A Look at The Rise of Cryptocurrencies – Cryptocurrency

 In Innovation

Cryptocurrencies have been in the news a lot these days, what with the price of bitcoin reaching stratospheric heights. But until recently, cryptocurrencies were very ‘niche’, holding interest only for geeky types on internet chat forums. Today, it has grown to the point where the use of cryptocurrencies has made it into the mainstream of daily life. Bitcoin is, unarguably, the most popular of the cryptocurrencies, but new ones are being introduced every day, and the proliferation of Initial Coin Offerings (ICOs) which accept payment for tokens in various other cryptocurrencies has boosted lesser known ones. Although the word ‘cryptocurrency’ has made it into our daily lexicon, most people do not fully understand them.

So, what exactly are cryptocurrencies?

A crypto currency is a digital means of exchange created by private individuals or groups through the process of mining. There are many differences between traditional currencies and cryptocurrencies, the most important of which is that they are not regulated by state or national governments and are therefore outside of the state’s monetary policy. However, in recent times, some governments have indicated that they would begin to regulate the use of and trade in cryptocurrencies.

Using advanced mathematics and computer engineering principles, crypto currency developers build extremely complex code systems or cryptographic protocols that are virtually impossible to break and they use them to encrypt sensitive data transfers as well as to secure their units of transfers. These protocols also make it difficult to attribute fund flows and transactions to a particular user, thus masking their identities.

Although it is the incredible rise in the value of Bitcoins that’s driving people’s interests in cryptocurrencies today, initially that wasn’t the case. The main driver for the early adopters of cryptocurrencies (Bitcoin) was the nature of the currency and the built-in mechanisms for maintaining user anonymity, record-keeping through a blockchain, decentralized control and the built-in scarcity I mentioned previously.

Advantages and disadvantages of cryptocurrencies

Cryptocurrencies have many advantages for users, including:

  • Cost saving, as transaction fees for crypto currency exchanges are very low compared to transactions in fiat currency.
  • Value through built-in scarcity. Most cryptocurrencies are designed to be scarce, as the source codes from which they are created limit the number of units that can exists at any one time. This helps the cryptocurrencies to keep their value. The scarcity also helps protect the currency from inflation.

 

  • Identity protection. When we use credit cards for transactions, we are compelled to provide some personal information, whether we know it or not. Cryptocurrencies on the other hand do not require you to submit personal information when paying. They operate on a “push” mechanism whereby the buyer only sends a specified amount of currency to the trader without giving up any additional information. This protects users from identity theft.

 

  • Fewer barriers. Crypto currencies do not have geographical boundaries in the way fiat currencies do. This helps eliminate the different barriers and costs that exist when doing international transfers with traditional money. Users are able to transfer to any recipient anywhere in the world, free of charge which helps save costs.

Disadvantages of crypto currencies

As with anything in life, there are pros and cons to cryptocurrencies. The “cons” of cryptocurrencies include:

  • Absence of regulation: Although its decentralized nature is one of its advantages and draws, it is also a disadvantage. Since the currencies are not easily traceable and not regulated, cryptocurrencies have a reputation of being used in illegal activities. Bitcoin for instance was the main currency used on notorious dark web sites like Silk Road and AlphaBay prior to being shut down.

 

  • Tax evasion: the use of crypto currencies has been attracting tax evaders especially in countries like the US which has taken steps to tax earnings made from cryptocurrencies Some employers and customers may also opt to use crypto currencies simply because the government has minimal control on them, making it easier to avoid detection. This is one of the reasons cited by opponents of cryptocurrencies for calling for regulation or outright ban. They argue that loss of taxes, which play an important part in the economy, could seriously damage national economies.

There is no doubt that cryptocurrencies hold value for those who invest wisely. For companies that choose to accept payment in cryptos, this could boost their profiles as innovative and flexible organizations. However, the sharp volatility in the prices of cryptocurrencies may also be reason to exercise caution. Closer regulatory scrutiny is inevitable and there is no telling what this will do to the value of cryptocurrencies.

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