Risks And Benefits Of Cryptocurrencies
Risks And Benefits Of Cryptocurrencies
Everything has gone digital and it was just a matter of time before money went that way too. Digital payment options have always been available to us in the form of online card payments and intra/inter-bank fund transfers. But, it wasn’t until 2009 that the world saw its very first digital currency.
This virtual currency, called ‘Bitcoin’ was developed by a developer who called himself Satoshi Nakamoto and he started the trend of using digital currencies to transact securely online; a trend that’s gained rapid momentum the world over.
The story of cryptocurrency
Digital currencies like bitcoins are called cryptocurrency. They are virtual currencies with real monetary value and can be used to make all types of financial transactions, right from purchasing goods to trading in the stock market.
When developed, cryptocurrencies captured the world’s imagination due to their feature of being completely decentralized payment mechanisms. So what does this mean?
Well, in traditional money exchange every payment you make and receive is tracked by financial authorities. Whether you make a debit card payment or deposit funds through a payment gateway, authorities and third party institutions are completely privy to everything you do with your money. This reduces your privacy and monetary security to a great degree.
Cryptocurrencies were designed with the objective of providing users with a way to securely transact online, while being completely off-the-radar and out-of-view of third party financial agencies, banks and authorities. Essentially, cryptocurrency allows users to spend, save and invest money in complete anonymity.
Today, apart from bitcoins, we have multiple types of cryptocurrency such as:
The benefits and risks of investing in digital currency
Cryptocurrency is gaining momentum. To help you understand if virtual currency is something that you should invest in and use, we have made a list of the risks and benefits associated with them. Take a look:
Top 5 benefits of cryptocurrency
- Ease of peer-to-peer interactions
The best advantage of cryptocurrencies is that they allow users to circumvent third party institutions and middlemen during online financial transactions. Users can directly interact with other users and engage in trade.
Not only do digital currency make peer-to-peer financial transactions easier, but platforms like Eretheum also provide users a place to list their decentralized software.
- Protection against counterfeiting and double spending
Cryptocurrencies are tracked, monitored and governed through blockchains, which are online ledgers that contain detailed information regarding every single transaction that a user has engaged in. These blockchains are visible to all users and can be used to verify which cryptocurrency was used where and when.
Since a user’s blockchain is visible to others (and any illegal activity is easily tracked), it prevents counterfeiting of currency and discourages double spending.
- Extremely quick settlements possible
Cryptocurrencies like Litecoin and Dogecoin take only 2-5 minutes to complete all incoming and outgoing transactions; making them much faster than traditional card payments.
Bitcoins take about 10 minutes to complete all transactions and are extremely efficient to operate. Additionally, cryptocurrencies allow users to purchase absolutely anything under the sun, ranging from airline tickets to real estate, in just a matter of minutes.
- Low transactional costs
Cryptocurrency networks compensate miners for mining the currencies, ensuring that users do not have to pay additional sums of money for procuring the cryptocurrency. This, as a result, leads to very low transaction costs.
Additionally, since no middlemen are involved in the transactions, there are no transaction fees that need to be paid.
- Complete protection from identity theft
Credit/debit card information can easily be accessed if users are not careful with who they give sensitive information to. Accounts can be hacked if hackers possess the right information.
Cryptocurrencies on the other hand, are more secure. Separate public and private keys guard users against identity theft. Users only need to share their public key with others, to authorize them to send money. Without the private key, no one can access users’ personal accounts and web wallets, ensuring complete safety.
Additionally, while credit/debit card transactions automatically pull money out of the account once a standing instruction is approved, cryptocurrency transactions can take place only if the user actively pushes the money out of his wallet and into someone else’s.
Top 5 risks of cryptocurrency
- Low possibility of scaling
On an average, only 341,076 bitcoin transactions are possible each day. The numbers stand similar to other cryptocurrencies as well. This brings into purview a question of scalability.
Cryptocurrency is still in its nascent stage and there aren’t enough capabilities to support large-scale operations, making them inflexible investments.
- Lack of applications to facilitate transactions
Although they use high-end technology, cryptocurrencies still lack the applications and systems necessary to make certain financial transactions such as international money transfer, campaign fundraising and creation of electronic contracts possible.
Cryptocurrencies and crypto technology are still in their infancy, making them not very lucrative investments as of now.
- Limited acceptance as a valid currency
Unfortunately, despite having been around for 9 years, cryptocurrencies are still relatively unknown globally. While some people have no idea about their existence, others have half-baked information, which in-turn stems misconceptions and leads to an unhealthy mistrust towards digital currency.
Very few corporates and retain owners accept cryptocurrencies as valid payment, making them low value investments.
- High risk of hacking
Although crypto technology provides enough security to keep you off-the-radar, there is nothing protecting users from basic issues such as password errors and hardware/software glitches. This makes it easy for skilled hackers to hack into wallets and get access to sensitive information.
A case in point is the Ethereum Classic cryptocurrency’s web wallet which was hacked in June 2017. Hackers used social engineering to hack into the wallets and steal money from users’ accounts.
- Increase in regulatory intervention
China’s crackdown on cryptocurrency trading is a clear indicator of the government’s lack of trust in digital currency. Countries are fearful of the repercussions of increased usage of cryptocurrencies and many are trying to nip this new mode of finance in the bud.
Cryptocurrencies are being viewed as a threat to the economic and financial stability of countries, with many governments seeking to establish regulations to control their usage and movement.
Cryptocurrency is the future. This is a truth that’s hard to deny. Although they have some disadvantages and risks associated with them, the benefits are great enough to consider purchasing them.
But, if you do decide to invest in cryptocurrencies, it’s important to be educated about important things like where to buy, who to buy from, how to invest and how to save. We recommend you dig into cryptocurrency education before you take your first step into the world of digital currency.