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Cryptocurrency: What you Need to Know - How it Works, Pros & Cons

about 2 years ago by Luigi Muscat Filletti
Cryptocurrency

The phenomenon of cryptocurrency has gained significant attention to the eyes of individuals and businesses both small and large the world over. In today’s day and age, cryptocurrency is fast-changing the way we trade, offering users the opportunity to complete online financial transactions privately, securely and efficiently. Although many associate the topic of cryptocurrency with professionals in the Finance and Technology industries, it can easily be understood in a straightforward manner. All the more, with the world’s major cryptocurrency exchanges flocking to Malta, it would be wise for one to be informed about what cryptocurrency is all about and how it can be used.

 

What is Cryptocurrency?

Cryptocurrency is a digital currency (the best known example of such is Bitcoin) which is generated and recorded through encryption techniques which verify online financial transactions between users. Users’ identities are kept private, whose only credentials include a public key (such as a system-generated index number) and a private key (their personal password to log-in into the system). There is no need for an official financial institution to confirm transactions between users - in fact, cryptocurrency does away with traditional banking, and is not overseen nor managed by a central authority or governmental system. Cryptocurrency is therefore recorded in a decentralised database, referred to as the blockchain. Within the blockchain, cryptocurrency transactions are verified within a peer-to-peer (P2P) network. In more simple terms, the blockchain may also be referred to as a system which structures, records and stores transactional data online, acting as a public ledger.

 

How do Cryptocurrency Transactions occur?

A transaction is requested between users when one wishes to send an amount of cryptocurrency to the other. In order for a transaction to be approved, it undergoes a process known as mining, where complex algorithmic problems are solved and displayed as proof of the transaction. The act of mining is completed by users of the blockchain, and the first ‘miner’ who validates the transaction adds a new block of data to the blockchain - data which may be viewed and verified by other miners too. Miners who successfully complete such verifications are rewarded with a newly generated amount of cryptocurrency - this also acts as an incentive for miners to continue solving computational problems to verify transactions in the system, and additionally adds to the overall cryptocurrency generation and supply.

With cryptocurrency as a viable option for completing financial transactions, it does well to be fairly knowledgeable about the subject to be able to weigh out the pros and cons. Below are a few positive and negative points on the topic.

 

Positive Points on Cryptocurrency

Transparency - Everyone utilising a cryptocurrency blockchain can view all the past and ongoing transactions being made by all users within the system. Issues on trust and credibility are disregarded, since every user’s transactional affairs can be seen by others.

Privacy Control - A user does not need to share their identity or any details about the transactions being made between them and others. The decentralised system means that no information needs to be passed on to an authority for the transaction to take effect. Also, each user is completely in control of their money, and nobody can get access to it but the user.

Easily Accessible - Cryptocurrency is readily available to anyone, anywhere. With an internet connection, cryptocurrency can be made accessible to anybody - a contrast to banks that require personal information and set criteria to open an account, cryptocurrency does not demand such.

Speedy Settlements - All transactional entries are broadcast across the network and confirmed in very little time. Transfer times range from ten minutes to about an hour - a very fast process when compared to international banks which take up to 1 to 5 working days for the process to be completed. There is no presence of any middlemen or third party approvals, only the verification of mining through the P2P nature of the networking structure.

Reduced Fees - Traditional banking presents a few fees to its users - fees linked to annual account statements, bank transfers and credit card processing which all add up considerably over time. When using cryptocurrency these fees are negligible, and when it comes to trading it is the buyer who pays the small fee, with the seller being unaffected.

Safe and Secure - All transaction data is secured through encryption and the latest cryptographic techniques. The network is spread over thousands of users, making the system near to impossible to infiltrate.

Currency of Universal Acceptance - Cryptocurrency maintains a consistent value in the global marketplace and by being obtainable to people the world over, everyone is able to trade without having to convert to other currencies.

 

Negative Points on Cryptocurrency

Not Widely Accepted - As for the time being, not many websites and organisations are accepting cryptocurrencies. Some businesses are slowly adopting it as a feasible method for online payment, however more exposure is needed to bring the use of cryptocurrency out of the shadows.

Insufficient Knowledge - The amount of people who are informed about cryptocurrencies and the blockchain is still low, and individuals and businesses alike must obtain the necessary knowledge before using and investing. The nature of the network is a complex one, and users must learn about its methods of operation before using it.

Transfers are Irreversible - Once financial transactions are complete they cannot be reversed - the process is one-way, and chargebacks are not permitted. Therefore, if you mistakenly pay someone an amount of cryptocurrency there is no way of retrieving it back unless you come to an understanding with the other user to pay the amount back. Since the system has no major authority to report to, there is no customer-care or technical support to aid you on the issue. On a plus side however, this system prevents potential fraud between users.

Fluctuating Value - The values of most cryptocurrencies change frequently, with several factors determining this fluctuation of value. Supply and demand is one of these factors - if more users are buying a cryptocurrency (for example, Bitcoin) while others are willing to sell it, then the price will go up, and vice-versa. The same goes to mass adoption of cryptocurrency, since with a higher demand in obtaining a cryptocurrency, its value is highly likely to shoot up. That being said, cryptocurrencies are volatile, meaning that it is unpredictable whether their value will increase or decrease - a reason why mass adoption is very slow, since some organisations tend to be skeptical with dealing with a currency which is probable to swing in value.

Attractive for Criminal Activity - With personal information being neglected from the system and data being encrypted, it is no surprise that concerns have been raised about the possibility of cryptocurrency being used for criminal activity. Such examples might include money laundering and trading for illegal goods and services such as drugs, weapons and terrorist funding. A popular occurrence of such was the online-drug market known as ‘Silk Road’ which recorded black-market activity and was shut down by the FBI in 2013 who seized 144,336 Bitcoin, valued at just over $48 million at the time.

 

To Conclude

Trading with cryptocurrency may have its fair share of pros and cons, however nowadays people are adopting the use of cryptocurrency more than ever before. This is especially due to the steady growth of adoption by major organisations worldwide who are acquiring the payment method of cryptocurrency for both online payments as well as for purchases in brick and mortar stores.

What is more is that official financial regulators are observing the growth of this technology in order to prevent cases of money laundering and to support consumer rights. As the use of cryptocurrency (namely Bitcoin) matures, it is almost certain that its value and acceptance will grow steadily, even more so due to economic inflation and market recessions which will make organisations turn to cryptocurrency to break free from capital control.

These major changes and developments in the way people pay and receive money on a daily basis, will inevitably bring a greater demand for people who have the skills to enable such transactions. Both Finance and Tech skills will increase in demand, as people evolve their talent to accommodate changes occurring in the cryptocurrency field.