Cryptocurrency: Unlocking the Future of Finance
“Cryptocurrency is not just about digital money; it’s a revolution in the way we think about finance and technology.”
Cryptocurrency, one of the greatest innovations in the world, has transformed finance and technology like never before. Since Bitcoin’s launch in 2009, it has continually surged to new heights, defying expectations easily and whenever the world thought the crypto market was dead. As more coins entered the market, they shaped an independent ecosystem in the financial field. Most people associate cryptocurrency with Bitcoin due to its popularity and leadership in the crypto world. Using Bitcoin as an example, this article aims to simplify the basics of cryptocurrency, providing knowledge and background on this revolutionary financial instrument.
How Cryptocurrency Works?
Cryptocurrency is digital money or an asset that is used as a medium of exchanging goods between 2 parties. It is similar to our fiat money like the Indian rupee (₹) and other currencies we use for daily transactions.
For example, suppose in the market you need 1 kg of rice which costs around ₹ 100. We generally pay this amount through cash or using digital methods like UPI or Credit card. If a cryptocurrency like Bitcoin replaces the same transaction then the exchange of value happening in Bitcoin has an equivalent worth of ₹ 100. Transaction in both scenarios has the same meaning but there lies a difference in operating and governance mechanisms over a broader term.
In the case of rupee transaction (₹), entry is recorded in the accounting journal and bank accounts where details are stored in its centralized server at a single location. This transaction is known between the sender, receiver, and only the bank. This gives the bank the authority of being a middleman or a facilitator of providing service wherein it earns its transaction fees.
This entire traditional financial system is controlled and regulated by a governing body or like central banks (eg.: Reserve Bank of India).
In the case of Bitcoin or crypto transactions, the entry is recorded in a ledger or blockchain. All transactions done in crypto are stored in an encrypted form using “cryptography” from where it derives its name. Generally, every transaction has a unique code known as a hash function similar to a unique fingerprint. These codes are generated in such a way that each code is linked to its former code or is simply like papers arranged in a book according to page numbers.
After a certain number of transactions are reached making up a certain memory size (i.e. 256 bytes in SHA-256 blockchain which is of Bitcoin), a block is created which also has a hash code linked to its previous block thus forming a chain known as a blockchain.
All these transactions on the blockchain are recorded online and are stored separately on all nodes (devices like smartphones or computers) that are active on the blockchain network. Thus, all transactions between the sender and the receiver are visible and known to all parties ensuring transparency in the system making it a decentralized economy.
This blockchain technology is immutable to hackers because even if any hacker tries to hack the system, then it needs to be hacked into all devices at once because of its decentralized nature.
There are more than thousands of crypto coins and tokens in this global market. Some of the popular crypto coins are Bitcoin, Ethereum, Binance Coin, Solana, Polygon Matic, Ripple (XRP), etc.
Advantages of Cryptocurrency:
- Decentralized Network: Contrary to traditional financial systems where financial data is vulnerable to failure of single point servers due to cyber attacks or any disaster, cryptocurrency’s decentralized network in multiple nodes or devices eliminates concentrated single point bottlenecks.
- Borderless transaction: Making payments in crypto for transferring money across borders requires only online access and the address of the sender and receiver’s wallet. Cryptocurrency transactions are similar to UPI payments. This eliminates the hassle of currency conversion or approaching any forex exchange.
- Financial freedom and ease of monetary access: Since cryptocurrency and blockchain networks are accessible online, all you need to do is open a crypto wallet or an account and register on blockchain networks. This enables anyone across the world to invest, earn, and trade cryptocurrency with one another in any part of the world, unlike fiat money whose value is limited only within national territory.
- Easy to store: Unlike any normal cash or commodity such as physical gold or any metal that needs physical storage space in the real world, cryptocurrency does not need any physical space since it exists digitally. Crypto wallets can store any number of coins easily and digitally. This reduces inventory expenses, and transport expenses at a large scale making it economically scalable.
- Has market scarcity: Gold is a rare metal on Earth because its mining involves extensive machinery and financial efforts making people willing to pay higher price. Bitcoin is rare in similar terms as there are only 21 million coins ever to exist, making it harder to own as time progresses.
- Cryptocurrency is people’s money: Fiat currencies like the Indian Rupee or U.S. Dollar derive their value from the trust people have in their respective governments and central banks. These institutions have the power to influence markets through regulations and actions like printing or demonetizing money, effectively controlling the nation’s economy.
In contrast, cryptocurrency operates independently of any central authority or government ownership. Its value is determined by factors such as supply and demand, the number of active users in its network, and its various applications like blockchain services, gaming development, and decentralized finance platforms.
- An alternative source of fundraising: Cryptocurrency relies on a ledger system called blockchain. By tokenizing real-world projects like constructing bridges and roads, regular investors could gain significant advantages. They could participate in funding these projects and receive rewards, which are typically only accessible to wealthy investors with fixed contracts. Using cryptocurrency for project funding ensures transparency and proper use of funds, reducing the risk of corruption
Disadvantages of Cryptocurrency:
- Price Volatility: Cryptocurrency works around the clock, like a bustling marketplace that never closes its doors. Whenever significant news hits, traders worldwide react swiftly, often pushing prices in one direction, creating a ripple effect of intense volatility and unpredictable price swings. This instability can make it challenging for cryptocurrency to function as a reliable form of currency.
- No physical record: Cryptocurrency is a digital form of wealth that you can’t hold in your hands. You can keep it in online wallets for investing or spending, or in hard wallets (offline) just for safekeeping. But if there’s no electricity, you can’t access its value, so it stays stuck in the wallet indefinitely.
- Irreversible transactions: The blockchain mechanism records all transactions permanently on all active computers across the globe. In case of wrong transactions, it is impossible to recover the amount.
- Misused by scammers: When technology is too hard to grasp or has fewer resources, many people tend to steer clear of exploring it. This creates a perfect chance for scammers to pose as cryptocurrency experts and steal money from unsuspecting individuals, which gives the whole industry a bad reputation. That’s why it’s crucial to have reliable resources available to guide and assist anyone interested in investing in cryptocurrency.
Bottom Line:
To sum up, cryptocurrency is like a big new world to discover, much like how stock markets were when they first started. It’s still growing and changing, with improvements happening all the time in the technology behind it. Despite challenges, it’s catching the eye of investors and regulators worldwide. As time goes on, cryptocurrency could become even more useful, fitting in better with regular money systems. This could mean better opportunities for people who invest in it, and possibly even benefits for governments if they handle it right.
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