crypto basics

What are Cryptocurrencies?

Daksh Murkute | | |

Bitcoin and cryptocurrency have become a buzzword recently. The rise in prices of the various cryptocurrencies has brought unprecedented attention towards it lately.

 

Everyone is talking about it and everyone wants to participate in it too and I am sure that even you one such person.

 

But do you know what exactly cryptocurrency is and how does it work? Do you what the underlying is?

 

In this blog post, I am going to introduce the cryptocurrency world to you and I am going to discuss everything you need to know in this space.

 

In the end, I will list out certain pros and cons of cryptocurrencies that you should be aware of irrespective of whether you participate in it or not.

Contents

The genius of cryptography

What is a cryptocurrency?

Cryptocurrency - The pros and cons

  1. Pros
  2. Cons

Are you a cryptocurrency enthusiast?

 

The genius of cryptography

 

cryptography

 

Before getting on to cryptocurrencies, you should know about cryptography in general. It is a concept on which cryptocurrencies are built.

 

In the world that we are living in, information is or data is of utmost importance. With every second that passes by there is an innumerable flow of information. It is often sent from one source to another and its protection is important.

 

Cryptography is the practice or study of secure communication. Its focus is the techniques for the secure flow of information allowing only the sender and receiver access to the contents. 

 

The term cryptography is derived from the Greek word kryptos, which means hidden. The sole aim of cryptography is to prevent a third party from gaining access to the information. Cryptography is used widely in digital banking, military and governmental communications, etc.

 

Cryptography is closely associated with encryption. Encryption is the conversion of readable information into nonreadable and then back to its normal type when it reaches the receiver. Encryption is not a modern technique but rather dates back to the ancient Egyptian era and the Roman kingdom era.

 

The most basic type of cryptography was of encrypting the information using a system or a secret key, and both the information and the secret key were sent for the receiver to decrypt the information. The downside to this was that if a third party gets access to the secret key, then it would be long before they intercepted the process.

 

To deal with this, there was a fresh system introduced that consisted of two keys, one with the sender and the other with the receiver. 

 

Whenever information is sent, the sender also sends it along with their key, and the information can be accessed only if the receiver has both keys. This is just a convenient illustration but the actual process that goes about is quite complex and technical.

 

What is a cryptocurrency?

 

image showing the cryptocurrency

 

Now that we have an idea about cryptography in general, the concept of a cryptocurrency will be easy to grasp. Cryptocurrency is the latest form of money. It is an online-based system for exchange that makes use of cryptographic functions and tools to carry out financial transactions.

 

Cryptocurrencies are nothing but a form of payment that can be exchanged on the internet for goods or services. Cryptocurrencies allow peer-to-peer transactions without any third party being involved in the process. It is a system that is decentralized in nature, hence no single institution or organization has authority or control over it.

 

Since the cryptocurrency is completely internet-based, it is a digital asset that the owner store on the online databases. Cryptocurrencies have some underlying value to them, which fluctuates over time.

 

Individuals that seek to send or receive money online through the traditional bank route which is a centralized system or transaction would have their transaction data stored with a third-party organization i.e. the bank, and in order to facilitate this transaction, the banks charge fees that are more or less hefty. 

 

With cryptocurrencies, individuals can bypass this traditional process. An individual looking to send a certain amount would look to send cryptocurrencies worth that much amount. In this process there is no third party involvement, hence it is completely private to the parties involved i.e. the sender and the receiver. 

 

In cryptocurrencies, transaction history is not stored with any institution or organization but rather is stored on an open-source database that is completely online. Since it is online, it doesn’t mean anyone can check details, rather only the sender and receiver have access to it.

 

This system or database that stores the information of transactions is blockchain technology. It is not a system that runs on any particular server at any particular location but rather is run on the vast computational network spread over the globe.

 

The first cryptocurrency was introduced to the world way back in 2008, the year of the financial meltdown by an anonymous man that goes with the name of Satoshi Nakamoto. He is more or less considered to be a modern visionary as he managed to create something that was not even thought of before.

 

Satoshi Nakamoto published a white paper in 2008, which contained every piece of information on Bitcoin and cryptocurrencies as a whole. Bitcoin is created in such a manner that there only a finite amount of Bitcoins. This was contrary to the system of the government of printing money whenever they deemed necessary.

 

Cryptocurrency - The pros and cons

Everything has its pros and cons or its advantages and disadvantages. Sometimes the pros outweigh the cons, while sometimes the cons outweigh the pros. Before getting on with anything individuals must be aware of both sides of the coin and then take the educated guess over it.

I. Pros

1. Decentralized

 

pros of cryptocurrency is that crypto is decentralized

 

This is the biggest advantage associated with cryptocurrencies. 

 

These are not governed or controlled by an authority or institution and it basically functions on technology that is open-source and is spread across the computational network around the globe.Since it is decentralized, no authority can dictate rules regarding it. 

 

2. Private

 

pros of cryptocurrency is that crypto is private

 

Cryptocurrencies function through blockchain technology that keeps the record of the transaction history while allowing the facilitation of transactions. 

 

Since it is a peer-to-peer system of transactions, no third-party involvement is present. Hence only the sender and the receiver have access to this transaction as they possess the authorization keys to it.

 

3. Convenient

 

pros of cryptocurrency is that crypto is convenient

 

Since this system is completely online and is nothing like the traditional banking system, it is quite convenient as individuals do not have to submit documents and go through rounds of verification to open up accounts as it happens at banks.

 

All that individuals require to send or receive cryptocurrencies is a computer or any other device with an internet connection and they can send or receive whenever and anywhere they intend to.

 

4. Low costs

 

pros of cryptocurrency is that crypto is low cost

 

Whenever individuals seek to transfer or receive funds through banks, they are charged some amount of fees for the facilitation of the transfer. In a cryptocurrency transfer, there is little to no amount charged as a transactional fee. Only the buyer is subject to a fee that is quite nominal.

 

Transaction fees ought to be kept at a minimum as in the beginning they may seem nominal, but when they pile up, it eats into the funds.

 

5. Immune from inflation

 

pros of cryptocurrency is that crypto is immune from inflation

 

Inflation is the situation when the cost of goods increases hence weakening the currency of the country. There are many factors that play a role in inflation.

 

Cryptocurrencies are completely immune to this as it is not associated with any particular region or country. The value of cryptocurrencies is based on sentiment and demand and supply forces.

 

6. Quick process

 

pros of cryptocurrency is that crypto is quick process

 

Everything about cryptocurrency is quick and convenient. Setting up a wallet to store cryptocurrency, to sending or receiving a cryptocurrency, users do not have to wait for long periods of time for the process to get done with.

 

7. No cap on the number of transactions

Users of cryptocurrencies can make several transactions of sending or receiving them without exhausting their transaction limits. Some banks have a limit on the number of times individuals can make transactions as well as have a limit on the total value of the transactions that can be made. This is not applicable to cryptocurrencies.

 

II. Cons

1. Volatile

The prices or values of the cryptocurrencies are not quite stable. Since this system is new and has not yet been completely embraced by countries around the globe, any small news regarding it creates an impulse in prices.

 

This volatility in turn is slowing the acceptance of cryptocurrencies, as potential investors are afraid of its volatile nature and hesitate in deploying capital for the same.

 

2. Privacy

 

Cons of cryptocurrency is that crypto is privacy

 

The private nature of cryptocurrencies is an advantage as well as a disadvantage. Since the information regarding it is limited only to the sender and receiver or the owner of it, any data loss will lead to financial loss as it will be next to impossible to retrieve it.

 

This strict private nature of the cryptocurrencies makes them prone to hacking or cyber crimes as criminals seek to infiltrate the system of the user with malware and take control of the cryptocurrencies.

 

Hence it is essential that owners have a sound cybersecurity system in place to keep them safe from such malpractices. It is also essential that owners of the cryptocurrencies store their account or wallet details properly, which they can refer to in case they forget the details.

 

3. No refund or cancellation

 

Cons of cryptocurrency is that crypto is no refund or cancellation

 

Unlike the traditional banking system where individuals can cancel the transaction once made but before the process is completed, in cryptocurrencies, this is not possible. Once a transaction has been initiated it cannot be reversed.

 

In cases where individuals make transactions to the wrong bank accounts or make the transaction my mistake, there is a process of refund that the banks carry out. This again will not be possible in the case of cryptocurrencies.

 

4. Lack of knowledge

 

Cons of cryptocurrency is that crypto is lack of knowledge

 

There is still a large section of individuals that have no knowledge about cryptocurrencies and this system is completely alien to them. Some groups of people do not have the right knowledge of this system due to its technical and complicated nature and the bad reception it gets due to some reasons.

 

All this simply results in a delay of complete acceptance of cryptocurrencies.

 

5. No regulatory authority

 

Cons of cryptocurrency is that crypto is no regulatory authority

 

Since cryptocurrencies are decentralized and no institution has authority over it, it can be seen as a disadvantage as well as an advantage. The complete anonymity of this system of transactions gives rise to dark transactions i.e. illegal transactions. This makes it next to impossible to track.

 

Cryptocurrencies are also a medium for money laundering and tax evasions. This is not a rampant practice but there have been such cases and is difficult to track.

 

Also Read: Why were cryptocurrencies introduced?

 

Are you a cryptocurrency enthusiast?

What is your take on cryptocurrencies and what opinion do you hold regarding this? Do let me know.

 

I understand that cryptocurrencies have their share of disadvantages and that individuals can always decide for themselves whether to participate in them or not

 

The fact cannot be denied that cryptocurrency is the next big step in this monetary system and that it has great potential as it disrupts that present traditional and somewhat flawed system.

 

This is more of an introduction to this domain and I would suggest that you read more such blogposts on this space to completely understand the value cryptocurrencies add to the world we live in.

 

Do reach out to me in case you have questions or queries regarding the cryptocurrency space or anything else, I will be more than happy to get back to it.

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