Understanding Cryptocurrency

Last Modified:25 Jul 2022 15:41:19
Understanding Cryptocurrency

Understanding Cryptocurrency

According to a recent investigation, by the year 2030 the number of crypto users will amount to one billion people.

Of course, it is no secret to anyone how popular and prevalent cryptocurrencies and of course by virtue the Blockchain technology are becoming.

In this article, we want to take an in-depth look at the idea of cryptocurrency, so you can understand what it really means and what its implications are.


What Is Crypto?

It goes by a lot of names, digital currency, virtual currency, digital money, or simply crypto – but of course the technical term is cryptocurrency.

As the name suggests, a cryptocurrency is a virtual currency that is secured with the help of cryptography. In this way this virtual currency has certain aspects that make it so precious: including being tamper proof, impossible to counterfeit, impossible to double spend, etc.

Cryptocurrencies are closely tied to Blockchain networks and of course the notion of distributed ledgers. Therefore, a salient aspect of a usual cryptocurrency is that they are not issued by any centralized entity. Therefore, being near completely immune to outside interference by governments or manipulation by fraudulent individuals.

So, to summarize, a cryptocurrency is a new form of digital currency that is based on distributed ledger technology, which is itself based on the Blockchain technology. Therefore, it means that information related to the cryptocurrency is spread across the Blockchain network is a very large number of computers; ergo not being centralized.

As a result, many experts speculate that the Blockchain technology will revolutionize many aspects of life and many industries, including of course finance, health, law, and governance.

What cryptocurrencies offer are monetary transactions that are faster and take place at a lower cost. However, there could also be some disadvantages, such as potential extreme volatility, consumption of electricity and other resources that are required for the mining process of certain cryptocurrencies, and of course last but not least, the potential use by mal-intending individuals.

To further understand the notion of cryptocurrencies, we need to also take a look at the underlying technology behind them – Blockchain.


What Is Blockchain?

Of course, in the same spirit of the discussion “which came first? The chicken or the egg?” the discussion of which came first? Blockchain or crypto? The answer is much more clear. There would be no cryptocurrencies without the Blockchain technology.

As the name of this technology suggests, Blockchain technology is in essence comprised of a series of blocks, which make up an online ledger, used to register and keep data. In a Blockchain, each block contains the information of the transactions that have been confirmed. When a new block needs to be added, it first needs to be verified by the previous block, therefore it becomes near impossible for counterfeit transaction histories.

Therefore, it can be seen that the Blockchain technology is essentially a very safe and tamper-proof method of registering information on a network. As a result, it can have various applications, other than just recording transaction and financial records.


The Legal Framework

So, you may ask yourself, are cryptocurrencies legal? To answer this question, first, let’s take a look at fiat currencies. Fiat currencies or conventional currencies that have been used for millennia derive their legitimacy from the fact that they are issued by a centralized entity; most likely a government.

However, as mentioned previously, cryptocurrencies are not issued by centralized entities. In fact, one would say that not being issued by a centralized entity is one of the advantages of digital currencies. They are by nature decentralized – even though there could be discussions about whether all the existing cryptos are decentralized or not. However, it can generally be said that they are decentralized and thus it is quite difficult to clarify their legal status.

As such, countries have been taking varying stances regarding the Blockchain technology and digital currencies. This variation of course goes from full-on acceptance to a complete ban.

But all things considered, from a legal perspective, things are looking up for cryptocurrencies. It seems that their level of acceptance and adoption by different countries is on the rise.

With some rather obvious exceptions, such as China, other countries are showing a greenlight to crypto one after the other; most notably, the European Union is attempting to offer a regulatory framework for digital assets with the help of the MiCa bill. And also, the US government, including the Securities and Exchange Commission, SEC, are looking into regulating digital assets as soon as possible.

In general, even though, throughout the recent years, especially in the beginning years of the inception of cryptocurrencies, the legal outlook looked rather dim, in that it was non-existing, but recently more and more nations are looking into regulating such currencies. So, it wouldn’t be surprising to see that cryptocurrencies are regulated in most countries around the world in the coming years.


Pros & Cons of Cryptos

In this section of the article, we want to focus on the advantages and disadvantages of cryptocurrencies – this section is inspired by the article published on the website WikiJob, titled How to Trade Cryptocurrency: A Guide for (Future) Millionaires.

First, let’s focus on advantages:

Fast Transactions: precisely because of the decentralized nature of cryptocurrencies, and the fact that brokers or other intermediaries are not involved in the process, the transaction are usually much faster than conventional currencies.

Secure and Confidential: of course, due to the use of cryptography, all cryptocurrency transactions are encrypted and as such offer a high level of safety and security.

International Monetary Transfer: since transactions do not go through local or national institutes and organizations, transfers can be made fast and easily on an international scale.

Cheap Transactions: another important factor that concerns many people with regard to conventional currencies is the high amount of fees and commissions they might have to pay when they are making payments.


Of course, nothing is pure positive – the same goes for cryptocurrencies. There are darker sides to digital assets:

Scam and Fraud: the decentralized nature of such currencies is both a gift and a curse. We talked about the upside, now let’s take a look at the downside. Precisely because these currencies are not regulated and governed by centralized entities, they have a higher potential for scam and fraudulent activities.

Price Volatility: unlike conventional currencies, cryptocurrencies are subject to higher degrees of volatility.

Illegal Activities: since cryptocurrencies are almost fully decentralized and anonymous, they are considered top choice for individuals and groups involved in illegal activities.



The Future of Financing

So, with all the advantages that cryptocurrencies offer over conventional financial systems, they make numerous improvements on aspects of daily life and also high scale financial operations.