Over the years, technology-focused fads come and go, sometimes creating a buzz that is more hype than anything else. But in some rare cases, a shiny, new application, tool, or software brings a wave of excitement that is difficult to ignore.
Cryptocurrency, also known as crypto-currency and crypto, is one of those innovations, but many are confused by it even after others try to explain how it works.
In the simplest of terms, cryptocurrency is a digital currency, sometimes described as virtual currency, that uses cryptography as a security measure. That means encryption techniques are used to control the currency’s use and its movement.
Individual users who rely on the power of the Internet work to guarantee a cryptocurrency’s value and verify transactions which use it. But the most interesting aspect of any crypto is its decentralized state.
Instead of being offered by large, powerful financial institutions in a centralized manner, like the currency we all know and love, cryptocurrency is organic in how it is created and cannot be regulated or controlled by any government or financial authority.
Because of these unique attributes and undeniable mystery, crypto is alluring to more and more people throughout the world each day.
A Brief History of Cryptocurrency
Cryptocurrency was first created in 2009 by a developer only known as Satoshi Nakamoto. Called Bitcoin (BTC), the first cryptocurrency used a set of cryptographic hash functions designed by the NSA and transactions were based on complex mathematical functions run through a network of computers. This network shares a large, public ledger that uses blockchain technology to record and validate all Bitcoin transactions.
Today, there are more varieties of cryptocurrencies that follow a similar process, including Namecoin (NMC), created in 2011, Litecoin (LTC), also making its first appearance in 2011, Ethereum (ETH) and Cardano (ADA).
Each type of cryptocurrency uses the same decentralized structure to create value for those who own it, although the specifics of how the digital currency is acquired and used varies slightly.
Advantages and Drawbacks of Crypto Use
The use of cryptocurrencies in everyday financial transactions has its benefits, at least according to those who consistently use it.
Advantages of Cryptocurrency
First, cryptocurrency is digitalized, similar to credit and debit card transactions, but in the decentralized world, the information that identifies the currency cannot be stolen or used by anyone other than the owner.
That’s because cryptocurrency only requires transmission of the amount the owner wants to send to a recipient – not sensitive account data or other identifying information about the payor. Only the owner has access to the digital key that unlocks the value of crypto, making it untouchable by any individual, bank, or government entity.
Additionally, the use of cryptocurrency does not come with transaction fees like traditional, centralized currency, and transactions cannot be reversed. Utilizing the ledge of blockchain technology makes it nearly impossible to stop payment or defraud another user, adding a layer of security for all parties involved.
Finally, cryptocurrency is accessible to anyone with a connection to the Internet, and so there is no need to use a conventional financial institution to complete transactions.
While crypto has its positive aspects, there are downsides just the same.
Disadvantages of Cryptocurrency
The masses have yet to start accepting cryptocurrency as a major form of payment for goods or services, and the number of businesses and individuals using cryptocurrency is far smaller than the several million debit and credit card users to date.
Virtual currency also comes with a great deal of volatility, making exchange rates widely unpredictable. The value of crypto can swing without much notice because the market for its use is still in its infancy.
That newness also means that some types of cryptocurrencies used today may not exist in the future, leaving some users at a loss.
How to Mine, Buy and Use Cryptocurrency
While there is much buzz surrounding crypto and its growing market, understanding how it is acquired and then subsequently used in real life transactions is a bit challenging.
Unlike fiat or physical currencies, like the dollar or pound, cryptocurrency is all managed through a network of high-powered computers, making it more complex than its more traditional counterparts.
Here’s how one can acquire crypto and then, use it to pay for goods and services.
Mining for Cryptocurrency
One of the most popular cryptocurrencies out there today is Bitcoin, and it encompasses all the traits of a cryptocurrency, including being free from the controls and restrictions of a central government or bank.
Because of this unique attribute, Bitcoin and other cryptocurrencies cannot be printed or issued like conventional currency but instead are acquired through a process known as mining.
Essentially, mining Bitcoins involves receiving the crypto after solving the math problems needed to verify transactions in the network. To keep the blockchain growing while maintaining the security of the cryptocurrency itself, mining is a necessary part of the process.
Mining for crypto would take a normal, everyday desktop computer and its owner more than 2 million years to complete a single block! This is why there are specific computer hardware and software tools that make mining for cryptocurrency more achievable, including an application-specific integrated circuit (ASIC) chip designed to mine crypto as well as mining software that connects to the chip.
For those who do not want to invest in these necessary tools, they may find a cryptocurrency mining pool, based on cloud computing, works better to suit their needs.
Buying Cryptocurrency
In addition to mining crypto, interested buyers may also acquire cryptocurrencies through special mobile or desktop applications.
Services such as Coinbase and Crypto.com for example, give individuals the ability to link a credit or debit card to the app for the purpose of purchasing Bitcoin or Ethereum, or another type of cryptocurrency. Once the bank account or credit card is connected, buying crypto takes a simple tap of a button.
Applications such as these also provide data on the volatility of cryptocurrencies and the current price, making it easy to understand the investment from a dollars and cents perspective.
Buyers are limited to the amount of crypto they can purchase each day or week, but this method takes away the need to mine in the traditional sense to acquire cryptocurrencies.
Using Cryptocurrency
Unlike traditional currency, digital currencies are not widely accepted at retailers and other merchants just yet, since they are not issued as physical notes or coins. Instead, cryptocurrencies are kept in a digital wallet with a special key used to unlock or validate the currency’s worth.
Individuals who have acquired cryptocurrencies can select any of the following to store and then use their currency:
- Desktop wallets: with a desktop wallet, those who have cryptocurrencies can store and send details about the value of their currency while staying connected to the broader network to keep track of transactions.
- Online wallets: online wallets, or exchanges, store data about the value of cryptocurrencies and can be accessed anywhere from a desktop computer or mobile device.
- Mobile wallets: mobile applications may also serve as a storage tool for cryptocurrencies, and some allow for payment to be made with available balances at accepting retailers or merchants.
- Paper wallets: information about cryptocurrency may also be maintained in a paper wallet which is a web-based service that issues paper to the currency holder. The paper includes one QR code for receiving crypto and another that allows for spending acquired coins.
- Hardware wallets: a USB device may also be used as a crypto wallet. This hardware stores details about the currency’s digital address and access keys.
Although cryptocurrency has topped the list of hot investments since its humble beginnings, many businesses see the volatility of its price as a reason to not accept it as a viable payment option for consumers.
However, there are several large organizations that accept crypto in exchange for goods and services, including Microsoft, Intuit, and Overstock.com. PayPal also announced its acceptance of cryptocurrency, specifically Bitcoin, in recent years, but the company is only acting as an intermediary between paying and receiving parties.
Over time, as the crypto market evens out and becomes less volatile, more businesses may include digital currencies as part of their payment methods. For now, however, individuals who own cryptocurrency are limited in how they can spend their digital currency.
What the Future of Crypto Looks Like
Since the announcement of the first cryptocurrency, Bitcoin, over a decade ago, the market for digital currency has expanded tremendously. Recent reports highlight a growth of more than 7,000% over a five-year period, meaning a single Bitcoin rose from roughly $1,000 to nearly $70,000 at one time.
It is hard to deny this exponential increase in value, especially when evaluating crypto as a viable investment option in addition to its purchasing power in the mainstream economy. However, the future of cryptocurrencies like Bitcoin is on shaky ground for several reasons.
Crypto is Lacking Regulation
Given its explosive growth, the market for cryptocurrencies has come under fire from several government agencies throughout the world.
One of the most alluring benefits of crypto from a consumer perspective is the fact that currencies in the space are decentralized. This means there is no watchful eye of a local or federal government, nor is there is a major financial institution in charge of creating, distributing, or monitoring cryptocurrency movement. Instead, those who are part of the vast network of crypto owners and users control transactions and access.
Because a decentralized approach to this type of currency creates concern among large, established governments, talk of regulating cryptocurrencies is now more common than not.
Several countries, including the United States and the UK, have welcomed the use of crypto, albeit with varied enthusiasm.
In the US, a handful of states have worked on passing legislation to accept and promote the use of blockchain technology, and the Commodity Futures Trading Commission recently granted approval to LedgerX, a cryptocurrency trading platform, for the purpose of regulating digital currency options.
Throughout Europe, governments have encouraged the development of virtual currencies through certain laws and ongoing research, moving more toward regulation in the future.
In stark opposition to the use of digital currencies, some countries have placed an all-out-ban on blockchain technology in the realm of cryptocurrency. Some government leaders have gone so far as to deem crypto a negative disruption in financial markets, refusing to offer a method for new currencies to take shape within their borders.
This trepidation and lacking regulation on a global scale could mean the future of cryptocurrency is limited across international borders.
Cryptocurrency is a Volatile Marketplace
As a decentralized system, all cryptocurrencies are valued based on several drivers, included supply and demand of buyers and sellers, mining efforts in blockchain technology, the difficulty of mining, and perceived value by the public.
Because there is no central bank or government regulating the value of cryptocurrencies, the price of digital currencies like Bitcoin and Litecoin fluctuate, often violently, on a day-to-day basis.
From an investment perspective, the volatility of price in the crypto market makes its future uncertain as buyers and sellers cannot know for sure what their cryptocurrency is worth from one day to the next.
While price fluctuations have become less extreme over the course of the last year, many speculate that an evening out of volatility is not a near-term reality for cryptocurrencies currently available in the market.
Lack of Mainstream Acceptance of Cryptocurrency
Another reason the future of cryptocurrency is uncertain is the lack of mainstream acceptance among companies both large and small.
Small businesses have been especially slow to offer crypto as a payment option for goods and services because the price volatility explained above. For instance, if a consumer pays for a product with Bitcoin today, the value of that transaction can drop dramatically within a matter of hours, leaving the business accepting Bitcoin as payment at a financial loss.
Until the price volatility of cryptocurrencies like Bitcoin decreases, mainstream use of virtual currencies for everyday transactions probably isn’t in the cards.
Overall, cryptocurrencies offer an alternative to centralized government and financial institution-controlled payments, but the future remains questionable for the viability of virtual currencies throughout the world. With that said, it seems cryptocurrency may be too big to fail here in the United States. Which is good news for those already heavily invested in crypto.
