Cryptocurrency pertains to a type of digital currency. With over a thousand variants to date, they are regarded as digital assets or mediums of exchange. Amongst the notable cryptocurrencies are Bitcoin, Ethereum and Dogecoin.
As for asset ownership, pertinent information is kept securely on the cloud. It’s important to highlight though, that some countries do not deem cryptocurrencies as legal tender and regulations surrounding them can be unclear or inconsistent.
Comprehending Cryptocurrency: Definition and Mechanics
While possessing distinct characteristics, many cryptocurrencies share fundamental similarities. Below is a brief overview of these:
The Technology behind Cryptocurrencies: Blockchain
Blockchains refer to an ever-expanding array of electronically secured and group-updated files called ‘blocks’. They are connected in a manner similar to a linked list, with each block containing a reference to the entries preceding it. This makes them incredibly resilient against data tampering since all subsequent blocks must be modified if one is altered, rendering such a task extremely arduous, if not unmanageable, without the permission of block owners. Consequently, blockchain architecture is inherently secure, even sans extra cryptographic measures. Typically, a decentralized network of computers maintains and operates blockchains, exchanging and sharing data in line with a structured protocol.
A “node” refers to a computer that establishes a connection to the Bitcoin network, with the role of transmitting transactions or preserving a copy of the blockchain. Node operators receive incentives in some way or may offer their services at no cost.
Authentication of Financial Transactions:
Various timestamping approaches are used by cryptocurrencies to authenticate transactions. These mainly include proof of work, which entails one party substantiating that a certain amount of work has been carried out with the least effort demanded from the verifying party. It was implemented with the aim of deterring spamming, DoS attacks, and similar problems. Two frequently employed algorithms for consensus are Proof of Work and Proof of State.
Aiming to minimise the computational burden of maintaining blockchain security, Proof of State is an alternative to Proof of Work. Validators must possess a minimum number of blockchain tokens, failing which, they will not have any authority, restraining malicious parties. Nonetheless, nodes responsible for validation may still fall prey to the nothing-at-stake issue, potentially resulting in double-spending should the wrong chain’s block be authenticated.
Wallets for Cryptocurrencies
In Bitcoin transactions, wallets are employed to store digital public and/or private keys. These can exist either as software or hardware devices.
Legal Status of Cryptocurrency
Cryptocurrency is a recent innovation, and its decentralised nature means that it functions differently from fiat currencies. About eight countries have implemented complete bans on cryptocurrencies, while another sixteen have introduced regulations that can be seen as prohibitive. Further, laws governing this realm can vary from one country to another and even from one region to another within the same country. Consequently, the regulations that define cryptocurrency’s legality vary significantly depending on the country and its jurisdiction.
Temporarily, major social media platforms like Facebook, Google, and Twitter have imposed limits on the promotion of bitcoin on their sites. Similarly, significant Chinese platforms like Baidu and Link have enacted comparable measures.
Cryptocurrencies are notorious for their absence of regulation, thereby facilitating money laundering and tax evasion with ease, eluding scrutiny. Further, the anonymity provided by cryptocurrency renders it a tempting option for those drawn to white-collar and cybercrime.
Although Bitcoin is legal, regulations are in place to govern its use. Cryptocurrencies have been subject to various criticisms, including concerns about their environmental impact, technical challenges, and scepticism from some economic experts.
Common Myths Regarding Cryptocurrencies
Because every new technology or concept can be subject to misunderstandings, there are several myths surrounding Bitcoin that can appear to be true to some extent. Let us look at some of these widely assumed beliefs. Here are a few examples:
The Primary Principle of Cryptocurrency:
Cryptocurrency is legal in most countries. However, it is crucial to be mindful of any country-specific legislations or limitations, so as to protect yourself from potential criminal charges. Staying updated with the relevant regulations is essential, and education in this regard can prove helpful.
Cryptocurrency Has No Legitimate Use
While there is some truth to the fact that criminals have utilised cryptocurrencies in the past, a similar case can be made for conventional cash. Bitcoin has been employed as a means of payment by a variety of entities, including ransomware attackers, money launderers, and even Tesla and SpaceX. Moreover, certain government officials receive their remuneration in the form of cryptocurrencies.
The answer to the question is no. Any form of currency that fulfils the three criteria can qualify as a fiat currency. However, the prevailing cryptocurrency system does not satisfy any of these criteria. Cryptocurrencies are evaluated based on the mood of buyers and sellers, which makes them an unviable store of value. When compared to conventional currency, the use of cryptocurrencies can lose value due to widespread scepticism. As a result, people may only be able to afford small amounts of Bitcoin, rendering routine tasks like grocery shopping unfeasible. Cryptocurrency has a long way to go before it can be deemed a fiat currency. Besides, dealing in cryptocurrencies poses its own hazards, since they may not always be traded readily, much like old texts or rare artworks.
Cryptocurrency is Shrouded in Complexity:
It is understandable that individuals who lack familiarity with cryptocurrency trading may find it perplexing. Yet, this is also applicable to traditional fiat-currency economies. One does not have to possess a degree in economics to transact or earn money. Although having a basic understanding of cryptocurrencies can be advantageous, it is not a prerequisite.
To summarise, cryptocurrency is simply a scheme to get rich quickly.
The past tense is used to indicate that something has happened in reality. The recent rise in Bitcoin’s value has turned many people into instant millionaires, much like the dot-com bubble, which made a few individuals extremely rich. However, it is crucial to consider that cryptocurrencies, such as Bitcoin and Ethereum, offer a secure financial shield, but it is improbable that such an event will recur soon in the cryptocurrency industry. Consequently, these currencies are unlikely to enable you to purchase a home within weeks.
The Steep Expense of Cryptocurrency:
While it is accurate that some cryptocurrencies may be hyped, and their values may be variable, the capacity to acquire, sell, or trade smaller units of these cryptocurrencies enhances their accessibility. Moreover, there are cheaper substitutes to the better-known, costlier brands, and a few countries have even launched their own cryptocurrencies, pegged to their fiat currencies.
It is frequently debated that fiat currency holds worth; however, the same holds for any form of currency. Following the US termination of the gold standard over 50 years ago, the value of fiat currency and cryptocurrencies depend on their users’ confidence in them.
Types of Cryptocurrencies
Bitcoin, the first decentralised digital currency globally, has become emblematic of the term “cryptocurrency.” Satoshi Nakamoto, or a team of individuals using that name, is credited with inventing Bitcoin. Bitcoin introduced various protocols and characteristics that are now accepted as standard within the cryptocurrency sector. Its robust security features are largely responsible for its remarkable rise in value during the past few years, allowing many of its owners to become instant billionaires.
Ethereum is a decentralised digital asset that provides a credible substitute to Bitcoin. It employs smart contracts and dApps to prevent downtime or fraud, and does not mandate any distinct paperwork or proof of residency. In December 2023, Ethereum shifted to a proof of stake algorithm to enhance efficiency and transaction speed, contrasting with Bitcoin, which still employs the proof of work method. When they stake their coins, participants in the Ethereum network are compensated with Ether, while Bitcoin rewards its participants with more bitcoins.
Litecoin is often called the “silver to Bitcoin’s gold” owing to its simplified variation of the initial cryptocurrency. Litecoin’s primary advantage is its shorter transaction confirmation period, aided by the Scrypt algorithm for Proof of Work, which can be solved using standard commercial hardware.
Initially, this seemed to be a jest, but the price grew due to either an actual interest in the cryptocurrency or a lack of comprehension of the humour. Presently, numerous organisations, including those owned by Elon Musk, accept this cryptocurrency that originally emerged as a remark on market speculation. At the moment of writing, its market capitalisation exceeds that of Litecoin, a cryptocurrency that was created to serve as a currency. In a similar satirical manner, the Shiba Inu memecoin, which was conceived as a parody of a parody, currently holds a higher value than Dogecoin.
The Binance Coin
This cryptocurrency holds the third spot in terms of market capitalisation. The Binance exchange permits transactions using this cryptocurrency. The decentralised exchange of Binance relies on the same infrastructure. Initially produced as an ERC-20 token, it has now shifted to the Ethereum blockchain, utilising the Proof of State consensus algorithm.
Being one of the earliest and most extensively embraced stablecoins, this currency has accomplished noteworthy success in the market. Stablecoins, or cryptocurrencies that are pegged to a more established currency, are developed to lower the price volatility that has limited the acceptance of Bitcoin and other prominent cryptocurrencies. As of present, this currency holds the third highest market capitalisation amongst all cryptocurrencies, which is responsible for its value.
Cryptocurrency: Expectations and Outlook
Cryptocurrency is a relatively fresh concept in financial history. Therefore, it is crucial to stay up-to-date with reputable and knowledgeable forecasts on the various trends that are expected to arise in the future. A few of these include:
Advancement in Decentralized Financial (DeFi) Services
Encrypted distributed ledger-based services are included in this segment. Given that Ethereum was constructed on the DeFi protocol, it is logical to believe that the entire cryptocurrency industry would benefit from its success.
Rise in Stablecoins:
Stablecoins, such as Tether, have gained attention for their advantageous aspects that merge the best of digital and traditional currencies. Therefore, their progression and advancement are very probable.
Rising Cryptocurrency Regulations:
Cryptocurrencies provide a decentralised and censorship-resistant channel of exchange, yet from a financial and legal perspective, they can pose several security risks. Consequently, various governments have put in place regulations to tackle this problem in a proper manner. Taxation is often the initial mode of government supervision that is implemented in several countries.
The Emergence and Soaring Popularity of Initial Coin Offerings:
It is becoming more widespread for new ventures to establish themselves in the national or global economy by means of an Initial Public Offering (IPO). Considering this trend, it is inevitable that cryptocurrency startups and companies will soon introduce IPOs to attain wider recognition.
The Ascendance of NFT Purchases Using Cryptocurrency:
Blockchain services have another significant use case in the form of Non-Fungible Tokens (NFTs). As these tokens inherently possess cryptocurrency features, it was only a matter of time before someone proposed the notion of using Bitcoin to purchase them. Furthermore, since cross-chain trading is already in existence, it’s not astonishing that cryptocurrency and NFT blockchains can collaborate.
Is Cryptocurrency Suitable for You?
One should always strive to equip oneself with ample knowledge when investing in stocks or cryptocurrencies. Investing in cryptocurrencies, like Bitcoin, doesn’t necessitate one to be a Blockchain engineer, however, being aware of the associated risks is crucial. It’s not reasonable to expect to become wealthy overnight, but rather consider it as a retirement or supplementary income fund. Additionally, it’s important to keep in mind that there are already over a thousand cryptocurrencies in circulation, so it’s wise to exercise caution when investing. Approach it like stock trading, where returns are typically nominal and profits are based on small percentages of the total value.
It’s crucial to acknowledge that Bitcoin is already a widespread cryptocurrency. Hence, it’s recommended to select stablecoins or systems that are supervised by a reputable organisation. Even though a monthly salary may not be adequate for buying a house, it should be enough to cover monthly expenses.