Is Cryptocurrency Really The Future?
We are all so curious to know if the concept of a parallel universe is real. Aren’t we? We read different theories; we watch youtube videos to know more and more about it. However, many of us have ignored an alternate financial universe that came into existence in the early 2000s.
Yes, I am talking about Bitcoin, the first-ever successful cryptocurrency created in January 2009 by a mysterious developer Satoshi Nakamoto.
Although previous attempts to establish a virtual currency network was made, they were not fully developed. B-Money and Bit Gold are two examples of such unfinished digital currency attempts.
Before deciding whether cryptocurrency is going to rule the world in future or not, let’s know about this digital asset in detail.
What is Cryptocurrency?
Cryptocurrency is a digital or virtual currency that is secured with cryptography. In simple terms, it is a currency in digital form which we cannot touch or feel but can have possession of. The most important thing is, it is encrypted with codes so that only the person to whom it belongs can process the information.
How Cryptocurrency Works?
Most of the cryptocurrency are decentralised networks based on Blockchain Technology, also known as the Distributed Ledger Technology. Now, let’s break this technical jargon into simpler terms to understand better.
Firstly, what do we mean by a Ledger? A Ledger is a book belonging to a person or a business entity in which account transactions are recorded as debits and credits. Similarly, all the virtual transactions related to cryptocurrency are recorded electronically in a distributed ledger or a blockchain, spread across different locations in the world.
So, blockchain is nothing but a type of database where we store information related to cryptocurrency transactions. The only difference between a blockchain and a traditional database is the way data are structured. In a database, the data is stored in a table format in a centralised manner, whereas in a blockchain, the data is stored in groups or blocks decentralised and distributed across the globe.
Each block has a certain storage capacity and so can store a limited amount of data. Once the storage is full, the next set of information is stored in a new block. All the blocks with data are chained together with the previous blocks, creating a chain of data known as the “blockchain”.
Now comes the safety part. All the data is available electronically, which means anyone can have access, so is it safe? As the name “Crypto” suggests, all the entries are encrypted using various cryptography techniques such as hash functions, symmetric and asymmetric key cryptography, making it difficult for anyone to crack it.
Characteristic of Cryptocurrency
Let’s know in detail about the main characteristics of Cryptocurrency:
Distributed Technology
As said before, the data or information related to every transaction is shared with multiple anonymous computers located in different locations. These computers communicate with each other through a common network. The advantage of a distributed network is that even if one system fails, we can retrieve the data from the other systems in the network, which means the chances of data loss is zero.
No Central Authority
Cryptocurrency, or Bitcoin, to be precise, is the first decentralised payment network that is fully controlled and managed by the users without any central authority or middlemen. Now that means no hidden banking charges, no minimum account balance to maintain, no interference from the government.
Irreversible and Immutable
The transactions made by cryptocurrency are irreversible and immutable. The only way to reverse the currency is by requesting the receiver to send it back. Therefore, you need to be extra careful before making any transactions.
Faceless
All the transactions made through cryptocurrency are discreet. Unless the users voluntarily publish, the transactions are not associated with any person. Also, the billing address that is generated changes after each transaction.
Volatile Price
The price of cryptocurrency are highly volatile as compared to any other financial products. The reason behind the volatility is the small size of the market, where even a small player can make a huge impact on the price. Another reason being the limited supply of few cryptocurrencies.
Limited Supply
The supply of Bitcoin is limited to 21 million, which means no more than that can ever be mined or circulated. The limited supply makes Bitcoin deflationary. However, not all cryptocurrency has limited supply, Ethereum has a constant supply in the cryptocurrency ecosystem, making it inflationary.
Demand and Supply
Most cryptocurrencies are purely digital and are not backed by any physical assets. Therefore, the price of the currencies are not based on any underlying assets. Neither does it have the government decide its value, which means the price depends on how many people want to buy it and how much supply is available.
Uses of Cryptocurrency
Let’s see the two most important use of cryptocurrency in real-time. Keep reading to know more.
Investing in Cryptocurrency:
As said before, the price of cryptocurrency is highly volatile, making it a medium to earn high returns. But as we all know, high volatility comes with high risks, so doing proper research before investing is necessary.
Paying with Cryptocurrency:
Making payment through cryptocurrency is easy and fast and can be received without any merchant account. Also, the transaction charges are relatively less than bank transactions.
However, cryptocurrency payments have its demerits such as it comes with no legal protections. Debit and credit cards come with legal protections, so in case of any dispute, the credit card company can help you out in getting back your money. Also, not to forget, the transactions are irreversible.
Cryptocurrency Vs. Traditional Currency ( e.g. US Dollar )
Following are the key differences between cryptocurrency and a traditional currency system (here, US Dollars).
- So basically, US Dollar or any fiat money, in that case, are government-issued money whose values are maintained by the government or the regulator. Whereas cryptocurrency has no regulatory body, and the value totally depends on its demand and supply.
- Secondly, we need intermediaries such as banks to store and transact our fiat currencies. However, to transact cryptocurrency, there is no need for any intermediary. The users can directly transact the cryptocurrency from their digital wallets.
- And the last important point is that, unlike fiat money, we cannot use cryptocurrency to make physical payments. We can only use it to make digital payments.
So, is cryptocurrency really the future?
Now that we are aware of the basics of cryptocurrency, let’s answer the question, “Is cryptocurrency really the future?” I would say it is still a distant thought as the idea is still unknown to many. Also, it involves a lot of risk and scams, which makes it an uncertain asset to hold. Also some of its major properties ( eg. completely untraceable transactions, globally distributed nature etc. ) are against it becoming a full fledged currency system in a country.
Bitcoin can be used anonymously to conduct transactions between any account holders, anywhere and anytime across the globe, which makes it attractive to criminals and terror organisations. They may use Bitcoin to buy or sell illegal goods like drugs or weapons. Most countries have not clearly determined the legality of Bitcoin, preferring instead to take a wait-and-see approach. Some countries have indirectly assented to the legal use of Bitcoin by enacting some regulatory oversight. However, Bitcoin is never legally acceptable as a substitute for a country’s legal tender. — Investopedia
With that thought, let me answer some common queries that you might have.
Can we encash cryptocurrency?
Yes, you can cash out your cryptocurrency. All you need is to create a wallet to receive your cryptocurrency. Then sell it out and withdraw the cash into your bank account.
What are some of the cryptocurrency with limited supply?
Some of the cryptocurrency with limited supply are:
- Bitcoin
- Litecoin
- Stellar
- Chainlink
- XRP
- Cardano
- Binance Coin
Can you lose money in cryptocurrency?
Cryptocurrencies are highly volatile, and if the price falls below a certain level, you lose your investment amount.
What are some of the crypto wallets available?
Some of the best crypto wallets are:
- Coinbase
- BlockFi
- PointPay Banking Wallet
- Binance Chain
- BitFinex
- Trezor
Does cryptocurrency have transaction fees?
Yes, cryptocurrency has transaction fees. There are three transaction fees involved in crypto, i.e. exchange fees, network fees and wallet fees.
