Everything you need to know about the pros and cons of digital currencies

Although cryptocurrency has only recently entered the lexicon of the common masses, the concept of cryptocurrency has been around for decades. Finally, the term became popular in 2008 with the invention of Bitcoin by an anonymous programmer named Satoshi Nakamoto.

A cryptocurrency is a digital or virtual asset that uses cryptography as its basis. What makes cryptocurrencies so attractive is their decentralized nature. Cryptocurrencies cannot be issued or regulated by any central authority or financial institution, making them independent of outside intermediaries.

The decentralized nature of cryptocurrencies is the result of blockchain technology, a blockchain serves the purpose of a digital ledger that maintains secure and decentralized records of all transactions within a crypto network. Basically, blockchain is a shared database that stores data in blocks. Since all users in the network maintain control over a specific blockchain, no single person has the authority to tamper with information. This reduces the risk of counterfeiting or double spending. The security and reliability of a blockchain generate a sense of trust without any central authority.

Cryptocurrencies are put into circulation by dedicated individuals through a process called mining. Those individuals or miners use advanced computing power to solve complex math puzzles and get cryptocurrencies as a reward. In addition, 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 retail and growth value. Most cryptocurrencies have limited supply, which boosts their valuation over time, as do other popular assets such as gold. For example, a popular cryptocurrency like Bitcoin has an offer limit 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 last Bitcoin.

The advantages

Cryptocurrencies have become so popular among users and investors because of their multiple beneficial offerings. One of the great advantages of cryptocurrencies is that they do not depend on any kind of central institution or authority. Without any central intermediary, crypto transactions are devoid of any kind of authoritarian oversight or regulation. Any user can trade in cryptocurrencies without being the 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 providers 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 in seconds. You no longer need a bank or credit card company to facilitate your transactions. In addition, crypto transactions are fully protected using private and public keys, along with other forms of reward systems.

At the same time, crypto investment promises to generate more profit than other investment vehicles. In fact, the crypto markets have witnessed rapid growth in values ​​in recent years. According to Coinmarektcap.com, Bitcoin was priced at its all-time high of $50,822.2 on December 24, 2021.

the cons

Being a newer asset class, cryptocurrencies are considered an eventful investment. The crypto market is extremely volatile as it is difficult to predict the future of a speculative investment vehicle such as cryptocurrencies. Like any other commodity, the price of cryptocurrencies depends on supply and demand. At the same time, highly concentrated holdings of cryptocurrencies make the market unpredictable. These wealthier investors or whales dictate the volatility of the crypto market to a very large extent.

While decentralization is the biggest advantage of cryptocurrencies, it is also a disadvantage of cryptocurrencies. Not only does its decentralized nature add to its volatility, but its lack of regulatory authority makes the crypto market more attractive to criminals. There is also no consumer safety that could lead investors to financial disaster.

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

There has been a lot of confusion about the legal status of cryptocurrencies in various financial jurisdictions around the world. As of December 2021, El Salvador will be the only country to legalize Bitcoin as a means of payment for money transactions. However, this has been able to limit cryptocurrencies from gaining unparalleled popularity with both novice and experienced investors. So, if you are someone who wants to kickstart crypto investments, spend time doing good research and gaining knowledge about cryptocurrencies. You can join online crypto communities or read crypto white papers to make an informed investment decision.

(Bibin Babu is co-founder of Colexion-NFT marketplace. Views are personal)

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Published on: Monday, March 14, 2022, 21:42 IST
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