What is Cryptocurrency?
Cryptocurrency is a digital currency that eliminates the need for any middlemen, such as the banks, for transactions between two people. It is a form of online payment used by people in exchange for goods and services.
Advantages of Cryptocurrency
- Elimination of third parties
As mentioned earlier, there is no need for a third party to get a transaction approved. Cryptocurrency holds the tantalising prospect of taking power away from banks and other centralised agencies altogether. The government cannot freeze the bank account or deny access to the funds, as is the case in traditional cash.
- Reduction in delay
Cryptocurrency allows users to zap digital money to each other in a matter of few seconds. With the flick of a wrist, users can pay for goods and services electronically without the hassle of carrying a ton load of cash.
- Elimination of transaction fees
In many cases, the intervention of banks, government agencies, and brokers costs a commission or fee, making the transaction slow and expensive.
- Reduction in fraud
When power is concentrated in the hands of one person or establishment, the chances of abuse of that power increases. Accordingly, dividing the power equally among all the members of the network resolves this issue.
- Elimination of money-printing
Governments hold power to print more money when the situation demands it. However, printing more money causes more harm than good. Inflation soars, and the value of money drops. On the other hand, most cryptocurrencies have a limited amount of coins available. A company or a central entity can not create more even if they wanted to.
Disadvantages of Cryptocurrency
- Price Volatility
Most cryptocurrencies are highly volatile. Their value fluctuates rapidly and unpredictably. Even experts face huge losses while investing in cryptocurrencies due to rapid price rise and high-profile missteps. While some investors make millions of dollars, others wipe out their initial investments.
- Privacy concerns
Cryptocurrency is susceptible to hacking and other fraudulent behaviours. When trading cryptocurrency on an exchange, it is essential to ensure that the host is credible. Numerous data breaches and security incidents occur due to these exchanges.
- Vanishing risk
With more and more cryptocurrencies popping up every day, some vanish while others flourish. It is consequential to research the fundamentals of a cryptocurrency before investing in it.
- Illegal transactions
Cryptocurrencies are decentralised and encrypted. These make the governments impossible to track down users. Thus, it can be used to fuel the shadow economy. Guns, drugs and other illegal products are bought on the dark web as it keeps the people anonymous.
All cryptocurrencies use blockchain technology to enable their functioning. A blockchain is a shared and distributed digital ledger that tracks and records the history of transactions. When a transaction occurs, it is verified by all the computers on the blockchain network. After verification, the blockchain stores the information in batches called blocks. The block is added to the chain of blocks in a central database for everyone to see.
The block comprises three elements, namely:
- Data: It contains the details about the transaction like sender, amount, time, receiver, etc.
- Hash: It is a unique code for the block that is formed using complex algorithms.
- Hash of the previous block: Every block contains the information of the preceding block. This makes the blockchain secure.
Blockchains use a peer-to-peer network. They are distributed among all the computers available on the blockchain network. Each member of the network is called a node. Whenever a new block is created, the change resonates in all the computers. So, if a hacker tampers with a block, the other nodes would notice the anomaly. Hence, it is almost impossible to interfere with a block on the blockchain.