An Infographic Guide to Virtual Currencies

VIRTUAL CURRENCIES AN INFOGRAPHIC GUIDE TO V irtual currency - often referred to as 'crypto currency' - is a software-based online payment system whereby units can be transferred between digital wallets without the need for a middleman, which in most cases is a financial institution. It is essentially an attempt to replace standard monetary transactions with a digital medium of exchange, using peer-to-peer networking to facilitate the transfer. Virtual currencies have no physical form, they exist solely in digital format. They can be used to purchase goods or services online and they're being quickly adopted by consumers and merchants all over the world. Virtual currencies are decentralised, meaning there is no single governing body overseeing the digital transactions; presenting a unique challenge to governments and financial institutions globally. BITCOIN Developed in 2009, Bitcoins are created via a computer process referred to as 'mining'. Bitcoin is a peer-to- peer system that relies on its user to keep working in order to produce more of the currency. This system has been used as the basis for numerous other virtual currencies since 2009, including: Litecoin (2011) Namecoin (2011) Dogecoin (2013) Peercoin (2012) Primecoin (2013) Ripple (2013) HIGHEST DIGITAL CURRENCY VALUES Let's look at the current virtual currencies with the highest values. Bitcoin: $311.26 "Values correct as of late October 2015 $300 $5 $4 $3 $2 $1 $0 THE MINING PROCESS You will likely have heard the term 'mining in relation to the production of Bitcoins, as well as other virtual currencies. The process refers to the fact that - in the case of Bitcoin - there are a limited number of coins available. In order to create more, they must be mined by users. Mining works by rewarding users with currency every time a 'block' is added to the blockchain. This reward is halved every four years, until eventually it is removed altogether. This is expected to occur around 2140, according to current estimates. Let's have a look at the mining process in a little more detail: 1. In order to mine Bitcoins, users must download a client - a piece of software used to send and receive Bitcoins from other parties. 2. Using this client, a user can download the blockchain. This is a complete list of all transactions made on the Bitcoin network. 3. Once users have a client and the blockchain, they 4. The job of the miner is to take a block of information and put it through a complex process aimed at confirming all of the transactions in the blockchain. must decide whether to mine as an individual or as part of a larger group. 5. To do this, miners must take all the data in an individual block and turn it into a 'hash' - a sequence of numbers and letters derived from a complex mathematical formula. Each block hash is completely unique, and can only be generated using the hash of the previous block. This is done to keep the blockchain secure, using what is known as a 'digital wax seal'. 6. Once a block is sealed and the hash created, a reward is generated and given to whoever created it. Miners compete with each other for this reward. 7. In order to collect their reward, miners must use a secret key which is generated once the hash is created, this key permits them access to their Bitcoins. BITCOIN VALUE OVER TIME Bitcoin is often considered a potential investment vehicle, but has it grown as predicted? *Value in USD from October 2011 to October 2015 $1200 $1000 $800 Peak value $600 $1124.76 $400 Current value $311.26 $200 $0 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 Jul 13 Oct 13 Jan 14 Apr 14 Jul 14 Oct 14 Jan 15 Apr 15 Jul 15 Oct 15 THE POTENTIAL GROWTH OF BITCOIN The number of merchants accepting Bitcoin is growing, but the exponential growth expected hasn't yet materialised. In order for virtual currency to establish itself as a successful payment method, it needs to achieve 'critical mass' on both sides. Reaching this critical mass requires having enough merchants who accept the payment instruction and enough users who want to use it, so it becomes attractive to other merchants and users, accelerating network effects. This has been the main issue for virtual currencies. Although Bitcoin has grown in popularity, it still pales in comparison to traditional payment methods. Let's look at the volume and number of global daily transactions with Bitcoin vs other payment solutions: Volume of global transactions on 10 August 2014 Figure is in billions (US$) Number of global transactions on 10 August 2014 Figure is in thousands 12.34 212,603 7.37 93,578 0.30 0.16 7,700 633 68 0.04 Visa Mastercard Paypal Western Bitcoin Visa Mastercard Paypal Western Bitcoin Union Union We can see that the use of Bitcoin, even several years after its introduction, is nowhere near that of more traditional payment solutions. If we compare the number of daily Bitcoin transactions with those on mPesa (a mobile payment solution launched in Kenya in 2007), we get a similar picture: 50m Total number of transactions (millions) 40m mPesa Bitcoin 30m 20m 10m Om Oct 11 Oct 12 Oct 13 Oct 14 Oct 15 Jan 12 Apr 12 Jul 12 Jan 13 Apr 13 Jul 13 Jan 14 Apr 14 Jul 14 Jan 15 Apr 15 Jul 15 As David S. Evans noted in the article 'Bitcoin payments: igniting or not', mPesa followed the classic path for a successful new payment method. The number of transactions increased, reaching an inflection point around the end of its first year, and growing explosively from then on (similar to Diners Club in 1950 and Discover Card in 1985). Whereas the number of transactions with Bitcoin did grow at first but then levelled out. According to Evans, there is still no evidence of an inflection point for Bitcoin or an explosive growth phase even five years after its launch. RESPONSES TO VIRTUAL CURRENCY IN THE EU As a decentralised currency, virtual currency offers a unique problem to individual governments and financial institutions around the world. It's extremely interesting to look at how different countries have reacted to virtual currencies, and it says a lot about how they have grown and whether or not governments recognise them as legal tender or a legitimate payment instrument. In this section we'll look at how some of the European governments have responded to virtual currency: 66 66 Virtual currency is not legal tender or electronic money CZECH REPUBLIC Bitcoins are not banknotes, coins, BELGIUM scriptural or electronic money 99 99 66 66 Bitcoin is not a currency and has no trading value like gold and silver. It's more similar to glass beads Virtual currency is not legal tender DENMARK GERMANY but a financial instrument 99 99 66 66 Virtual currencies are not Virtual currency is not considered to be legal tender SPAIN ITALY considered legal tender 99 99 66 66 Virtual currencies are not Not legal tender, electronic money or foreign curency CROATIA POLAND legal tender 99 99 66 Acts as money to a limited extent and only for relatively few people Virtual currency is an asset, not SWEDEN UK a currency 99 99 Sources: European Central Bank | Dataconomy.com | Sciencedaily.com Tandfonline.com | Bitcoincharts.com | Virtualcurrencytoday.com BBC.co.uk | Bitforum.info | Coindesk.com | Blockchain.info | NYMag.com Cryptocoinsnews.com | Startbitcoin.com | Techradar.com | Wikipedia.org Computerworld.com | Engadget.com | Heavy.com | Thebitcointrader.com AssetBank Tether: $1.00 •SuperNET: $1.26 • Unobtainium: $1.34 • Flycoin: $1.55 • Dash: $2.28 • Mastercoin: $2.33 Litecoin: $3.79 • BlockShares: $5.16