If you have been following global trends, especially in the financial sector, then you no doubt must have heard of cryptocurrencies. In the last few years, the popularity of cryptocurrencies has soared.
A cryptocurrency is a virtual currency. It is primarily used as a medium of exchange. Cryptocurrencies make use of cryptography in both making new units of currency as well as in securing transactions. The use of cryptography makes it that coins are significantly harder to create (hence making it difficult for counterfeits to be made) while making it easy to verify transactions.
Bitcoin is the most popular type of cryptocurrency, and in most cases, people interchange the two terms. Bitcoin has enjoyed massive success, although there are lesser-known cryptocurrencies like Ripple, Litecoin, Peercoin, etc. The success of any cryptocurrency largely depends on the number of people who use and trade in it. A cryptocurrency disappears when it fails to garner popular support. Bitcoin has been mostly successful because of the massive support from people all over the world.
Cryptocurrencies are designed to take advantage of the internet. It eliminates the traditional financial systems. With cryptocurrencies, there is usually no need for third-party verification of the identity of users. Users’ computers verify transactions logged into the system’s network.
There are certain features unique to cryptocurrencies that cannot be found with traditional currencies (and even nontraditional ones such as gold).
The features include:
- Security
A cryptocurrency is a decentralized currency, which means that all transactions have to be in real-time. This feature reduces the chances of fraud occurring in a transaction involving cryptocurrencies. Also, transactions can be conducted without the need for intermediaries or any other third party. This gives you total control of the process. You will have full control over your asset, eliminating the possibility of diversion of funds.
- Storage
Bitcoins and other cryptocurrencies do not have paper equivalents. They are only stored digitally and have no paper form the way cash does. Cryptocurrencies are stored in digital wallets. The wallets are accessible from different points. It is even possible to access your digital wallet from another device. You will need to go through some security checks, but ultimately, you will have access to the money.
Cryptocurrencies can also be saved offline. There are two options for this to happen. They can either be saved in a paper wallet, or they are kept in a removable hard drive instead. The removable hard drive can be disconnected from the internet, making it virtually untraceable.
- Portability
As long as you have a digital wallet, there is no need to worry about carrying funds around. Cryptocurrencies offer an irreversible digital currency that can be accessed at any time. Due to its portability, transactions involving huge sums can be concluded within minutes.
Furthermore, cryptocurrencies can be converted into cash quickly. They can be converted into whatever currency desired and transferred to a user’s bank account. The ease of this transformation is one of its attractive qualities.
- Anonymity
The digital wallet operates in a way different from how traditional banks operate. The chief aim is to protect the identity of the owner of the wallet. While banks often know everything about their clients, in a digital wallet, there is no information about the identity of the owner. Due to its anonymity, users do not have to pay for currency conversion fees any time they make use of any cryptocurrency. There is, of course, a small fee for every cryptocurrency transaction, but it is significantly lower than what is usually charged as credit card processing fees.
Impacts of Cryptocurrencies in the Financial World
Cryptocurrencies are relatively new, but they are already taking the financial world by storm. A look at the upheavals it has caused will be instructive in predicting future patterns of disruptions:
1. Increased overseas transactions
One of the benefits of cryptocurrencies is that it caters to people who do not have bank accounts. A large proportion of these persons are in developing countries with weak economies. Cryptocurrencies such as Bitcoins make it possible for them to engage in financial transactions. The only requirement is for the individual to have internet access and a digital wallet. Transactions carried out this way are significantly faster and secure. Another attraction is the affordability of transaction fees charged. The boundaries created by international financial institutions are being broken down by cryptocurrencies.
2. Reduction in the reliance on Fiat money
Cryptocurrencies are increasingly replacing fiat or authorized money. They have come to be regarded not only as viable alternatives but better ones. Cryptocurrencies are not affected by the political and financial issues that plague fiat money. This ensures its relative stability in the global market. At the moment, people are carrying out more digital transfers, making use of cryptocurrencies to pay for goods and services. The fact that digital transactions are taken even to be more reliable than authorized money makes its use more appealing.
3. Eliminates the need for a Central Regulatory Agency
The decentralized nature of cryptocurrencies means that there is no need for a central body to issue currencies or grant approval. This creates a new market structure where no central authority controls the money market. This is vital, especially for startups. Gone are the days when angel investors, venture capitalists, and banks were the sole sources of funds for startups. These days, business founders often sell their Bitcoins (in the case of Bitcoins) and the resources funneled into their businesses. This strategy is called Initial Coin Offering (ICO).
4. Introduces a new form of crowdfunding
The emergence of cryptocurrencies also brought with it a unique way of crowdfunding. This is known as crypto equity funding. Here, investors buy coins that are taken to be the same as shares in a company. In that way, the investor owns some part of the company. The value of the coin rises as the value of the company increases and vice versa. This has helped improve the global economy, as well as sustain startups situated in fledgling economies.
5. Eliminates problems related to remittances
Cryptocurrencies circumvent the isolationist policies of some governments that make it impossible for people to send money overseas. With cryptocurrency, it is easy to send money to loved ones abroad.
Cryptocurrencies can rightly be said to be the rave of the decade and for a good reason. The chances of huge returns on investment are high. However, there is a problem with its volatility. A case in point is the fluctuations experienced in Bitcoin value between 2017 and 2019. However, bearing this risk in mind, cryptocurrencies appear to be the future of money.
About the Author:
Brenner Thomas is a blogger who enjoys writing articles about home decoration and house security.
After working as a writer for various media publications, Brenner decided to start his own blog top10pack.com where he covers topics of lifestyle, house decoration and home security.