Explaining Cryptocurrency With Investment Benefits And Drawbacks

Digital or virtual cash that is encrypted to prevent forgery and double spending is called cryptocurrency. Cryptocurrencies rely on blockchain technology, which is a distributed ledger monitored by a distributed network of computers, to function as decentralized networks.

Cryptocurrencies are distinguished from traditional currencies by the fact that they are not issued by any centralized institution. Cryptocurrencies have many benefits, including instantaneous and cheap money transfers and the lack of a central point of failure. Cryptocurrencies have several drawbacks, including excessive energy consumption due to mining and illicit use.

Cryptography refers to the use of mathematical procedures and techniques to ensure the security of data, such as elliptic curve encryption, public-private key pairs, and hash functions, which are used to protect these database entries.

A cryptocurrency can either be mined or bought via a cryptocurrency exchange. While many online retailers accept cryptocurrency payments, some do not. Few people use cryptocurrencies for everyday purchases, not even the most well-known ones like Bitcoin. But their astronomical value has made cryptocurrencies widely used as a medium of exchange. They are also used for some international monetary transfers.

Sub-Genres of Cryptocurrencies

When it comes to market value and overall popularity, Bitcoin is king. It was created in 2008 by an unknown person using the name Satoshi Nakamoto, who then released a white paper detailing its features to the public. Currently, the market is flooded with thousands of different cryptocurrencies.

Virtual currencies all assert unique purposes and technical details. Ether, the cryptocurrency used by the Ethereum smart contract platform, advertises itself as “gas.” To ease international money transfers, banks utilize Ripple’s XRP token.

Introduced to the public in 2009, Bitcoin continues to dominate the cryptocurrency market. There were about 19 million bitcoins in circulation as of May 2022, and their market cap was about $576 billion at that time. The total supply of bitcoins will stop at 21 million.

After the success of Bitcoin, many alternative digital currencies have appeared. Some are copies or forks of Bitcoin, while others are completely original concepts in the cryptocurrency space. Some examples are Solana, Litecoin, Ethereum, Cardano, and EOS. By 2021’s end, Bitcoin’s worth will have increased to over 41% of the overall cryptocurrency market‘s $2.1 trillion valuation.

The IRS does not recognize cryptocurrencies as currency but rather as property or financial assets. Also, if you make money from selling or trading cryptocurrencies, the government will want a cut of your winnings just like it does with other types of investments.

It was proposed on May 20, 2021, by the U.S. Department of the Treasury that taxpayers report to the IRS any bitcoin transaction totalling more than $10,000. The amount of time a taxpayer holds bitcoin determines whether the IRS will treat revenues as capital gains or ordinary income.

Investing in Cryptocurrencies: Is It a Safe Bet?

High investor losses owing to scams, hacks, and flaws have given cryptocurrencies a reputation as risky investments. Despite the inherent security of cryptography, the technical challenges of working with and keeping cryptographic assets pose a significant risk to inexperienced users.

Investors in cryptocurrencies should be aware of the following risks, in addition to those connected to the market volatility inherent in speculative assets:

  • In contrast to conventional financial transactions, once a cryptocurrency transaction has been sent, it cannot be undone or cancelled. About 20% of all Bitcoins are thought to be unusable now because of forgotten passwords or invalid Bitcoin addresses.
  • As of now, countries have varied on whether to treat cryptocurrencies like bitcoin and ether as securities, currencies, or both. A sudden regulatory crackdown might result in difficulty in selling cryptocurrencies or a market-wide price decrease.
  • Rather than keeping their cryptocurrency on hand, many traders and investors prefer to leave it in the custody of an exchange or other custodian. Investing in anything that could be stolen or lost by a third party could be disastrous.
  • There are few safeguards against dishonest or unethical management practices because regulations are all over the place and don’t make any sense. Many wealthy backers have been burned by management teams that promised but couldn’t deliver.
  • Automated smart contracts are used to regulate the transfer of funds on several investment and lending platforms. Any money put into one of these exchanges is done so with the understanding that it could all disappear due to some software flaw or exploit.
  • Some cryptocurrency exchanges have been accused of engaging in manipulative pricing practices or engaging in anti-customer trading, highlighting the pervasiveness of market manipulation in the bitcoin industry.

The Advantages of Cryptocurrencies

  • Decentralized money is what cryptocurrencies are. To uphold confidence and regulate transactions under this system, banks and other financial organizations are not required. Therefore, the likelihood of a single point of failure, such as a sizable bank, leading to a chain reaction of worldwide crises, such as in 2008, is decreased in a system that uses cryptocurrencies.
  • Using cryptocurrencies, which don’t require a bank or credit card company, is supposed to simplify direct financial transfers between two parties. Public and private keys, along with incentive programs like proof of work and proof of stake, are used to protect decentralized transactions.
  • Since there are no middlemen involved, cryptocurrency transfers are quicker than traditional money transfers. Flash loans are a part of decentralized transfers in financial systems. Trading uses these quick, no-collateral loans.
  • Investors in cryptocurrencies may profit. The value of cryptocurrency market surpassed $2 trillion in the last ten years. May 2022 saw the value of bitcoin reach $550 billion.
  • One of the key uses of cryptocurrencies is remittances. Cross-border money transfers are now quicker thanks to cryptocurrencies like Bitcoin. So, fiat cash gets converted to Bitcoin, sent across borders, and then reversed. This makes money transfers easier and more affordable in forex hour.

The Disadvantages of Cryptocurrencies

  • Cryptocurrencies are vulnerable to unauthorized access, despite claims of anonymity. The FBI can decipher their digital path. This allows governments to track citizens’ money transactions.
  • Criminals use cryptocurrencies for money laundering and illegal purchases. 
  • In theory, cryptocurrencies are decentralized, with wealth distributed on a blockchain. Ownership is concentrated. MIT discovered that 11,000 investors held 45% of Bitcoin’s value.
  • Anyone with an Internet-connected computer can mine cryptocurrency. Popular cryptocurrencies require a lot of energy, often as much as countries. Energy prices and unpredictability have consolidated crypto mining among major corporations with billions in income. 10% of miners account for 90% of mining capacity, according to MIT.
  • Blockchains are secure, but exchanges and wallets can be hacked. Many bitcoin exchanges and wallets have been hacked, resulting in millions of dollars stolen.
  • Publicly traded cryptocurrencies are volatile. Bitcoin’s value has risen and fallen rapidly, reaching $17,738 in December 2017 and $7,575 afterwards.

The Crux of the Matter

Cryptocurrencies, also known simply as virtual currencies, are digital assets that are protected via cryptography. Since they are a relatively new form of technology, they are extremely speculative, and prior to making an investment, it is essential to gain an understanding of the dangers that are involved.