What is Cryptocurrency? – Here’s What you Should Know

What is Cryptocurrency? - Here's What you Should Know

As it stands, cryptocurrency is an unavoidable term that has taken the world by storm. Even if you aren’t too familiar with the concept, the recent whirlwind of digital innovation has found its way into virtually every crevice of our lives in some shape or form, with prominent cryptocurrencies like Bitcoin and Etherium leading the way of the countless blockchain-related developments. 

Some parts controversial, some parts inspiring, the realm of crypto ushers in a new era that echoes sentiments of various degrees. Some find it a potentially empowering decentralisation force that shifts the control of money back to the people and from institutionalised financial infrastructures. 

At the same time, critics are leaning into the doubt that surrounds the digitised hype, calling out the many features of cryptocurrency for possible fallacies and a range of issues. On one hand, scores of unscrupulous activity stem from the blockchain frenzy like frauds and ponzi schemes. On the other hand, it has made certain individuals undeniably wealthy.

The Islamic world is also up in arms about the advent of this innovation frenzy, with scholars, experts and influential figures giving their opinions on crypto being halal or haram, along with the implications of its potential viable utility.

For regular investors and ordinary people who are curious about cryptocurrency as a possible extension of wealth or revenue growth, it’s all very confusing. In order to clear up some of the mystery, let’s begin with a basic breakdown.

What is cryptocurrency?

Cryptocurrency

Here’s a fairly simple definition of cryptocurrency: It is a medium of exchange just like the US dollar, except it’s a digital form of currency. It applies encryption mechanisms to control and manage the creation of monetary value. 

Think of it as labour in the form of complicated computer problems that are solved by machines, thus producing the essential value produced from digital coins. This encryption process also helps to verify the transferring of funds. 

This technology would not be possible without the existence of the blockchain, which is essentially a decentralised ledger of every single transaction across a peer-to-peer network. With this, users can confirm transactions all without the approval of a single dominating authority to clear each transaction. 

This is where the decentralisation power of cryptocurrency is derived. Applications include fund transfers, voting systems, trade settlements and other related processes.

The blockchain as we know it today, was created in tandem with the single most major cryptocurrency to date; Bitcoin.

They were both created by a very mysterious inventor who goes by the name Satoshi Nakamoto, and he built the concept of the blockchain as a way to systematically manage the public transaction ledger of Bitcoin. 

How does it work?

Cryptocurrency

As mentioned, cryptocurrencies are based on the blockchain, a distributed public database that keeps track of all transactions and is updated by currency holders.

Cryptocurrency units are formed through a process known as mining, which entails employing computer processing power to solve complex mathematical problems in order to earn coins. Users can also purchase the currencies from brokers, which they can then store and spend using encrypted wallets.

You don’t possess anything concrete if you own cryptocurrency. What you possess is a key that enables you to transfer a record or a unit of measurement from one person to another without the involvement of a trustworthy third party.

Cryptocurrencies are also quite different from traditional money in a number of ways.

Legal tender status is granted to most fiat money, such as the euro. This indicates that the currency is the country’s official currency and that it must be accepted as payment for a debt.

Cryptocurrencies, on the other hand, are not recognised as legal tender. This means that they are under no legal obligation to accept them.

Another significant distinction between cryptocurrencies and traditional currencies is their structure. Official currencies are backed by a central bank, which also controls their supply. 

The European Central Bank, for example, guarantees the euro and regulates its supply in the eurozone. Meanwhile, cryptocurrencies are uncontrolled and decentralised. This means that they are not guaranteed or controlled by any central bank.

Investing in cryptocurrency ?

The question of investing in cryptocurrencies is quite a murky topic to discuss, simply because the world is so divided on the subject. 

There are ongoing debates, updates and opinions about the validity, strength and legitimacy of cryptocurrencies as monetary assets and as a future-proof technology. 

Investing greats like billionaire Charlie Munger (Warren Buffet’s close associate) and financial advisors like Ryan Payne take a traditionalist approach to cryptocurrency, accusing the whole space of being a bubble that’s not much different from the one seen during the dot-com era. 

Cryptocurrencies like Bitcoin are notorious for being extremely volatile in the markets. In 2021, Bitcoin plunged below $50,000, which dashed the hopes of many who expected it to hit over $100,000 by end of the year.

However, Bitcoin is still on a year-to-date hike, moving approximately up 70% as a whole.

On the other side of the fence, a good portion of the financial landscape is rooting for the mass adoption of crypto. Large players like Goldman Sachs are exploring loans backed by Bitcoin, while a few major banks have announced the acquisition of crypto talent to stay on the ball with any new developments. 

Countless companies, individuals and influential figures are heavily invested in the rise and retention of cryptocurrency power. Plenty of Fintech companies around the world are based on the innovative traits of crypto and blockchain, which indicates that at least in some part, the technology could be here to stay.

Yet at the same time, big influencers and celebrities have been accused of promoting shady crypto schemes that turned out to be pump-and-dump campaigns (where the public is encouraged to buy into a currency and inflate value while the scheme founders sell all their shares and drop the value, causing them to make a lot of money and the rest of the victims to lose all their money.)

When it comes to investing, there’s just no clear answer. Some people have made good returns while others have lost all they have.

Crypto and Islam

The Muslim community is divided on the subject of cryptocurrency. Some Islamic scholars consider the investing of cryptocurrency to be permissible under a few conditions (like the prohibition of illegal or haram activities). 

1) Speculation

Shariah advisor Mufti Muhammad Abu-Bakar (the former advisor to Blossom Finance) argued that Bitcoin is permissible because all currencies have a speculative element and this fact alone did not deem crypto as haram. Other scholars state that cryptocurrency is inherently anti-interest and that is also intrinsically a good thing.

2) Uncertainty

On the other hand, some have outright refused to accept cryptocurrencies as a permissible investment vehicle. 

Indonesia’s National Religious Council for instance, has ruled crypto haram due to factors like uncertainty, wagering and potential harm caused on society. The nation’s government is also siding with this viewpoint.

3) Volatility

Tajdid Central Leadership (PP) Muhammadiyah along with the Tarjih Assembly recently issued a fatwa against cryptocurrencies this year. 

The argument is that cryptocurrencies like Bitcoin and others which are used for investment and payment are considered not permissible due to a range of factors including the volatility of such assets, and the lack of any attachment to physical assets.

What’s more, when cryptocurrencies are not essentially backed by physical assets, it becomes gharar.

Majelis Tarjih and Tajdid PP Muhammadiyah stated that:

“This speculative and gharar nature is forbidden by sharia as the Word of Allah and the Hadith of the Prophet (peace be upon him) and does not meet the values and benchmarks of Business Ethics according to Muhammadiyah, especially these two points, namely: there should be no gharar (HR). Muslim) and there should be no maisir (QS. Al Maidah: 90)”

Maisir in Islam refers to the element of chance, speculation or gambling.

Gharar is the Arabic word associated with uncertainty, excessive risk or deception.

On one hand, some Muslims view crypto as Haram (illegal) since it has no inherent worth, significant volatility resulting in extreme uncertainty and high risk akin to gambling. What’s more, they claim it has no relation to the real economy, and trading in cryptocurrencies is similar to a bubble that could collapse.

Furthermore, the claims state that cryptos are utilised for illegal acts, that they are riddled with ambiguity and anonymity, and that they are neither issued or regulated by any government or recognised Shariah authority.

On the other hand, some believe that because cryptocurrencies are digital assets, exchanging them is considered Halal. Assets can be bought and sold in any market depending on demand and supply factors. This argument is made by those who claim cryptocurrencies are currencies: cryptocurrencies have all of the characteristics of a means of exchange, a unit of account, and a store of value.

The argument carries on into 2022, and we have yet to see a full agreement among the global Muslim population on the permissability of cryptocurrencies.

Potential future developments

Cryptocurrency

Although Bitcoin has been present since 2009, cryptocurrencies and blockchain technologies are still in their infancy in terms of financial applications. There are a lot more developments in the pipeline, with the possibility of other financial assets like stocks or bonds being traded via blockchain-enabled channels in the future.

Ever since the creation of blockchain and the Bitcoin, countless other cryptocurrencies have also begun to prop up one after the other. Some of these alternatives hold promising features while others are weak in their structure and are bound to fail.

The blockchain solves the double spending problem

In essence, you’ll need a payment network with easily understandable account balances and transactions.

Preventing double spending – that is, preventing one entity from spending the same amount twice – is a major problem that every payment network must address. In a decentralised network, this is usually done by a central server that maintains track of all the balances.

If you don’t have this server, you’ll have to rely on every single network entity to do the task.

Every peer in the network must have a complete list of all transactions in order to determine whether future transactions are valid or if they are an effort to double spend. But how can these entities maintain record consensus if the network’s peers disagree on a single minor balance?

When something goes wrong, they need complete agreement and consensus.

Nobody knew how to achieve this until Satoshi demonstrated it with the blockchain, a complicated technological discovery no doubt. Cryptocurrencies are an important component of this strategy.

Satoshi Nakamoto is anonymous

Cryptocurrency

While Satoshi Nakamoto was the name used by the person or persons who began the entire cryptocurrency saga, not much else is known about this mysterious identity. 

Satoshi authored the white paper for Bitcoin, developed it to fruition, and devised the very first blockchain database as a way to establish the Bitcoin process. After that, Sato vanished, and has not really been heard from again.

There’s much speculation about who Satoshi is, with some believing Satoshi is a pseudonym for a group of extremely intelligent individuals who cooperatively worked on the concept of cryptocurrency. The technology may be too complex of an undertaking for just one person, so this theory is quite plausible. 

Bottom Line

Whether it’s a good thing or a bad thing, many cryptocurrency evangelists might agree that the landscape is currently in quite a mess. This may be a phase that comes to pass before a more solid foundation for blockchain’s future is established. 

It may also mean that a large chunk of the crypto hype is just that – hype – and when the bubble pops most investors will be left holding the empty bag.

Only time will tell, as for now the pure confusion, volatility and controversy that surrounds this potentially empowering and economically-viable innovation casts a very deep shadow that is difficult to penetrate. 

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