What are Cryptocurrencies?
- Cryptocurrencies are a type of digital currency, originally created with the goal of buying and selling goods, and ultimately replace real currencies.
- Cryptos work with the help of blockchain technology.
What is a cryptocurrency?
You can think of a cryptocurrency as a virtual currency which can be used to buy and sell goods, and which carries a unique feature: a long list of ALL transactions ever made with that coin. .
This feature is implemented through the eponymous blockchain, which is a digital public ledger of transactions that is very difficult to hack - because everybody keeps a copy of it.
This allows users to securely transact with one another - and in peer-to-peer fashion, this limits the interference of the government, banks or any other third party. The major appeal of digital currencies is that it is anonymous and independent of oversight.
Example; when you go to a theme park, you pay for a special currency that can only be used for goods and services within the theme park. Similarly with cryptocurrencies, you’ll need to use real currency to purchase cryptos like Bitcoin, which are then used to access relevant goods and services, like non-fungible tokens. At its peak, the total value of all cryptocurrencies in the market was approximately $2.2 TRILLION.
Benefits and Drawbacks
Crypto currencies remove central banks from the picture. By doing this, the supply and value of the token is not modified in times of stress and hence, cryptos are hedged against inflation. In theory makes cryptocurrencies the perfect asset for diversification since it has little to no correlation with the USD - albeit in practice speculative trading adds back some correlation to traditional currencies and equity markets.
The technology behind crypto currencies is also highly complex and makes blockchains more secure than traditional payment systems.
With anonymity, comes the risk of money laundering. Crypto currencies are frequently used for black market activity since they are unregulated. For example, the Silk Road on the dark web (the amazon for narcotics) only allows transactions with bitcoin so that no transaction can be traced by law enforcement. As a result, cryptocurrencies face regulatory challenges because of their ability to facilitate illegal activities under the radar.
Finally, the crypto market can be very volatile - whilst this can help investors achieve high returns, the potential for losses are equally higher.