SME Futures Explains: Cryptocurrency

Cryptocurrencies have skyrocketed in value over the last few years. Almost everyone has heard about them, but how many people actually know what Cryptocurrency is? How many people know where they come from and how they work?

Let’s understand!!! What Is a Cryptocurrency?

A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. They are systems that allow for the secure payments online which are denominated in terms of virtual “tokens,” which are represented by ledger entries internal to the system. Many cryptocurrencies are decentralized networks based on blockchain technology. A defining feature of cryptocurrencies is that they are generally not issued by any central authority.

Types of Cryptocurrency

The first blockchain-based cryptocurrency was Bitcoin, which still remains the most popular and most valuable. Bitcoin was launched in the late 2008 by an individual or group known by the pseudonym “Satoshi Nakamoto. Some of the competing cryptocurrencies spawned by Bitcoin’s success, known as “altcoins,” include Litecoin, Peercoin, and Namecoin, as well as Ethereum, Cardano, and EOS.

Advantages and Disadvantages of Cryptocurrency

Advantages

Cryptocurrencies hold the promise of making it easier to transfer funds directly between two parties, without the need for a trusted third party like a bank or credit card company. In modern cryptocurrency systems, a user’s “wallet,” or account address, has a public key, while the private key is known only to the owner and is used to sign transactions. Fund transfers are completed with minimal processing fees, allowing users to avoid the steep fees charged by banks and financial institutions for wire transfers.

Disadvantages

As cryptocurrencies are virtual and are not stored on a central database, a digital cryptocurrency balance can be wiped out by the loss or destruction of a hard drive if a backup copy of the private key does not exist. Also, the semi-anonymous nature of cryptocurrency transactions makes them well-suited for a host of illegal activities, such as money laundering and tax evasion.

Criticism of Cryptocurrency

Cryptocurrencies face criticism for a number of reasons, including their use for illegal activities, exchange rate volatility, and vulnerabilities of the infrastructure underlying them. Cryptocurrencies are thus considered by some economists to be a short-lived fad or speculative bubble.

Nonetheless, many observers see potential advantages in cryptocurrencies, like the possibility of preserving value against inflation and facilitating exchange while being more easy to transport and divide than precious metals and existing outside the influence of central banks and governments.