What Are Cryptocurrencies?

Advantages and Disadvantages

A cryptocurrency is a virtual currency used to exchange goods and/or services through a system of electronic transactions without the need for an intermediary like a bank or government. It is based on blockchain technology. Think about it: If you were to create a currency you’d want it to be both digital and not to have to carry any coins around. Add low barriers to entry and top notch anonymity and you’ve got cryptocurrency!

Bitcoin was the first “cryptocurrency” created with the main objective of “digitizing and democratizing money” through decentralized, anti-fraud technology. After Bitcoin, other new cryptocurrencies began to emerge with similar objectives as Bitcoin. With their respective technologies, the cryptocurrencies had objectives in areas such as the movement of money, privacy, online games and other applications.

Bitcoin is currently considered the most important cryptocurrency. Keep in mind that the vast majority of other cryptocurrencies share a common goal with Bitcoin but with small, unique differences. If you understand how Bitcoin works, you can understand how other cryptocurrencies work when you start studying them individually. But, like the internet, it isn’t necessary to understand the technology completely in order to utilize it. Really, how many of us know the in’s and out’s of the world wide web?

Presently, cryptocurrencies are mainly used for trading like the stock market. At the same time, however, more and more real life applications are available and companies and governments are investing resources in cryptocurrency research and block chain technology.

Advantages

Decentralization

The biggest advantage of digital currencies in’t their investment potential, but the underlying technology: blockchain. A blockchain works like a database, which can not be falsified or manipulated. It is maintained in a decentralized way, meaning there are countless independent computers that permanently store every single transaction. If in doubt, millions of users can understand whether a transfer has taken place or not. This is precisely the advantage over a bank which is centralized. In the centralized model, there is only one place where transaction records are kept, within the banks system. This, of course, is much easier to manipulate than a multitude of independent observers. In addition, transactions in the blockchain are comparatively anonymous to a bank and are executed much faster.

Blockchain can also be used outside of the financial sector. Everywhere middlemen are needed, they can now be dispensed with. For example, forgery-proof elections are possible with blockchain. Or the playback of music and films without the need for streaming services as an intermediary between user and label/studio are possible.

Low Barriers to Entry

Unlike typical financial products, cryptocurrencies don’t require users to have things like several types of identification or a bank account. This opens the door to billions of people who still need to use money but don’t want to be limited to cash.

More and more potential applications

While the value of digital currencies was mainly speculative in the early days of Bitcoin or Ethereum, more and more uses are emerging. For example, some online shops already offer Bitcoin as a payment option, and various online casinos are also utilizing cryptocurrencies. Worth mentioning are so-called ‘smart contracts’: these protocols ensure that a contract is executed as soon as a specific condition is met, overcoming mistrust. As an example, you can create a contract that pays out winners of a bet automatically or dividends to shareholders at specific periods.

Disadvantages

High volatility

Looking at Bitcoin’s price evolution as a proxy for the market as a whole, it becomes clear that the currency can only be used to a limited extent as a real means of payment. From January to December last year alone, the value increased nineteen-fold, only then in the last two months to sink to under half of that. Volatility means Bitcoin works as a speculative object, and buyers expect that a product bought at the beginning of the year would be available for a completely different price in a short period of time.

Minimal Mainstream Adaptation

Even with more and more companies using blockchain technology, and projects like IOTA working with big companies such as Bosch, Cisco or Volkswagen, digital currencies are not universally accepted as payment. Theoretically, there is a possibility that mainstream adaptation will fail and cryptocurrencies will lose importance.

The difficult entry

While investing in the stock market will not be problematic for most investors, buying a digital currency for the first time can easily overwhelm a user: the number of exchanges is too high and the verification process too lengthy. Furthermore, deposit, withdrawal and transaction fees can be daunting at first glance.

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janeiro 4, 2019

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