Cryptocurrencies – Two sides of the same coin

You have probably heard of that guy who earned thousands of dollars trading in a cryptocurrency, like bitcoin. But what exactly is this crypto business? Impress your friends with your newfound knowledge.

What are cryptocurrencies?

A cryptocurrency is virtual or digital money that takes the form of tokens or “coins”. Bitcoin is the best known cryptocurrency but there are others like Ethereum and Litecoin. While some cryptocurrencies have ventured into the physical world with credit cards etc., the large majority remain intangible and can only be exchanged online for goods and services.

How do cryptocurrencies work?

Cryptocurrencies use blockchain technology. It’s complicated, but in short, a blockchain is a digital ledger – almost like a shared spreadsheet on Dropbox or Google Drive – that stores all the transactions that take place across a network of computers.

A blockchain exists only between the users – there is no outside authority. It’s like a country without a government that is ruled only by the citizens. Cryptocurrency, therefore, largely only exists as an open-source computer code, without a single bank or government creating or regulating the currency. This lack of regulation has raised concern.

So, what’s all the fuss about?

Some people believe virtual money is the future and investment in cryptocurrencies has gained much traction. However, it uses complicated technology that is constantly developing and challenging to understand.

Here are the advantages and disadvantages of cryptocurrencies:

Advantages

1 Using cryptocurrencies are cheaper and convenient.

They can be used anywhere in the world and converted into any currency. And transactions are usually instantaneous.

2 It is a transparent trading system. All the users of the specific cryptocurrency can see all the transactions. The transaction happens directly between the two users – no third party, like a bank or government, is involved.

Disadvantages

1 While the transactions are transparent, the user remains anonymous. It’s like operating under a pseudonym or a code name. Who else likes to do business anonymously? Criminals! Cryptocurrency is widely popular on the dark web, as well as the black market, valued for its ability to send large sums of money anywhere in the world, unregulated and unchecked.

2 Trading in cryptocurrencies is risky. Cryptocurrencies have no intrinsic value – they are not backed by a central bank or government like other currencies. Their value or price is determined solely by supply and demand, which is entirely driven by market sentiment that can be exceptionally fickle. In short, their value is determined by what people believe them to be worth.

Therefore, there are no fundamental indicators that investors can use to assess whether the price at which they are trading is expensive, reasonable or cheap. Potential traders should be extremely cautious and not use cash they cannot afford to lose.

3 It’s an energy-intensive business. Cryptocurrency transactions are validated through a process called “mining”. Mining requires a network of thousands of computers running all the time. This process uses large amounts of energy — sometimes more than is used by entire countries!