The concept of cryptocurrency might sound pretty complicated, but it’s quite easy to understand once you break it down. If you ask around, you will get many different opinions about the construct of digital money, but what we’re interested to know is if you should consider cryptocurrency as friend or foe?
Cryptocurrency is now being used to purchase lots of different products and services, and some are even buying big things like cars and houses with theirs! They’re not widely used… yet. But many believe the use of cryptocurrencies could one day become a common way to buy and sell things.
So, what is Cryptocurrency?
In the simplest of terms, cryptocurrencies are digital currencies or digital money. They don’t exist physically, you can’t hold them in your hand like the trusty bank note, instead they’re completely virtual. They’re regulated through digital encryption and transfer verification, rather than a central bank or government.
You can store cryptocurrencies in ‘digital wallets’ on a smartphone or computer, and owners can send them to people to buy things.
Bitcoin is the first ever form of cryptocurrency. It first came on the scene in 2009, envisioned by Satoshi Nakamoto. Since then, thousands of cryptocurrencies have been created including some of the most popular…
Cryptocurrency works in a very different way to cash and debit cards. The exchange of these digital currencies is known as ‘peer-to-peer’ transactions, meaning there is no bank, or other third-party involvement. Every transaction ever made is recorded on a large database known as a blockchain (imagine is as a giant spreadsheet).
What is Blockchain?
Cryptocurrencies run on a technology known as “blockchain.”. A blockchain is a public ledger that documents all transactions in a way that makes them difficult to alter. Because of this, it provides a secure way for individuals and businesses to transact directly with each other without involving a bank, government, or any other third-party entity.
Each transaction record – also known as a “block” – is linked using cryptography. It’s then verified by independent peer-to-peer computer networks before being time-stamped and permanently added as a new block to the ever-growing chain of transactional data. Once a new block is added, the information it contains can’t be modified.
A blockchain isn’t necessarily based on a central location but is distributed among a large network of computers which is kept secure at all times through complex systems. This makes it virtually impossible for anyone to tamper with a blockchain and ensures all transactions and users have protection.
The good and bad of Cryptocurrency
Cryptocurrency is becoming the talk of the town; every second person is intrigued by the idea of investing in cryptocurrencies. But before you do, it’s important to consider both the good and the bad. So, are cryptocurrencies the most lucrative investment right now? Is investing in cryptocurrencies secure? What returns would it provide?
Because the encryption and verification of transfers happens across multiple computers around the world at the same time, it means that no one person is controlling it. This makes the process completely independent. To reiterate, because cryptocurrencies run on blockchain technology, this defines the way transactions are recorded, time-stamped, and added onto the chain, making it difficult for anything or anyone to alter this information. Before this happens, each transaction has to go through a two-factor authentication process. So, this begs the question, is cryptocurrency hackable? Unfortunately, the short answer is – yes. But it’s like anything, nothing is 100% secure.
If you’re interested in the idea of investing in cryptocurrency, just be aware of the possible scams. Cryptocurrency scams and related fraudulent activities should be reported to your local country’s fraud division, for America it would be the Federal Trade Commission (FTC), for the UK we would advise going through the official Action Fraud website and Europe it’s best to report through Europol.
The fact that the blockchain network works on a decentralised system, allows its users to be anonymous. It operates in the form of silos. Without the need for users to reveal their details, they create a pseudonym for themselves which will randomly generate a bitcoin address that allows cryptocurrency transactions its anonymity.
The peer-to-peer form of the network allows everyone to join in as there are no entry barriers. Anyone can deal with cryptocurrencies, or even mine them if they have the right hardware which makes investing in cryptocurrency pretty easy in the first instance!
Belonging to a decentralised system with no single governing body overseeing its regulation means that complete anonymity is offered to those involved in mining and trading it. This can then increase the chances of misuse and potential illegal transactions.
Ever since its creation, cryptocurrency has had its share of highs and lows. Its value fluctuates on a daily basis and this volatility can massively affect its users for the good or the bad.
You can’t be indecisive when it comes to cryptocurrency, the transactions are irreversible and final. You can’t reverse a payment once it’s going through the process stage on the blockchain network. Blockchain works on the tenets of storing data in a way that prevents any alteration and tampering.
You could say that cryptocurrency is still the new kid on the block… still in the experimental but fast-growing phase, it’s encountering new challenges every day. Each day could bring threats to its security and integrity too so investing at this stage could wind you up with fluctuating and increased fees, slower confirmation, and other issues.
The legal status of cryptocurrencies is rather complex. In most countries in the world there aren’t any specific laws against the mining, purchasing, or trading of cryptocurrencies. Though in some places they’re legal to have and own, that doesn’t necessarily mean they’re accepted as a legal tender. Some countries have made laws explicitly to allow the trading of cryptocurrency. However, some have made it illegal due to the risks of money laundering.
Cryptocurrencies are legal in countries in Europe, and North America, they’re also legal in Israel, Turkey, India, Pakistan, Japan, South Korea, the UK, and Australia. They are illegal in Bangladesh, Nepal, Cambodia, Ecuador, Algeria, and Morocco. Then in Indonesia, cryptocurrencies cannot be used as payment, but it is legal to mine them. In China and India there is restriction on use.
The future of cryptocurrencies is volatile to say the least. Due to the nature of the system, the value will always fluctuate. It’s really down to you whether you consider cryptocurrencies to be the future of payments or not. All we can advise is that you do a lot of research into understanding the figures before you involve yourself. Everyone has a different opinion, Bill Gates and Richard Branson are part of the few that use Bitcoin and then you have some who are completely against bitcoin like Paul Krugman, Warren Buffet, etc.
So, where is the future of cryptocurrency? Only time will tell.
If you’re interested in learning more about currency and the different forms of payment, you should check out our blog “Unusual forms of Ancient Currency“, where we explore what currency looked like before metal, paper and digital currency was invented!