, cryptocurrency is volatile. In the recent past, people have
witnessed the volatility in the value of major cryptocurrencies such as bitcoin (Fry 2016
pp.343). This made them too risky for businesses and customers that want to use them as a
means of payment. Transactions are affected when the value of a currency fluctuates
frequently. For example, some users buying a product online may not complete the payment
process when the value of currency and transaction costs change. The value of digital
currencies is only stable for a limited period of time which makes them ineffective for
transactions (Iansiti 2017 pp.118). Given this volatility, many people prefer fiat currencies for
payment as they are more stable.
Additionally, application of cryptocurrency in the financial services industry has been
undermined by laws and regulations (Pieters 2017 pp.1). In 2017, China declared that it was
illegal to create initial coin offering (ICO). This move was made to prevent fraud companies
that swindled people off their money. This curtailed penetration of cryptocurrency into the
Chinese finance sector. In the US, businesses that accepted bitcoin are required to apply for a
license which ensures they comply with taxation laws. The application costs thousands of
dollars and legal paperwork which needs a team of lawyers. For many businesses, this is not
worth investing when only a few people will actually use cryptocurrencies for payment. Strict
regulations have not only affected merchants but also investors. IRS released a guideline that
requires people who profit from cryptocurrencies to pay taxes. Such regulations have pushed
people away from the cryptocurrency bandwagon crippling its hold in the financial sector.
Overall, the growth of cryptocurrency has not come without challenges. Its volatile nature has
made it a poor alternative to fiat currencies despite the opportunities it offers. Also, emerging
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regulations have curbed the capability of digital currencies limiting their application in the
financial sector.
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