The impact of technology during the twenty-first century has sent ripples to every corner of industry, including an evolution of finance you may have heard of called cryptocurrency. Like any aspect of a newly emerging technology, many new investors shy away due to a lack of understanding or even base knowledge of the subject. Here is a general overview of cryptocurrency to help you should you have an interest in investing, utilizing, or just want to be in the know.
CRYPTOCURRENCY BASICS
Cryptocurrency, sometimes referred to as “crypto,” is a digital currency or system of information exchange that uses advanced cryptography algorithms for security, from which it derives its name. The two most popular cryptocurrencies used are Bitcoin (BTC) and Ethereum (ETH). Both cryptocurrency tokens are decentralized, meaning they are not regulated or governed by a central bank, country, or third party. Every transaction made with either BTC or ETH is tracked and vetted by using a technology called a blockchain. Blockchain functions as a ledger or log that is a record of every transaction made using one’s cryptocurrency. Unlike a bank’s records, the blockchain is distributed to all participants of the digital currency across its network.
Obtained cryptocurrency is kept in a crypto wallet. A crypto wallet is a secure location; usually, an app or a physical device called a that keeps your digital currency. The most popular is a hosted wallet in which a third party holds your crypto, like a bank account. A popular example of a hosted wallet app is Coinbase. The more secure option is the hard wallet which is like a hard drive or jump drive that keeps your information offline, making it safe from hacking.
One last piece of info to round out the basics of crypto is that of mining. Mining is the complicated process by which new cryptocurrencies are put into circulation. Mining is not for the inexperienced and requires high-powered computers referred to as mining rigs that grind out complex mathematics to create a new “block” on the blockchain.
Amateur investors and users should be aware of the potential advantages and disadvantages of cryptocurrency. Here is a shortlist of pros and cons to consider.
THE PROS
- There is no need for a middleman such as a bank or broker of services when trading in cryptocurrency, creating cost-savings by having only to pay the miners/network to calculate the transaction. Differing cryptos have different rates or “gas fees” that are charges for the computational effort it takes to make your trade.
- For those who value their privacy, there are blockchains designed with private ledgers and wallets where no trace of the transaction or wallet holder can be found. An example of this type of cryptocurrency is Monero (XMR).
- Using a trusted and tested blockchain such as Bitcoin, one cannot falsify the value of the asset transferred because the blockchain network (depending on the crypto) validates that the information contained is verified and true. This minimizes the chance for fraud.
- Crypto provides around-the-clock access utilizing only a smartphone. There is no need for a computer to access your digital currency. These two factors make for easy international trade or transference between two parties.
THE CONS
- Despite the efforts of this post, cryptocurrency can be difficult to comprehend. The idea of a decentralized financial system logged via a blockchain can be a difficult concept for those with limited technological understanding.
- Inexperience can be a security risk when it comes to digital currency. Crypto is an actual commodity and should never be thought of otherwise. When a cryptocurrency is lost by being sent to an incorrect address, for example, it’s gone. Treat every transaction with great care and attention.
- Most holders utilize cryptocurrency as an investment opportunity, making them subject to the same market fluctuations as any commodity. As with any investment, one should be careful and not expect unrealistic returns, odds, or bonuses. Plus, as crypto is an emerging field, the market can be inherently more volatile as a result.
- Cryptocurrency payments have no legal protections like credit or debit cards. Purchases cannot be disputed, and charges are not usually reversible.
From the birth of Bitcoin in 2009, crypto has ushered in a new age of financial transactions and technologies. Despite detractors, the use of digital currency is here, and it’s not going away anytime soon. If you’re interested in breaking into cryptocurrency, it is strongly advised that you consult your accountant for additional risks. They will caution you on careful tax preparation to appropriately claim your losses or gains should you choose to engage in investing or trading, as cryptocurrency is viewed as a capital asset by the IRS.
