Rather than printed or created from a central bank of national or supranational entities, cryptocurrencies are completely decentralized. Usually, no one single entity controls the circulation or transaction of said currency, but rather it works through the people possessing it, or to be specific, their machines.
Most cryptocurrencies are created digitally through a “mining” process. Using powerful computing tools to generate blockchains — essentially a continuously growing list of records that are encrypted — these cryptocurrencies are almost purely based on timestamps and transaction data. Due to them using a peer-to-peer network (which means no central database or center of operations), they are secure by design. An attempted retroactive change at any record in the blockchain would require a network majority, thus preventing a lone hacker from changing the blockchain in that regard to suit their needs. These blockchains serve as a public financial transaction database as opposed to transactions done behind a veil.
Privacy and Security of Cryptocurrency
One of the most “talked-about” traits of cryptocurrency is its enhanced ability regarding privacy and security compared to regular currency. While not fully anonymous, cryptocurrency users do enjoy a far more secure approach compared to conventional currency transactions. What makes this anonymity special is that the cryptocurrency isn’t bound to people, but rather addresses or “keys.” Bitcoin owners are not identifiable even with all transactions laid bare for the public. Still, many cryptocurrency exchange groups are required by law to collect a degree of personal information. Such anonymity has also been taken advantage of by illicit or illegal groups, such as scammers and hackers, which bank on the hard to track nature of cryptocurrencies to ask for payments in this way. When that happens, the anonymity is used in reverse, disallowing law enforcement to chase down the suspects promptly.
Creation is another very unique trait of cryptocurrencies in that they are not created physically — no printing machines or monetary plates. Nor are they created by a standard quota, as in the Fed or another organization deciding how much should be released into circulation each year. As mentioned before, they are generated via computer mining, which is a validation of transactions for the cryptocurrency network. As a reward, they get some of the cryptocurrency as an incentive to continue their work while also increasing the overall sum in circulation. As the resources required for mining are considerably high, generally rewards are still just a bit higher for the miners, which is what makes this a profitable endeavor. While many people believe that miners do not affect the stability and security of the blockchains, a recent study has expressed some doubts about the matter.
Valuation and Exchange of Cryptocurrency
Now while you may possess some of these cryptocurrencies or have the desire to do so, you should be aware that their usage is rather niche, especially pertaining to regular needs. Many counties have either outright banned it or regulated cryptocurrency usage heavily. So, most people seeking to utilize it or profit from it would need to exchange them to regular centralized currencies, such as the US dollar. But, since it is a decentralized form of currency, cryptocurrencies have a uniqueness in that their transfer rates to other centralized currencies fluctuate much more frequently than the day-to-day currencies we mostly rely on. For example, Bitcoin once dropped nearly $2000 worth of USD in just a day.
Without a government or overseeing party on how much the currency itself is worth, the price itself is purely determined by those who have bitcoin in their virtual wallets. While this may sound like a perfect recipe to fulfill the dreams of a fully free market, in reality, people can utilize this double-edged sword to artificially inflate or collapse the value of the currency. In some cases, the cryptocurrency itself was a pyramid scheme to rope people into investing their real money into something that had no value in reality.
That being said, due to the methods and nature of cryptocurrencies, they do possess an advantage in ease of exchange or transfer compared to conventional currencies. Say today if you wanted to purchase European goods or services from the U.S., you’d have to go through a couple of hoops to verify such payment with your bank and wait for them to process, not to mention that your credit card would give you an arbitrary exchange rate for the foreign currency being converted into the native one that your bank account uses.
With cryptocurrency, it is much simpler. As both parties are already using the same currency with the same valuation, no money would be lost to exchange rates during the transaction process. Apart from that, the process can be faster than doing so through regular channels, with some cryptocurrencies reporting transfer times around 2–8 minutes.
Considerations for the Future
Since cryptocurrencies are a relatively recent development, many governments and banking institutions are struggling to keep up with the progress of ever-evolving virtual currency. Like with new trends or rises in technology, most governments and therefore current regulations are built on the fundamental knowledge of cryptocurrencies as it is today, not what it will be in years if not decades from now. Currently, there is a growing number of players in the expanding field, some good and some bad actors. Cryptocurrencies and their laws need to address the decentralized nature but yet provide adequate consumer safeguards while clamping down on the currency being used for money laundering or tax evasion.
While blockchains are hard to crack, they are not impossible. Even then, hackers and scammers will often try to target the more vulnerable end client themselves. Through phishing and other schemes, they can acquire keys from an unwitting person and use them. Even larger malicious networks could even try to dismantle an entire cryptocurrency, either through viruses or exploits within its own system. If that happens, it could spell disaster for investors or currency holders. The valuation of the cryptocurrency itself could be wiped in an instant, thus resetting all your invested money to zero in the blink of an eye.
Mining is another concern. The energy for cryptocurrency mining has only grown exponentially over the years. Reports have shown that just for Bitcoin alone, it has already consumed 0.2% of the global total. With conservation issues on the rise, there is some concern whether efforts at mining cryptocurrencies would clash with power reduction or efficient usage.
For marketing and investing purposes, cryptocurrency has expanded massively compared to when Bitcoin first came out in 2009. Now there around 6000 types of cryptocurrencies. With bumpy rides in stock markets, investors could be turning towards relatively more stable investing assets, which includes gold and certain bitcoins now rising to prominence. Predictions have also been made that with the volatility and slumps of regular economic capitals, a bull market for cryptocurrency could be around the corner.
Overall, it’s better to view cryptocurrency as more of an investment than a currency. While it’s considerably more volatile then regular currencies, there are many investing methods that are equally or if not of higher risk. It’s up to you to weigh those risks and judge to see whether cryptocurrencies are for you or not. One thing is certain though. For the foreseeable future, they will keep growing in their market share. Whether you like it or not, cryptocurrencies are here to stay.
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