What Is Cryptocurrency?
A cryptocurrency is a digital or virtual
currency, that is secured by
cryptography, which makes it nearly
impossible to counterfeit or double
spend. Many cryptocurrencies are
decentralized networks based on
blockchain technology-a distributed
ledger enforced by a disparate network
of computers. A defining feature of
cryptocurrencies is that they are
generally not issued by any central
authority, rendering them theoretically
immune to government interference or
manipulation.
• A cryptocurrency is a form of
digital asset based on a network
that is distributed across a large
number of computers. This
decentralized structure allows
them to exist outside the control
of governments and central
authorities.
• Experts believe that blockchain
and related technology will
disrupt many industries,
including finance and law.
• The advantages of
cryptocurrencies include
cheaper and faster money
transfers and decentralized
systems that do not collapse at
a single point of failure.
• The disadvantages of
cryptocurrencies include their
price volatility, high energy
consumption for mining.
• The disadvantages of
cryptocurrencies include their
price volatility, high energy
consumption for mining
activities, and use in criminal
activities.
Understanding Cryptocurrencies.
⚫Cryptocurrencies are digital or virtual
currencies underpinned by
cryptographic systems. They enable
secure online payments without the use
of third-party intermediaries. "Crypto"
refers to the various encryption
algorithms and cryptographic
techniques that safeguard these entries,
such as elliptical curve encryption,
public-private key pairs, and hashing
functions.
🔸Cryptocurrencies can be mined or
purchased from cryptocurrency
exchanges. Not all ecommerce sites
allow purchases using cryptocurrencies.
In fact, cryptocurrencies, even popular
ones like Bitcoin, are hardly used for
retail transactions. However, the
skyrocketing value of cryptocurrencies
has made them popular as trading
instruments. To a limited extent, they are
also used for cross-border transfers.
Blockchain
🔸Central to the appeal and functionality of Bitcoin and other cryptocurrencies is blockchain technology. As its name indicates, blockchain is essentially a set of connected blocks or an online ledger. Each block contains a set of transactions that have been independently verified by each member of the network. Every new block generated must be verified by each node before being confirmed, making it almost impossible to forge transaction histories.The contents of the online ledger must be agreed upon by the entire network of an individual node, or computer maintaining a copy of the ledger.
🔸Experts say that blockchain technology can serve multiple industries, such as supply chain, and processes such as online voting and crowdfunding. Financial institutions such as JPMorgan Chase & Co. (JPM) are testing the use of blockchain technology to lower transaction costs by streamlining payment processing.
Types of Cryptocurrency
🔸Bitcoin is the most popular and valuable cryptocurrency. An anonymous person called Satoshi Nakamoto invented it and introduced it to the world via a white paper in 2008. There are thousands of cryptocurrencies present in the marketEach cryptocurrency claims to have a different function and specification. For example, Ethereum's ether markets itself as gas for the underlying smart contract platform. Ripple's XRP is used by banks to facilitate transfers between different geographies.
🔸Bitcoin, which was made available to the public in 2009, remains the most widely traded and covered cryptocurrency. As of November 2021, there were over 18.8 million bitcoins in circulation with a total market cap of around $1.2 trillion. Only 21 million bitcoins will ever exist.
In the wake of Bitcoin's success, many
other cryptocurrencies, known as
"altcoins," have been launched. Some of
these are clones or forks of Bitcoin,
while others are new currencies that
were built from scratch. They include
Solana, Litecoin, Ethereum, Cardano, and
EOS. By November 2021, the aggregate
value of all the cryptocurrencies in
existence had reached over $2.1 trillion
-Bitcoin represented approximately 41%
of that total value.
Are Cryptocurrencies Legal?
🔸Fiat currencies derive their authority as
mediums of transaction from the
government or monetary authorities. For
example, each dollar bill is backstopped
by the Federal Reserve.
But cryptocurrencies are not backed by
any public or private entities. Therefore,
it has been difficult to make a case for
their legal status in different financial
jurisdictions throughout the world. It
doesn't help matters that
cryptocurrencies have largely functioned
outside most existing financial
infrastructure. The legal status of
cryptocurrencies has implications for
their use in daily transactions and
trading. In June 2019, the Financial
Action Task Force (FATF) recommended
that wire transfers of cryptocurrencies
should be subject to the requirements of
its Travel Rule, which requires AML
compliance.
🔸As of December 2021, El Salvador was
the only country in the world to allow
Bitcoin as legal tender for monetary
transactions. In the rest of the world,
cryptocurrency regulation varies by
jurisdiction.
🔸Japan's Payment Services Act defines Bitcoin as legal property. Cryptocurrency exchanges operating in the country are subject to collect information about the customer and details relating to the wire transfer.
China has banned cryptocurrency.
🔸exchanges and mining within its borders. India was reported to be formulating a framework for cryptocurrencies in December.
Cryptocurrencies are legal in the
European Union.
🔸Derivatives and other
products that use cryptocurrencies will
need to qualify as "financial
instruments." In June 2021, the
European Commission released the
Markets in Crypto-Assets (MICA)
regulation that sets safeguards for
regulation and establishes rules for
companies or vendors providing
financial services using
cryptocurrencies. Within the United
States, the biggest and most
sophisticated financial market in the
world, crypto derivatives such as Bitcoin
futures are available on the Chicago
Mercantile Exchange. The Securities and
Exchange Commission (SEC) has said
that Bitcoin and Ethereum are not securities.
Advantages and Disadvantages of Cryptocurrency.
🔸Cryptocurrencies were introduced with
the intent to revolutionize financial
infrastructure. As with every revolution,
however, there are tradeoffs involved. At
the current stage of development for
cryptocurrencies, there are many
differences between the theoretical ideal
of a decentralized system with
cryptocurrencies and its practical
implementation.
Some advantages and disadvantages of
cryptocurrencies are as follows.
Advantages
🔸Cryptocurrencies represent a new,
decentralized paradigm for money. In
this system, centralized
intermediaries, such as banks and
monetary institutions, are not
necessary to enforce trust and police
transactions between two parties.
Thus, a system with cryptocurrencies
eliminates the possibility of a single
point of failure, such as a large bank,
setting off a cascade of crises
around the world, such as the one
that was triggered in 2008 by the
failure of institutions in the United
States.
🔸Cryptocurrencies promise to make it easier to transfer funds directly between two parties, without the need for a trusted third party like a bank or a credit card company. Such decentralized transfers are secured by the use of public keys and private keys and different forms of incentive systems, such as proof of work or proof of stake.
🔸Because they do not use third-party intermediaries, cryptocurrency transfers between two transacting parties are faster as compared to standard money transfers. Flash loans in decentralized finance are a good example of such decentralized transfers. These loans, which are processed without backing collateral, can be executed within seconds and are used in trading.
🔸Cryptocurrency investments can
generate profits. Cryptocurrency
markets have skyrocketed in value
over the past decade, at one point
reaching almost $2 trillion. As of Dec.
20, 2021, Bitcoin was valued at more
than $862 billion in crypto markets.
🔸 The remittance economy is testing
one of cryptocurrency's most
prominent use cases. Currently,
cryptocurrencies such as Bitcoin
serve as intermediate currencies to
streamline money transfers across
borders. Thus, a fiat currency is
converted to Bitcoin (or another
cryptocurrency), transferred across
borders and, subsequently, converted
to the destination fiat currency. This
method streamlines the money
transfer process and makes it
cheaper.
Disadvantages
🔸Though they claim to be an
anonymous form of transaction,
cryptocurrencies are actually
pseudonymous. They leave a digital
trail that agencies such as the
Federal Bureau of Investigation (FBI)
can decipher. This opens up
possibilities of governments or
federal authorities tracking the
financial transactions of ordinary
citizens.
🔸Cryptocurrencies have become a
popular tool with criminals for
nefarious activities such as money
laundering and illicit purchases. The
case of Dread Pirate Roberts, who ran
a marketplace to sell drugs on the
dark web, is already well known.
Cryptocurrencies have also become a
favorite of hackers who use them for
ransomware activities.
🔸 In theory, cryptocurrencies are meant
to be decentralized, their wealth
distributed between many parties on
a blockchain. In reality, ownership is
highly concentrated. For example, an
MIT study found that just 11,000
investors held roughly 45% of
Bitcoin's surging value.
🔸One of the conceits of cryptocurrencies is that anyone can mine them using a computer with an Internet connection. However, mining popular cryptocurrencies requires considerable energy, sometimes as much energy as entire countries consume. The expensive energy costs coupled with the unpredictability of mining have concentrated mining among large firms whose revenues running into the billions of dollars. According to an MIT study, 10% of miners account for 90% of its mining capacity.
🔸Though cryptocurrency blockchains
are highly secure, other crypto
repositories, such as exchanges and
wallets, can be hacked. Many
cryptocurrency exchanges and
wallets have been hacked over the
years, sometimes resulting in millions
of dollars worth of "coins" stolen.
Cryptocurrencies traded in public
🔸markets suffer from price volatility.
Bitcoin has experienced rapid surges
and crashes in its value, climbing to
as high as $17,738 in December 2017
before dropping to $7,575 in the
following months. Some
economists thus consider
cryptocurrencies to be a short-lived
fad or speculative bubble.
$862.1 billion
Total market cap of Bitcoin, as of Dec. 20, 2021.
Frequently Asked Questions What Is Cryptocurrency in Plain Words?
Cryptocurrencies are digital assets and decentralized systems that allow for secure online payments.
How Do You Get Cryptocurrency?
🔸cryptocurrency from popular crypto exchanges such as Coinbase, apps such as Cash App, or through brokers. Another popular way to invest in cryptocurrencies is through financial derivatives, such as CME's Bitcoin futures, or through other instruments, such as Bitcoin trusts and Bitcoin ETFs.