World of cryptocurrency: All you need to know about advantages, drawbacks of digital currency

Bibin BabuUpdated: Monday, March 14, 2022, 09:42 PM IST
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What makes cryptocurrencies so appealing is their decentralized nature. | Image by WorldSpectrum from Pixabay

Even though cryptocurrency has only recently entered the lexicon of the common mass, the concept of cryptocurrency has been there for decades now. Eventually, the term became popular in 2008 with the invention of Bitcoin by an anonymous programmer called Satoshi Nakamoto.

A cryptocurrency is a digital or virtual asset that uses cryptography as the underpinning. What makes cryptocurrencies so appealing is their decentralized nature. Cryptocurrencies cannot be issued or regulated by a central authority or financial institution, making them independent of third-party intermediaries.

The decentralized nature of cryptocurrencies is the result of blockchain technology, a blockchain serves the purpose of a digital ledger that keeps secured and decentralized records of all the transactions within a crypto network. In fact, blockchain is a shared database that stores data in blocks. As all the users in the network retain control of a specific blockchain, no single person holds the authority of tampering with any piece of information. This mitigates the risk of counterfeit or double-spend. The security and fidelity of a blockchain generate a sense of trust without any central authority.

Cryptocurrencies are brought into circulation by dedicated individuals through a process called mining. Those individuals or miners use advanced computing power to solve complex mathematical puzzles and get cryptocurrencies as a reward. Moreover, users can only buy or sell cryptocurrencies on dedicated crypto exchange platforms.

The concept of cryptocurrency was introduced to replace traditional fiat currencies. Cryptocurrencies can be used as units of exchange for goods and services or as investment vehicles due to their store and growth value. Most cryptocurrencies come with a limited supply which drives up their valuation over time, just like other popular assets like Gold. For example, a popular cryptocurrency like Bitcoin has a supply cap of 21 million. As of January 2022, there are a total of 18.9 million Bitcoins in circulation and it will take the year 2140 to mint the final bitcoin.

The advantages

Cryptocurrencies have gained so much popularity among users and investors due to their multiple advantageous offerings. One of the major advantages of cryptocurrencies is that they do not rely on any kind of central institution or authority. Without any central middleman, crypto transactions are devoid of any kind of authoritarian policing or regulations. Any user can trade in cryptocurrencies without having to be a subject of external interventions. In other words, in the case of cryptocurrencies, governments cannot dictate their distribution or utility by manipulating policies.

The absence of third-party vendors also allows crypto transactions between two parties to be easier and faster than standard money transfers. Virtual currencies can reach any part of the world within seconds. You will no longer need a bank or credit card company to facilitate your transactions. Moreover, crypto transactions are completely protected using private keys and public keys along with other forms of incentive systems.

At the same time, crypto investment promises the generation of greater profit than other investment vehicles. In fact, the crypto markets have witnessed rapid growth in values over the past few years. According to Coinmarektcap.com, on Dec 24, 2021, Bitcoin was priced at its all-time highest of $50,822.2.

The drawbacks

Being a newer asset class, cryptocurrencies are considered to be a topsy-turvy investment. The crypto market is extremely volatile as it is difficult to predict the future of a speculative investment vehicle like cryptocurrencies. Like every other commodity, the price of cryptocurrencies depends on supply and demand. At the same time, the highly concentrated ownership of cryptocurrencies makes the market an unpredictable one. To a very great extent, these wealthier investors or whales dictate the volatility of the crypto market.

While decentralization is the major benefit of cryptocurrencies, it is also a disadvantageous factor of cryptocurrencies. Its decentralized nature does not only contribute to the volatility but the lack of regulatory authority makes the crypto market more attractive to criminals. There is also no consumer safety which can lead investors to financial disasters.

With the popularity of cryptocurrencies, the instances of crypto-scams are also skyrocketing. Some of the major forms of crypto-scams are social engineering scams (romance scams, phishing scams, giveaway scams, and blackmail scams) and investment scams, ICO & DeFi scams, and cloud mining scams.

There has been a lot of confusion around the legal status of cryptocurrencies in different financial jurisdictions across the world. As of December 2021, El Salvador is the only country to legalize Bitcoin as a tender for monetary transactions. However, this has been able to restrict cryptocurrencies to gain unparalleled popularity among both newbie and experienced investors. So, if you are someone who is looking to kickstart crypto investment, do spend time in proper research and gaining knowledge about cryptocurrencies. You can join online crypto communities or read crypto whitepapers to make an informed investment decision.

(Bibin Babu is Co-Founder, Colexion-NFT marketplace. Views are personal)

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