Ten years after the most well-known form of cryptocurrency, Bitcoin, first became publically traded, the cryptocurrency market is still subject to a great degree of misunderstanding. In some quarters, cryptocurrency is viewed as “trendy” simply because of its relative newness and associations with technology, but others link it with criminal use on the black market and so view it with suspicion and distrust.
Meanwhile, expert traders are able to look dispassionately at the many forms of cryptocurrency, assess their relative advantages and disadvantages, and buy, sell or invest accordingly.
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What exactly is cryptocurrency?
Cryptocurrency is a form of virtual currency where digitally stored information is itself the unit of value. It is a digital means of exchange created and used by private individuals and groups as an “alternative currency” that is decentralized and outside of the control of national banks and governments. This means that it is not affected by state monetary policies and assets cannot be easily seized or otherwise interfered with.
By using cryptographic protocols and algorithms that allow for secure, unalterable information exchange, each unit of a given cryptocurrency is made up of encrypted data, ensuring that they can’t be counterfeited. Most cryptocurrencies are limited to a finite supply, with the currency’s source code stating from the outset the maximum number of units that will ever be created. In the case of Bitcoin, this upper limit is 21 million, which it is not predicted to reach until the middle of the next century.
The advantages of blockchain technology
Cryptocurrencies use a blockchain, which records every transaction made using that particular currency. Rather than being stored in one central location, blockchain copies are stored on an unlimited number of servers all over the world. The chain is updated, a block at a time, by miners who are paid in newly created units of currency as well as optional transaction fees. The blockchain validates ownership of every unit of a particular cryptocurrency currently in circulation. A transaction isn’t finalized until it’s recorded on the blockchain, and once recorded, it can’t be undone.
Trading in cryptocurrency
The opportunities to trade in cryptocurrency depend on the currency in question. Bitcoin, by far the biggest cryptocurrency in terms of value, recognition and market cap, is widely traded on public exchanges and can easily be traded for “real” currencies such as dollars and euros. More obscure cryptocurrencies can often only be traded on private online exchanges between limited numbers of interested parties.
This has led to criticisms that cryptocurrencies lack liquidity as a trading component. While this may be true for some of the lesser-known forms, the bigger cryptocurrencies such as Bitcoin, Ripple, and Ethereum are increasingly widely traded and so can be fairly easily cashed in or converted into other currencies and/or assets. Moreover, as cryptocurrencies become more widely accepted and understood, this liquidity can only increase. Keep an eye on the latest cryptocurrency updates for news and information on trading opportunities.
Because most cryptocurrencies are limited to a finite supply, they are effectively inflation-proof and will retain their value where national currencies often lose value in real terms compared to the rising cost of living. The fact that cryptocurrencies are not subject to government regulation also means that they are not affected by controversial policies such as quantitative easing, where the state effectively prints more money as a short-term solution that runs the risks of longer-term financial instability.
For many cryptocurrency users, the built-in privacy and anonymity of use is seen as a great advantage, although this is also the main reason why cryptocurrencies have gained a shady reputation in some quarters. Ownership of cryptocurrency units in a transaction is verified by the use of a unique private key, consisting of a single number up to 78 digits long, and this privacy is seen as a great strength for Bitcoin as an investment option compared to gold.
In theory, cryptocurrency transactions can be made without any fees, but in practice this hardly ever happens. This is because transaction fees make up a large part of the income of cryptocurrency miners, who are allowed to prioritize fee-paying transactions over fee-free ones. Fees are charged by the seller because it means that the transaction will be processed sooner. These fees are paid by the buyer, but ultimately go to the miner who processes the transaction.
However, cryptocurrency fees are typically less than 1% of the total transaction value – less than with credit cards or PayPal. There is also no additional fee for international transactions, and no need to calculate differences between currencies.
There is much to be gained from trading in cryptocurrencies, and the existing disadvantages will likely be reduced as time goes on, simply because of the wider acceptance of these kinds of transactions. In a global, digital marketplace, they will surely go from strength to strength.
Featured image source: Freepik