If you haven't heard about cryptocurrency, you must be living under a rock; its a relatively new, technology-based, financial phenomenon that is taking the world by storm!
From the introduction of debit cards to the ability to pay contactlessly, technology is forever changing the way we go about our finances. However, these incremental changes may not be half as influential as the introduction of the new cryptocurrency payment system.
If you're like the majority of us who have heard of the terms "cryptocurrency" and "bitcoin" but do not have a great understanding of what it is, this guide is for you.
What is Cryptocurrency
As previously mentioned, Cryptocurrency is a digital payment system; the various types of Cryptocurrency are all digital assets which can be traded and used to make payments for things online.
What makes Cryptocurrency so special is the fact that authorities such as banks and governments do not need to verify any transactions; instead, everything is centred around peer-peer transactions. This means that anybody and everybody can send and receive payments without anyone verifying the transaction.
It's important to note that just because these transactions are not verified by banks, it doesn't mean that these transactions are untraceable. These transactions are recorded as digital entries in various online databases and can be found in a public ledger.
If you're wondering why this digital payment system is called cryptocurrency, it's because it encrypts the data when verifying transactions. What this means is that when one is storing or transferring cryptocurrencies, a lot of advanced coding is used to provide security to every user.
Lastly, another thing that makes cryptocurrencies so cool is that they're not actually a tangible asset. Therefore, because they're only digital assets, their value is determined by the supply and demand of the public; this means that they're incredibly hard to predict and their values tend to be incredibly volatile.
The Security of Cryptocurrency
The emerging popularity of cryptocurrency has also come with a fair share of criticism regarding their security and safety. This is because it's hard to imagine that financial payments which are not overseen by an authority can be safe and secure.
However, there are measures in place to attempt to ensure that the crypto space is as secure as possible. Firstly, cryptocurrencies are usually created via blockchain technology; this technology essentially stores the details of each transaction on a global database. This prevents forms of fraud and the double-spending of cryptocurrencies.
Furthermore, the majority of cryptocurrency transactions require the user to complete a two factor authentication process. This ensures that the cryptocurrencies are not being traded by a bot and that each transaction can be traced back to the user.
Despite these measures, cryptocurrency is far from the most secure form of financial payment. There are still plenty of scams happening within the crypto space whilst every so often there are major hacks to big corporations. For example, BitGrail was hacked for over $195 million in 2018; evidence of the weak security that the crypto space currently has.
Forms of Cryptocurrencies
At the time of writing this, there are over 5000 cryptocurrencies in existence today. However, it is important to note that the top 5 cryptocurrencies account for over 80% of the current market.
The biggest cryptocurrency is also the original cryptocurrency - Bitcoin. This popular cryptocurrency was formed in 2009 as an open-source software and has gone on to become the largest cryptocurrency with a market cap of $600bn.
Other popular cryptocurrencies include:
Advantages of Cryptocurrency
As you could probably expect from the incredible rise in popularity regarding cryptocurrencies, there are various advantages to utilising this digital payment system.
The first advantage that cryptocurrency has is it provides more control over a user's finances. Users do not have to deal with authorities such as a bank who have a say on how they spend their money; in the crypto space, no authority has a say on how you spend your money. Furthermore, this means that users can make transactions to anyone in the world without seeking approval of a bank or any other governing authority.
Another advantage of using cryptocurrencies are the discretion it provides. For the majority of crypto transactions, the transactions are very similar to cash payments in the sense that they can't be easily traced back to the user. Furthermore, the bitcoin user's address changes with each transaction so it's difficult to link any two transactions together.
The next advantage is the minimal fees that are associated with the transactions. Despite users still needing to pay "taker" fees and deposit/withdrawal fees, there are a lot less fees to pay compared to traditional banking systems. For example there are no account maintenance, overdraft or minimum balance fees associated with the crypto space.
Disadvantages of Cryptocurrency
As previously mentioned, a key disadvantage regarding the crypto space is the penetrable security. The problem with being a digital asset is the exposure to online hackers; thus, security will always be of concern and crypto companies are more likely to be compromised when compared to the traditional banking system.
Another disadvantage of the crypto space is the inability to scale it. This is because cryptocurrency can only deal with so many transactions at once. For example, Bitcoin can only handle 7 transactions per second, any more and the the transactions enter a queue. Therefore, there's going to need an incredible investment into the cryptospace for it to compete with the likes of Visa who process an incredible amount of transactions every second. Furthermore, factors such as the speed of transactions and the inability to trade face to face further limit the scalability of cryptocurrencies.
I hope that this guide serves as a good knowledge-base regarding the crypto space and inspires you to keep learning about this digital-based, financial phenomenon. After all, this could be one of the biggest technological advancements of the century!