What are Cryptocurrencies?
The emergence of cryptocurrencies and blockchain has led to a strong media coverage but it is often found to be confusing and may lead us to question whether we actually understand what a cryptocurrency is.
Simply put, alike money, cryptocurrency is a medium of exchange. However, transactions are digital and to a degree safer as they rely on encryption to store and exchange coins. Interestingly, inventing a form of digital currency was not the primary objective when the creator of arguably the most relevant and favoured cryptocurrency, Bitcoin, originally wanted to find a way to avoid double spending. This is done by building a decentralized system, where a network of individuals keeps a copy of the complete ledger and performs checks to validate transactions made by other users. Confirmations of transactions are crucial and done by miners investing computer power to validate transaction in exchange for a reward, most commonly tokens of the cryptocurrency in question.
Cryptocurrencies take away the power of financial institutions by manoeuvring the token supply
One of the strongest benefits of absence of a third party, such as a financial institution is undoubtedly the impossibility of government meddling. Cryptocurrencies take away the power of financial institutions by manoeuvring the token supply and the currencies are both built on, and backed up by cryptography.
To warrant security, cryptocurrencies operate on a Blockchain to oversee all transactions in an open and decentralised ledger. Although generally praised and acknowledged, there are some opposing opinions on the effectiveness of a decentralised ledger.
Pros:
· Reduced reliance on financial institutions:
Close presence of banks and financial institutions is not only a major convenience, but also a large privilege. Using cryptocurrency for payments can diminish or completely erase fees and also allow access to banking anywhere in the world, such as it is in the case of Stellar, where the provision of financial services to the unbanked is its social mission.
· Precaution against scam:
The role of miners also encompasses a constant maintenance and monitoring, hence fraud can be spotted quite easily and appropriate action made accordingly.
· Quick Transactions:
The speed of transactions is along with absence of fees, one of most prominent benefits of using decentralized ledger for payments. It usually takes days for banks to process transactions. Conversely, blockchain made payments take mere minutes, are safe and accurate. Fast monetary movement will undoubtedly benefit businesses worldwide and potentially change the way we obtain goods and services.
· Government meddling:
As mentioned before, cryptocurrencies operating on a blockchain are working without the intervention of a third party and are not under control of any prominent financial institution or government which allows them to avoid issues such as artificially created hyperinflation or currency devaluation.
Cons:
· Volatility
Cryptocurrencies experience extreme instability and price fluctuations of tens of percent from day to day. This unpredictability makes it difficult to foresee the viability of investment and future returns, and may make cryptocurrencies seem untrustworthy and unverified for the general public.
· Lawbreaking
Committing crime can seemingly be easier due to anonymous nature of blockchain users. A digital black market that used mostly Bitcoins for transfers “Silk Road” is one of many examples. It was very prosperous and profitable until discovered by the FBI in 2013.
Not for nothing have cryptocurrencies been described as digital gold. They hold immense value which is steadily increasing and will continue to do so. Today, the most popular and valuable coins by market cap are Bitcoin, Ethereum, XRP (Ripple), EOS and Stellar. Cryptocurrencies are able to transform people’s financial lives. Not only by providing cheap, fast and free-of-fraud money transfers or helping the unbanked in the developing world, but they have the ability to evolve into a worldwide system for everyday payments. However, for this to happen, cryptocurrencies should remain truly decentralized, hence trustworthy. Not to be forgotten, crypto is still fairly new and there is still a lot of room for development, and it is going to be interesting to see how will the issues of volatility be tackled and which direction the market will head and grow towards in the decades to come.
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