Cryptocurrency is to blockchain technology what fiat currencies (money) are to traditional banks, only without a central authority. These digital currencies are ‘the money’ spent on the blockchain by anonymous users without the need for a central authority like a bank or government. However, despite giving control to the users, cryptocurrencies are secured by cryptography, which makes it nearly impossible to counterfeit or double-spend.
Cryptocurrency is making waves in the financial market, affecting different financial corporations positively and negatively depending on how it is utilized. While many users leverage the pros of these digital currencies, others are left to deal with the cons. The difference between these users is their knowledge of how cryptocurrencies work.
What is Cryptocurrency?
Cryptocurrencies are digital tokens that leverage blockchain technology—a distributed public ledger. They are created from mining by blockchain users. They can be used to purchase products online without government regulations and are secured with encryption algorithms and decentralization. Cryptocurrencies have two significant uses: as currencies and as virtual transaction storage.
How are Cryptocurrencies Created?
Cryptocurrencies are created from mining. Mining is a process of using hardware and software technology to add transactional blocks to a blockchain. Before any transaction is completed, it must be validated by fellow blockchain network users — miners — by solving complex mathematical problems.
Some cryptocurrencies are not created from mining but from virtual hard forks—changes in the programming language of a coin to build a replication—with extra effort from blockchain developers. Cryptocurrencies produced from hard forks are ideal for investments rather than purchases.
Types of Cryptocurrency
Cryptocurrencies are of two major types based on how they are created — coins and tokens. Coins are developed on unique blockchains. Examples include Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC), Solana (SOL), etc. However, tokens are created on existing blockchains. Examples are Dogecoin (DOGE), Shiba Inu (SHIB), and Pepe Coin ($PEPE).
Also, based on their functions, below are the major types of cryptocurrencies;
Utility Tokens: These are used for individual needs on their respective blockchains. Examples include XRP and ETH tokens.
Transactional Tokens: They exist for transactional purposes only. A good example is Bitcoin.
Governance Tokens: Tokens that exist for voting purposes, e.g., Uniswap.
Platform/Native Tokens: Tokens used on blockchain web and mobile applications.
Security Tokens: Tokens used to take ownership of a stock, e.g., an MS Token, to purchase a specific percentage ownership of Millennium Sapphire.
Major Advantages of Cryptocurrency
Below are the major advantages of cryptocurrency;
Financial Inclusion & Accesibility
Cryptocurrencies are accessible to anyone with a phone, laptop, internet connection, and a crypto wallet worldwide. In contrast to traditional banking, there are no tedious requirements such as identity verifications, credit, and background checks. People have constant access to the cryptocurrency financial system, which gives them a sense of inclusion.
Cryptocurrencies hasten cross-border transaction processes. They make the process easier by eliminating the need for an intermediary and providing funds with a reduced processing fee and time.
Security:
Cryptocurrency operates on blockchain technology, where all transactions are immutable. This feature makes all transactions made on the network highly secure. Furthermore, the decentralization of cryptocurrency across the networks of users in its blockchain technology makes it impossible for hackers to access the entire chain of transactions at once.
Transparency
Users of public blockchain technology have access to all transactions made on the blockchain. Good examples include the Bitcoin and Ethereum blockchains. Users can access a public key used to encrypt data and track live transactions made on the cryptocurrency platform, ensuring transparency across the network.
Inflation Shield
Cryptocurrencies are not dependent on a currency or economy, so their value does not fluctuate with a change. Due to the limited supply of coins, inflation rarely occurs. Most coins are created with a market cap, meaning there can not be more circulation than the set maximum value, ensuring inflation doesn’t set in. For example, Bitcoin’s highest supply is permanently capped at 21 million coins.
On the other hand, Ethereum has no maximum supply cap but uses the burn method to ensure a limited supply of coins. Transactions made on the Ethereum network attract a gas fee, of which a certain percentage is destroyed, thereby destroying Ethereum and reducing its supply.
Potential For High Returns
Each cryptocurrency has its quirks, creating a volatile market where an investor can either make a lot of profits or a huge loss. However, a careful study of the market and the ability to predict profitable entry into the market can result in high returns.
Currently, the global cryptocurrency market has a projected revenue of $56.7 billion, indicating many opportunities for profit.
Major Disadvantages of Cryptocurrency
Here are the major disadvantages of cryptocurrency;
Volatile Market
Due to their small market size and limited supply, cryptocurrencies are subject to price fluctuations. Prices can soar high, resulting in a high return on investment, and crash low, leading to a massive loss for the investor. This unpredictability makes cryptocurrency an unsafe choice for individuals seeking a stable source of income.
Absence of Regulation
Cryptocurrencies have been adopted in many countries, but they are yet to be legalized by the central government. This increases the risk of scammers gaining access to the blockchain network and manipulating it without legal implications, which will always pose a problem until the central government regulates it legally.
Investors can find it challenging to navigate compliance requirements and potential legal risks in the cryptocurrency space, as countries have varying jurisdictions and legislation.
Expensive Production
Mining, a process for creating coins, depending on their type, can be energy and effort-consuming. Bitcoin, for example, has a large proportion of its cost attributed to the energy required to create the currency. Furthermore, excessive power consumption can result in local pollution, noise pollution, and greenhouse gas emissions.
Non-Refundable Funds
Transactions made on the blockchain network are immutable, and funds are non-refundable. In cases where funds are sent to the wrong wallet or a conflict occurs between parties, funds cannot be reversed. Some individuals seize this as an opportunity to scan other users by creating fake products and never delivering them after receiving payment.
Security Compromise:
Cryptocurrency technology is decentralized and immutable, thus providing a sufficient security structure. However, there have been reports of scams using blockchain technology. Newbies in the cryptocurrency space can fall victim to losing their private keys and their assets in the process. The FBI reported cryptocurrency-related fraud of $5.6 billion in 2023, which was noticed to have increased by 45% compared to 2022.