What is Cryptocurrency?
Cryptocurrency is a form of payment that can be exchanged online for goods and services. Many companies have issued their own currencies, often called tokens, and these can be traded specifically for the good or service that the company provides. One would need to exchange real currency in order to purchase and store cryptocurrency.
Cryptocurrencies work using a technology called blockchain. Blockchain is a decentralized technology spread across many computers that manages and records transactions. Part of the appeal of this technology is its security.
In Indian investing circles, cryptocurrency has not yet made significant inroads- in fact, most investors doubt the credibility of dealing in cryptocurrencies. Western investors, however, have been more accepting of cryptocurrencies. In this article, we shall attempt to enlist the pros and cons of cryptocurrencies to help one understand better. Read on!
Advantages of cryptocurrency
- High standards of security and privacy
Cryptocurrencies are known to prioritise security and privacy over anything else. A blockchain ledger is based on multiple complicated mathematical puzzles, which are quite difficult to solve or decrypt. This makes cryptocurrency data far more secure than regular online transactions. In addition, cryptocurrencies also utilize pseudonyms that are unrelated to any user, account or stored data.
- Inflation-proof
Unlike Fiat currencies, whose value gets severely affected by inflation from time to time, cryptocurrency remains unaffected by inflation which makes it a risk-free investment to some extent. This is because only a fixed amount of cryptocurrency is launched which is determined by the source code at the time of or prior to its launch. For example, in case of Bitcoin, only 21 million Bitcoins can be mined in the entire world.
- Self-governed and Self-managed
Governance and maintenance of any currency is a major factor for its development and stability. In cases of cryptocurrencies, everything is managed entirely by developers who store data on their secure servers. The developers/miners charge a minor transaction fee as an incentive to keep the system running and for storing accurate records.
- Currency-exchange friendly
Cryptocurrencies allow purchase through all major currencies such as the US Dollar, European Euro, British Pound, Indian Rupee, Japanese Yen and so on. Therefore, one currency can be quickly converted to another through purchase of cryptocurrency using cryptocurrency wallets or applications. Needless to say, the fees involved in such transactions is minimal.
- Decentralised
Owing to the fact that cryptocurrencies are controlled by the developers or people who have a significant amount of the coin, it remains decentralized and free from the clutches of monopoly. As a result, no one organization can dominate the flow and value of the coin.
- Quick And Efficient
By eliminating intermediaries like VISA or Paypal, cryptocurrencies have become one of the quickest and most cost-efficient methods of sending money across borders.
Disadvantages of cryptocurrency
- Incompatibility with other Fiat currencies
Most cryptocurrencies are incompatible with several minor Fiat currencies which are specific to only one country and not that commonly used. Thus, in these cases, one has to first convert his or her money into a major currency in order to purchase cryptocurrencies. This inconveniences the user and makes the entire process expensive as there are additional transaction fees involved.
- Risk of financial loss from data loss
Cryptocurrencies allow users to access their wallet through private keys, Although the system itself is secure, the loss of data relating to the private key can block out the user from his or her wallet forever which translates into loss of the entire wallet value.
- Absence of a refund or cancellation policy
This is a highly disappointing aspect of cryptocurrencies. In case of a dispute between two or more parties or in case a transaction has been facilitated to the wrong wallet address, there is no mechanism for the sender to recover his or her lost money. This is a potentially dangerous flaw which repels potential investors from taking cryptocurrencies seriously.
- Risk of data breaches
Although most cryptocurrencies conform to superlative standards of privacy and security, the chance of getting hacker or that of data breaches cannot be altogether eliminated. Users and especially developers getting hacked can be catastrophic as the latter store wallet data of hundreds of users.
- Susceptible to illegal transactions
Since cryptocurrency transactions are not monitored by government agencies, there is a strong possibility that such platforms may come under misuse by criminal elements. Cases of cryptocurrency being used for illegal transactions such as buying drugs or selling weapons on the dark web are far too common.
- Adverse environmental effects
Administering cryptocurrencies warrant heavy-duty computing power which in turn requires gigantic amounts of electricity, which can only be generated from coal and fossil fuels. It therefore comes as no surprise that the countries leading in mining cryptocurrencies have incurred an increased carbon footprint.
Despite its advantages, a large number of investors stay skeptical of dealing in cryptocurrencies. There is a need to spread correct information and awareness regarding cryptocurrencies so that anyone looking to invest their money can make an informed decision.
What is Cryptocurrency?
Cryptocurrency is a form of payment that can be exchanged online for goods and services. Many companies have issued their own currencies, often called tokens, and these can be traded specifically for the good or service that the company provides. One would need to exchange real currency in order to purchase and store cryptocurrency.
Cryptocurrencies work using a technology called blockchain. Blockchain is a decentralized technology spread across many computers that manages and records transactions. Part of the appeal of this technology is its security.
In Indian investing circles, cryptocurrency has not yet made significant inroads- in fact, most investors doubt the credibility of dealing in cryptocurrencies. Western investors, however, have been more accepting of cryptocurrencies. In this article, we shall attempt to enlist the pros and cons of cryptocurrencies to help one understand better. Read on!
Advantages of cryptocurrency
- High standards of security and privacy
Cryptocurrencies are known to prioritise security and privacy over anything else. A blockchain ledger is based on multiple complicated mathematical puzzles, which are quite difficult to solve or decrypt. This makes cryptocurrency data far more secure than regular online transactions. In addition, cryptocurrencies also utilize pseudonyms that are unrelated to any user, account or stored data.
- Inflation-proof
Unlike Fiat currencies, whose value gets severely affected by inflation from time to time, cryptocurrency remains unaffected by inflation which makes it a risk-free investment to some extent. This is because only a fixed amount of cryptocurrency is launched which is determined by the source code at the time of or prior to its launch. For example, in case of Bitcoin, only 21 million Bitcoins can be mined in the entire world.
- Self-governed and Self-managed
Governance and maintenance of any currency is a major factor for its development and stability. In cases of cryptocurrencies, everything is managed entirely by developers who store data on their secure servers. The developers/miners charge a minor transaction fee as an incentive to keep the system running and for storing accurate records.
- Currency-exchange friendly
Cryptocurrencies allow purchase through all major currencies such as the US Dollar, European Euro, British Pound, Indian Rupee, Japanese Yen and so on. Therefore, one currency can be quickly converted to another through purchase of cryptocurrency using cryptocurrency wallets or applications. Needless to say, the fees involved in such transactions is minimal.
- Decentralised
Owing to the fact that cryptocurrencies are controlled by the developers or people who have a significant amount of the coin, it remains decentralized and free from the clutches of monopoly. As a result, no one organization can dominate the flow and value of the coin.
- Quick And Efficient
By eliminating intermediaries like VISA or Paypal, cryptocurrencies have become one of the quickest and most cost-efficient methods of sending money across borders.
Disadvantages of cryptocurrency
- Incompatibility with other Fiat currencies
Most cryptocurrencies are incompatible with several minor Fiat currencies which are specific to only one country and not that commonly used. Thus, in these cases, one has to first convert his or her money into a major currency in order to purchase cryptocurrencies. This inconveniences the user and makes the entire process expensive as there are additional transaction fees involved.
- Risk of financial loss from data loss
Cryptocurrencies allow users to access their wallet through private keys, Although the system itself is secure, the loss of data relating to the private key can block out the user from his or her wallet forever which translates into loss of the entire wallet value.
- Absence of a refund or cancellation policy
This is a highly disappointing aspect of cryptocurrencies. In case of a dispute between two or more parties or in case a transaction has been facilitated to the wrong wallet address, there is no mechanism for the sender to recover his or her lost money. This is a potentially dangerous flaw which repels potential investors from taking cryptocurrencies seriously.
- Risk of data breaches
Although most cryptocurrencies conform to superlative standards of privacy and security, the chance of getting hacker or that of data breaches cannot be altogether eliminated. Users and especially developers getting hacked can be catastrophic as the latter store wallet data of hundreds of users.
- Susceptible to illegal transactions
Since cryptocurrency transactions are not monitored by government agencies, there is a strong possibility that such platforms may come under misuse by criminal elements. Cases of cryptocurrency being used for illegal transactions such as buying drugs or selling weapons on the dark web are far too common.
- Adverse environmental effects
Administering cryptocurrencies warrant heavy-duty computing power which in turn requires gigantic amounts of electricity, which can only be generated from coal and fossil fuels. It therefore comes as no surprise that the countries leading in mining cryptocurrencies have incurred an increased carbon footprint.
Despite its advantages, a large number of investors stay skeptical of dealing in cryptocurrencies. There is a need to spread correct information and awareness regarding cryptocurrencies so that anyone looking to invest their money can make an informed decision.
YLCC would like to thank Sachet Labroo for his valuable inputs in this article.
