Everyone talks about cryptocurrency. But do you fully understand what it means and how it works? We’re here to help!
Cryptocurrency seems to be in the news quite regularly recently. We’ll help you understand it fully and how it’s impacting the financial world. Let’s dive right into the good stuff, one question at a time.
Additional Reading: Bitcoin vs Credit Card: The Ultimate Showdown
What Is Cryptocurrency?
Cryptocurrency is a digital form of currency that is being used increasingly all over the world. Compared to the prevailing currency system, cryptocurrency is far more efficient in terms of usage and transaction costs as it is also decentralised. This means it is not regulated by a central banking system. Cryptocurrencies use cryptographic protocols, or extremely complex code systems that encrypt sensitive data transfers, to secure their units of exchange.
How Did It All Start?
Cryptocurrency existed as a theoretical construct long before the first digital alternative currencies debuted. Cryptocurrency’s technical foundations date back to the early 1980s.
The first cryptocurrency to begin trading was Bitcoin back in 2009. Since then, we have seen numerous cryptocurrencies being created with new algorithms with longer or shorter block times and overall behaviour changes to better suit a future economy.
Most people today believe that cryptocurrency is the evolution of money and payment methods as we know them. Cryptocurrency is the means of online payment that excludes any middleman and any additional fees like with other online payments, such as Credit Cards or Debit Cards. The idea behind cryptocurrency was formed to create a decentralised market, which governments and banks cannot interfere with or pose taxes and fees upon.
What Is Bitcoin?
Bitcoin is widely regarded as the first modern cryptocurrency – the first publicly used means of exchange to combine decentralised control, user anonymity, record-keeping via a blockchain, and built-in scarcity. It was first outlined in a 2008 white paper published by Satoshi Nakamoto, a pseudonymous person or group.
In early 2009, Nakamoto released Bitcoin to the public, and a group of enthusiastic supporters began exchanging and mining the currency. By late 2010, the first of what would eventually be dozens of similar cryptocurrencies – including popular alternatives like Litecoin – began appearing. The first public Bitcoin exchanges appeared around this time as well.
In late 2012, WordPress became the first major merchant to accept payment in Bitcoin.
Additional Reading: How To Use Digital Wallets Effectively For Online Transactions
What are the advantages of Cryptocurrency?
1. Cheaper Than Traditional Transactions
Cryptocurrency transaction fees are generally less than 1% of the transaction value, versus 1.5% to 3% for Credit Card payment processors and other such payments.
2. No Currency Monopoly
Cryptocurrencies offer a reliable means of exchange outside the direct control of national banks. In the long run, many economists and political scientists expect world governments to co-opt cryptocurrency.
3. Built-in Scarcity May Support Value
Most cryptocurrencies are hardwired for scarcity – the source code specifies how many units can ever exist. Like precious metals, they may offer inflation protection unavailable to fiat currency users.
4. Fewer Barriers and Costs to International Transactions
Cryptocurrencies don’t treat international transactions any differently than domestic transactions. Transactions are either free or come with a nominal transaction fee, no matter where the sender and recipient are located.
What are the disadvantages of Cryptocurrency?
1. Often Can’t Be Exchanged for Fiat Currency
Generally, only the most popular cryptocurrencies – those with the highest market capitalisation, in dollar terms – have dedicated online exchanges that permit direct exchange for fiat currency.
2. Data Loss
This is one of the biggest concerns today – often the reason why people are reluctant to invest in cryptocurrency. Data loss here results in a direct financial loss.
3. Black Market Activity
Probably the biggest drawback and regulatory concern around cryptocurrency is its ability to facilitate illicit activity. Many gray and black market online transactions are denominated in Bitcoin and other cryptocurrencies.
4. Tax Evasion
Since cryptocurrencies aren’t regulated by national governments and usually exist outside their direct control, they naturally attract tax evaders.
5. High Price Volatility
Many cryptocurrencies have relatively few outstanding units concentrated in a handful of individuals’ hands. These holders effectively control these currencies’ supplies.
6. No Refunds
The concept of an arbitrator violates the decentralising impulse at the heart of modern cryptocurrency philosophy. This means that you have no one to appeal to if you’re cheated in a cryptocurrency transaction.
This Just In
The Ministry of Finance, India has said that virtual currencies (VCs), including Bitcoins, are not currencies. “VCs are not currencies. These are also being described as ‘coins’. There is, however, no physical attribute to these coins. Therefore, VCs are neither currencies nor coins,” the ministry said in a press statement. It was made clear that virtual currencies are not backed by government fiat. “These are also not legal tender. The government or Reserve Bank of India (RBI) has not authorised any VCs as a medium of exchange.”
This finally clears the Indian government’s stand on Cryptocurrency. So far, there were only speculations if Cryptocurrency would come under the purview of the RBI.
The Conclusion?
Bitcoin, in particular, has been in the news recently for its frequent rise and fall in value. Cryptocurrency is an exciting concept with the power to fundamentally alter global finance for the better. But while it’s based on sound, democratic principles, cryptocurrency remains a technological and practical work in progress.
Cryptocurrency users need to remain ever-mindful of the concept’s practical limitations. Immunity from legal accountability might make a lot of users nervous, and that’s completely natural. Eventually, it’s all about consuming the facts and making a decision. How that might work out for you, you’ll have to wait and see.
Hope this helps. If you’re in the market for more conventional financial products like Personal Loans or Credit Cards, we’ve got you covered.