What are cryptocurrencies

To begin this article, we start by defining what cryptocurrencies are, which is quite simply purely digital money. The name cryptocurrency comes from cryptography due to the use of cryptography to create an encrypted system to make digital transfers secure.  Cryptocurrencies are typically decentralized, unregulated, and secured through encryption on the blockchain, making the currency impossible to counterfeit.

What is blockchain

You could say that blockchain is a kind of ledger or the equivalent of a statement that reflects all financial movements that are generated. They follow a sequence that cannot be deleted, only new movements can be added. This is pretty much an immutable record. 

This digital record is not made in a book but stored in blocks in a database. As soon as a block is filled, because there is a limit of records per block, that digital block is “chained” to the previous blocks and a new one is created.

So when any person executes a transaction their movement is generating a new record. This record is added to the block, which is then synchronized with other existing blocks creating a sequence of movements that are happening in real-time to be recorded in the ledger.

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Decentralization

Using blockchain technology, where all users are responsible for the cryptocurrency’s ledger, it is possible to create a completely decentralized currency. That is, no single entity, bank, or country whom controls the production or the value of this digital asset. This makes these kinds of assets somewhat volatile considering that what dictates the value of these assets is what people are willing to pay for them, without any kind of influence from intermediaries or intrinsic value.

What they are used for

Currently, there are dozens of cryptocurrencies, all with different values and quantities of coins in circulation. At the moment, the vast majority are used only for investment, either short or long term. Only a few like Bitcoin are accepted as a form of payment, but recently huge companies like Tesla, Microsoft, and even Paypal, which allows buying and selling of cryptocurrencies, have announced that they accept Bitcoin as a form of payment.

Advantages

  • Security – cryptocurrencies use blockchain technology to verify each transfer, this allows transfers to be made secure and private as none of these transactions require sensitive personal information to be made.
  • Mobility – since these digital assets are not centralized, this makes transfers possible anywhere in the world without the need for a specific bank or government.
  • Transparency – As we mentioned earlier, although the use of cryptocurrencies is private, the transactions themselves are recorded in the ledger. In other words, this information is available to everyone at any time, making it difficult to falsify transactions.

Disadvantages

  • Volatility – Cryptocurrencies can be incredibly volatile, their value can increase or decrease extremely fast, sometimes in a matter of hours. Due to its decentralization, it is not controlled by any government or entity, which leads to these huge price fluctuations, something that can be seen as a negative for those looking for a stable currency. In the case of Bitcoin for example, in 2016 one Bitcoin had a value of about 350€, and today, in 2021, it is worth about 47000€. In between this astronomical rise, there have also been periods when it has experienced major falls.
  • Deregulation – Since it is not regulated or supervised by any reputable entity, it is susceptible to fraud, or can even be used in criminal activities.
  • Inherent Value – Not being tied to any country or economy, it becomes difficult to calculate the value of cryptocurrencies, which in turn could also limit their use in day-to-day life. What this situation causes is a certain distrust to be accepted as payment.

Conclusion

This type of digital asset is something that is still in a very embryonic stage, so it is still difficult to define the future of this asset. On the one hand, decentralization is seen as something quite advantageous for some. However, this same decentralization drives some investors away from this type of product, due to the lack of regulation and security.

Cryptocurrency probably has a small place in the portfolio of some investors looking for certain riskier products, but it should be noted that the lack of connection to a product with intrinsic value makes cryptocurrencies volatile assets that are difficult to predict.

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