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Advantages and Disadvantages of Cryptocurrency

  • Soumalya Bhattacharyya
  • Jul 06, 2022
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Cryptocurrencies are digital assets that individuals invest in and use to make purchases online. You use actual money, like dollars, to purchase "coins" or "tokens" of a particular cryptocurrency.

 

Consider the following scenario: Cryptocurrency is similar to exchanging money in a foreign nation. In the United States, a Benjamin will get you a wonderful supper, but if you want to enjoy gourmet dining in Italy, you'll need some euros. We appreciate dollars and euros because we know we can use them to buy products and services. 

 

The same may be said of cryptocurrencies. You trade your money for cryptocurrency, which you may use in the same way as regular money (at places that accept it as a type of payment).

 

Cryptocurrency is traded online between individuals without the need of a mediator such as a bank or government. It's like the Wild West of the internet world, only there's no law enforcement to enforce it.

 

Have you ever hired a youngster from your neighborhood to mow your yard or watch your dog while you were away on vacation? Most likely, you paid them in cash. To make a formal transaction, you didn't need to go to the bank.

 

That's how it feels to trade cryptocurrency. They're decentralized, which means no government or bank has authority over how they're created, valued, or traded. As a result, the value of cryptocurrencies is determined by what individuals are willing to pay or trade for them.


 

What is Cryptocurrency?

 

A cryptocurrency is a digital or virtual currency that is protected by encryption, making counterfeiting and double-spending practically impossible. Many cryptocurrencies are decentralized networks based on blockchain technology, which is a distributed ledger maintained by a network of computers. 

 

Cryptocurrencies are distinguished by the fact that they are not issued by any central authority, making them potentially impervious to government intervention or manipulation.

 

A cryptocurrency is a type of digital asset that is built on a network that spans a huge number of computers. They are able to exist outside of the control of governments and central authorities because of their decentralized nature. Many industries, including banking and law, are expected to be disrupted by blockchain and associated technology, according to experts.

 

Cryptocurrencies are digital or virtual currencies that rely on cryptography technologies to function. They make it possible to make safe online payments without the involvement of third-party payment processors. 

 

Various encryption methods and cryptographic approaches, such as elliptical curve encryption, public-private key pairs, and hashing functions, are referred to as "crypto."

 

Cryptocurrencies may either be mined or bought on cryptocurrency exchanges. Cryptocurrency purchases are not permitted on all ecommerce sites. In reality, even famous cryptocurrencies like Bitcoin are rarely utilized for retail purchases. Cryptocurrencies are also utilized for cross-border transfers to a limited degree.

 

Any investor may buy cryptocurrencies using prominent cryptocurrency exchanges like Coinbase, applications like Cash App, or brokers. Financial derivatives, such as CME's Bitcoin futures, and other products, such as Bitcoin trusts and Bitcoin ETFs, are another popular way to invest in cryptocurrencies.

 

Every cryptocurrency claims to have a unique purpose and specification. Ethereum's ether, for example, is marketed as gas for the underlying smart contract platform. Banks utilize Ripple's XRP to ease transfers across various locations.

 

What is Crypto Mining?

 

Mining is how cryptocurrencies are created. Bitcoin, for example, is created through Bitcoin mining. The procedure entails downloading software that provides a partial or complete history of transactions that have taken place on the network. 

 

Though everyone with a computer and an Internet connection may mine bitcoin, the business is dominated by huge corporations because of its energy and resource-intensive nature.

 

An Overview of Bitcoin

 

Bitcoin is by far the most popular cryptocurrency, with Ethereum, Binance Coin, Solana, and Cardano following closely behind. The Securities and Exchange Commission (SEC) has said that Bitcoin and Ethereum, the two most valuable cryptocurrencies by market capitalization, are not securities. It has not made any statements on the state of other cryptocurrencies.

 

The most well-known and valued cryptocurrency is Bitcoin. It was conceived and introduced to the public in 2008 by an unidentified individual named Satoshi Nakamoto through a white paper. Thousands of cryptocurrencies are currently available on the market.

 

The most commonly traded and covered cryptocurrency is Bitcoin, which was first made available to the public in 2009. There were almost 19 million bitcoins in circulation in May 2022, with a market capitalization of $576 billion. There will only be 21 million bitcoins ever created.

 

Following Bitcoin's breakthrough, a slew of other cryptocurrencies known as "altcoins" have emerged. Some are Bitcoin clones or forks, while others are brand-new currencies created from the ground up. 

 

Solana, Litecoin, Ethereum, Cardano, and EOS are among them. By November 2021, the entire value of all cryptocurrencies in existence had surpassed $2.1 trillion, with Bitcoin accounting for around 41% of that total.

 

What is Blockchain?

 

Blockchain technology is at the heart of Bitcoin's and other cryptocurrencies' attractiveness and usefulness. Blockchain is, as its name implies, a collection of interconnected blocks or an online ledger. Each block comprises a collection of transactions that each network member has independently validated. 

 

Every new block must be validated by each node before being confirmed, making forging transaction histories very difficult. The contents of an online ledger must be agreed upon by the whole network of a single node, or computer, that keeps a copy of the ledger.

 

According to experts, blockchain technology may benefit a variety of sectors and activities, including supply chain management and online voting and crowdfunding. JPMorgan Chase & Co. (JPM) and other financial institutions are experimenting with blockchain technology to reduce transaction costs by simplifying payment processing.


 

Advantages of using Cryptocurrency


The image shows Advantages of using Cryptocurrency which includes High risk management, Security, More transparent financial system, Availability, Beat Inflation and Transactions Simplicity

Advantages of Cryptocurrency


 

  1. High risk management

 

There are already more than 10,000 cryptocurrencies available, and each cryptocurrency has unique characteristics. But there are some characteristics that all cryptocurrencies have, like as the propensity for sharp price increases (and decreases). The supply of coins from miners and the demand for them from buyers are what largely determine prices. 

 

Furthermore, the dynamics of supply and demand can provide large profits. For instance, the price of Ethereum nearly quadrupled between July 2021 and December 2021, providing a tidy profit to investors who joined the bandwagon at the proper moment.

 

  1. Security

 

The infrastructure that underpins cryptocurrencies is responsible for some of their main advantages, not the currency themselves. That is the blockchain, a decentralized ledger for data storage that keeps track of every transaction made there. 

 

It is impossible to remove an entry from the blockchain once it has been made. Additionally, because the blockchain is distributed across a number of machines, no hacker can access the entire chain at once, making the information held therein unbreakable.

 

  1. More transparent financial system

 

Most of the time, third-party intermediates who handle transactions are the center of our financial system. In order to complete a transaction, you must put your faith in one or more of these intermediaries. Given the early 2000s recession, many individuals questioned whether it was a wise decision to do this. 

 

Emerging as a solution to this, is the blockchain and cryptocurrency. Anyone, anywhere may access them, allowing you to participate in the financial markets and conduct transactions without the need of any middlemen.

 

  1. Availability

 

The fact that cryptocurrency markets are available 24/7 is another benefit cryptocurrencies have over banks. You don't need to wait for the NYSE, NASDAQ, or any other exchange to open for business each day in order to purchase, sell, or trade cryptocurrency since coins are created and transactions are recorded constantly. 

 

Due to the impact of this, normal stock exchanges are considering the possibility of stock trading outside of typical business hours as well—although that may still be some time in the future. Cryptocurrency may thus be the greatest solution for investors who are always on the road to earn profits outside of regular business hours.

 

  1. Beat Inflation

 

Since cryptocurrencies aren't linked to any one country or currency, their price is determined by worldwide demand rather than, for example, domestic inflation. But what about cryptocurrency inflation itself? For the most part, you can relax as an investor. 

 

There is no inflation because there is a limit on the quantity of coins, which prevents the supply from growing out of control. This strategy prevents inflation regardless of whether a currency has an overall cap (like Bitcoin) or an annual cap (like Ethereum).

 

  1. Transactions Simplicity

 

A bitcoin transaction is usually a simple and rapid operation. Bitcoins, for example, may be exchanged between digital wallets using only a smartphone or computer. Every cryptocurrency transaction is recorded on a public ledger known as the blockchain, which is the technology that makes it possible for it to exist. 

 

This allows individuals to follow the history of Bitcoins, preventing them from spending coins they don't own, copying transactions, or reversing them. 

 

Because blockchain intends to eliminate intermediaries such as banks and internet marketplaces, there are no transaction costs. Payments in cryptocurrencies are growing more popular among major corporations and in industries such as fashion and pharmaceuticals.


 

Disadvantages of using Cryptocurrency

 

  1. Time Consuming

 

It may take some time to fully understand cryptocurrencies. The idea of cryptocurrencies (much alone the blockchain) may not feel natural to someone who is not a digital native. Also risky is trying to invest in something you don't completely understand. 

 

Although there are many internet resources that may be used to your advantage (like N26's blog series on cryptocurrency), you still need to devote some time to fully comprehend the benefits and drawbacks of investing in cryptocurrencies.

 

  1. Extremely volatile investment

 

A cryptocurrency's price can suddenly score to dizzying highs (with related rewards for investors!) and then plummet to terrifying lows. Therefore, this might not be the greatest option if you're hoping to generate consistent profits. 

 

Because of its relative small size and reliance on speculation, the bitcoin market is particularly susceptible to price changes. One of the main drawbacks of cryptocurrencies is that this might have a disastrous effect on coin value.

 

  1. Long-term Investment

 

It's important to keep in mind that cryptocurrencies have only been around for a little over a decade, despite the fact that they are now well-known and continue to grow in popularity. The concept didn't really take off until a white paper on Bitcoin was published in 2008. 

 

Contrarily, stock markets have a long history dating back many decades. For instance, the London Stock Exchange was established in 1801. For millennia, gold has been known to be a reliable keeper of value. 

 

Bitcoins, however? You must have courage to invest in these uncharted seas because no one truly knows what will happen to cryptocurrencies in the future.

 

  1. Scalability issues

 

You could be excused for believing that digital currencies move at breakneck speed—and, to a certain extent, they do. However, when taken to a certain degree, they encounter significant problems that make their wide-scale implementation challenging. 

 

The creators of Ethereum have acknowledged that this is a problem, claiming that the blockchain has "certain capacity restrictions" that reduce the speed at which transactions may be completed. In addition to the possible financial losses it may result in, this may be a frustrating process for everyone involved in the transaction.

 

  1. Vulnerable to security risks

 

Cryptocurrencies may not have the hazards associated with relying on centralized middlemen, but it does not mean that they are fully secure. If you possess cryptocurrency, you run the risk of losing the private key that gives you access to all of your holdings. 

 

Then there are all the various malevolent techniques of gaining control, including hacking, phishing, and so forth. Experienced investors are aware of this, while novice investors are more prone to fall prey to these sorts of traps.

 

  1. Fluctuations

 

It's likely that you'll misplace your virtual wallet or lose your money. There have also been thefts from websites that allow you to store bitcoin on the internet. Because the value of cryptocurrencies like Bitcoins may fluctuate dramatically, some individuals are hesitant to convert real money into Bitcoins. 

 

There are no standards in place to protect your business because the bitcoin market is not regulated by the Financial Conduct Authority (FCA). It might lose value and become useless if firms or customers switch to a different cryptocurrency from you or stop utilizing digital currencies altogether. 

 

Cryptocurrency is a computerized or virtual currency that is obtained using encryption, making it nearly impossible to counterfeit or double spend. Many cryptographic types of money are decentralized organizations because of blockchain innovation, which is a distributed ledger that is executed by a single group of computers. 

 

One distinguishing feature of digital forms of money is that they are generally not issued by any central authority, making them theoretically immune to government censorship or control.

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