Cryptocurrencies are also known as crypto-assets are a form of digital currency that enjoys a high degree of popularity among the public. But this popularity is relative because their functioning is still unclear for many, and they are often confused with stock market speculation or practices to be wary of. And yet, as virtual as they are, cryptocurrencies allow you to make payments on the internet. How do these cryptocurrencies work? Here are the details.
Cryptocurrencies allow you to exchange money online without going through traditional channels: they ensure that you can transact safely and transparently with a community of users. In this context, the word “crypto” refers to the security encryption of transactions, not to something that is hidden or concealed. Today, more than 7,000 decentralized currencies are circulating on the internet, which has become dynamic assets where investors try their luck. You can research which cryptocurrencies are the most promising, for example, if you are thinking of getting into this business!
How does cryptocurrency work?
In the traditional monetary system, it is the central bank that manages and formalizes the transactions. But in the case of cryptocurrencies, this task is carried out by a computer network, directed by a protocol spread throughout the world. This network, the blockchain, is responsible for managing the transactions, securing them, and controlling the issuance of cryptocurrencies, as they have a maximum mass in circulation.
Let’s take the case of bitcoin. To ensure that exchanges are perfectly secure, the blockchain is set up: it is used to ensure the inviolability of the computer protocol and the certification of exchanges within the framework of Bitcoin transactions for example. Each computer that manages this protocol is, therefore a node in the network: it contains a part of this blockchain and participates in the functioning of the chain. The blockchain is a sort of open register that archives copies of all transactions. Everything recorded in it is definitive and cannot be falsified by anyone in any way whatsoever.
Origin of cryptocurrencies
Throughout history, there have been multiple ways to exchange goods and services. All of them have undergone evolutions and changes or, directly, disappeared. This is the case of barter or the use of precious materials, which gave birth to the system that has worked until today, the banknotes and coins.
However, in an age where technology is gaining ground every day, a medium of exchange more in tune with the times is emerging: cryptocurrencies. In the wake of the cypherpunk movement of the 1980s, cryptocurrencies have emerged. This art form advocated the widespread use of writing with secret keys that could only be understood by those who could decipher them.
Ten years later, David Chaun created Digicash to provide a centralized electronic money system for more secure and anonymous transactions. Around the same time, Adam Black proposed Hashcash, a system to combat spam and denial-of-service attacks. However, it wasn’t until 2009 that bitcoin, the first fully decentralized cryptocurrency, was born.
What are cryptocurrencies used for and what can you do with them?
In addition to investing in cryptocurrencies to increase their value and get an economic return in the future, cryptocurrencies allow you to perform operations and transactions like normal money, provided that the product, service, or platform accepts them as a means of payment.
There are cases where people use cryptocurrencies in order to make fast transactions without paying any fees or transaction costs. Many products can now be purchased with currencies such as bitcoin, from homes in some parts of the world to electronics, video games, and travel and entertainment.
There are restaurants and movie theaters that charge in bitcoins, ATMs like the ones in Salvador, gift cards, and even space tours like those offered by Virgin Galactic. Even Madrid’s Gran Teatro Bankia Príncipe Pío allows tickets and subscriptions to be paid for in bitcoins, as does the event portal 13 tickets. Digital stores such as Shopify and Overstock also allow bitcoin integration.
Advantages and disadvantages of cryptocurrencies
There is currently a multitude of cryptocurrencies. Every day, specialized magazines announce the creation of new virtual currencies. Although they are all different and use the blockchain in different ways, it is possible to establish some common criteria between them.
Advantages of investing in cryptocurrencies
Cryptocurrencies have several advantages; let’s know in detail some of them:
This is one of the main characteristics of cryptocurrencies and the reason why they are promoted by many. Cryptocurrencies are not issued by a central entity and are not under an institution’s control, like the dollar, which is issued by the United States and controlled by the Fed.
Therefore, cryptocurrencies are not subject to regulation by their issuer, and the network on which they operate, the blockchain, is not under the control of any person or institution. They also have security advantages, thanks to the way the network works and the impossibility of attacking it through a single node.
With decentralization comes greater security, as cryptocurrencies cannot be confiscated. If we have our money in a bank account, we may have difficulty withdrawing it from the bank in case the institution has liquidity problems or even if we need to comply with the required paperwork.
With cryptocurrencies, having a wallet is not the case (by having the private keys to it). We are the only ones who have power over our money, and to access it, there is no need for another institution to intervene. This means that no one is able to confiscate our money, as the network is also very well protected against hacking.
Fast transactions and low fees
If we have ever done bank transactions, especially international transfers, we may know that the fees and the time it takes to complete them are usually quite long, and you can pay a lot of fees. With cryptocurrencies, transactions only take a few seconds to process, and the fees are very low, although some networks may have higher fees.
Profitability and investment opportunities
One of the main reasons people know about cryptocurrencies is the growth the market has seen, especially with the rise in the price of bitcoin. Behind all this, there is a growing sector with high volatility, which gives the opportunity to make big profits. Also, the industry has evolved, with more and more investment options, such as staking, participating in liquidity pools, cryptocurrency mining and more.
Disadvantages of cryptocurrencies
While cryptocurrencies are a very attractive industry, they also have their drawbacks:
They are not yet widely accepted
Several countries have joined the acceptance of cryptocurrency transactions and some have even been encouraged to make cryptocurrencies a legal tender, such as El Salvador and Ukraine. However, not everyone is familiar with this platform and in some countries, such as Argentina, the taxes on these transactions are high. Therefore, it is impossible to make all types of payments with cryptocurrencies, although there are more and more options.
Volatility and risks
The cryptocurrency market has a lot of volatility, which brings great risk to investing, with the possibility of losing money. It is also a market where you can fall victim to scams. To avoid this, it is important to study the market and to know more about what you are doing. Professional advice can be a great help for this, so you can schedule a call with one of our experts for advice.
Instability of the institutional framework
Although cryptocurrencies do not have their own regulatory framework, countries have had varying stances on this activity. Therefore, one is exposed to unexpected changes in the country’s regulatory framework and changes in the payment of taxes.
Beginners are vulnerable to security risks
Although cryptocurrencies do not present many risks, it does not mean that they are completely free from security problems since if you lose your password, your information and your investment could be affected. Remember that if you are thinking of investing in cryptocurrencies, take into account these advantages and disadvantages, and don’t forget to read more about the subject with us before taking your first step.
Cryptocurrencies offer different possibilities and opportunities that traditional currencies lack. In particular, blockchain technology has proven to be extremely compelling to date, which is why it is being picked up in many projects outside the financial sector. The absence of a central regulator, a principle firmly embedded in most cryptosystems, is a very promising approach. However, the accompanying freedom from market regulation is also one of the biggest problems with cryptocurrencies. Since they have no concrete counter value, cryptocurrency prices are subject to large fluctuations and carry the risk of a total system collapse at any time.