Whether represented by a cowrie shell, leather, a metal coin, a piece of paper, or a string of code electronically mined by a computer, money has always had three functions. According to a podcast by the Federal Reserve Bank of St. Louis, it serves as a store of value, a unit of account, and a medium of exchange.
Until the emergence of mobile phones and online banking, when it became possible to do business without needing to move actual money around, the most acceptable forms of currency have been the dirham, dollar, pound, and other fiat (authorised) currencies. But the world never ceased dreaming of newer possibilities, and we have woken to the reality of an entirely new type of currency – cryptocurrency.
What Is Cryptocurrency?
Cryptocurrency is a virtual currency that is exchanged using designated software, applications, and networks. The term crypto is derived from the English word ‘encrypt’, which means to code. The foundation of bitcoin is sophisticated coding that stores and transmits data between wallets and public ledgers.
Fiat currencies are government-issued currencies with sovereign backing; cryptocurrencies, on the other hand, are decentralised digital funds or assets held together by blockchain technology. The blockchain is a distributed public ledger that records transactions in blocks (code). A single transaction is represented by a block, and each new block is linked to the preceding one as new transactions occur. The blockchain (ledger) is updated every time a new transaction occurs by debiting one account and crediting the other. Mining for cryptocurrency is the process of creating new digital “coins.”
Today, there are numerous cryptocurrencies. Bitcoin (BTC), Ethereum (ETH), Cardano (ADA), Ripple (XRP), Binance coin (BNB), Dogecoin (DOGE), Litecoin (LTC), and Polkadot (DOT) are a few notable ones that all run on their own blockchain.
Use Cases Of Cryptocurrency
A currency is only as valuable as what people claim it can do for them, which determines its demand and supply. Blockchain technology and cryptocurrencies have the ability to alter the way people engage, communicate, work, and play, and the possibilities are limitless.
- Payments
If you need to transmit $1,000 to someone in another country right away, using a banking system would be a nightmare. After all, urgent situations cannot afford to wait three to seven days for a payment to be processed. With cryptocurrencies such as Bitcoin (BTC), Ether (ETH), or XRP, transfers will reach the receiver’s account almost instantaneously.
- Store of value
Cryptocurrencies are not only a highly efficient mode of payment, but they are also a more secure store of value.
Traditional currencies are inflammatory, which means they lose value over time. Cryptocurrencies, on the other hand, use better supply systems that limit inflation and may increase in value as demand increases. As a result, when you hold your funds in cryptocurrencies, they may grow value rather than lose value over time.
- Borrowing and lending
What if you could acquire a loan without filling out a single form or signing a contract? Decentralised financial applications have removed the middleman from the lending and borrowing process. They enable people to lend and borrow money almost immediately utilising cryptocurrency. Furthermore, because cryptocurrencies are global currencies, you can lend or borrow from these platforms no matter where you live.
- Tokenization of assets
With the emergence of cryptocurrencies, it is now possible to tokenize physical assets. Copyrights, real estate, art, and commodities can all be tokenized and represented in the form of a cryptocurrency token. This adds liquidity to an otherwise illiquid asset and facilitates the interchange of even non-liquid assets. In addition, buying and selling these assets becomes more cost-effective, quick, and transparent.
- Gaming
With the dawn of Web3 and the metaverse, the gaming industry has already been disrupted by cryptocurrency in the form of non-fungible tokens (NFTs). NFTs are crypto tokens in the gaming sector that represent a unique digital asset within a game. Because each NFT represents something distinct, their values differ and they are not interchangeable. This provides each user with a truly real in-game item that no one else owns. The most well-known example of blockchain-based NFTs is Crypto Kitties, which are digital cats.
- Storage
The centralised cloud storage platforms have numerous significant flaws, ranging from excessive prices to server outages. This has paved the way for decentralised storage enabled by blockchain technology.
Risks And Returns Involved
Volatility: Cryptocurrencies are extremely volatile, with price fluctuations occurring at an alarming rate as a result of unforeseen shifts in market sentiment. Your $5,000 in Bitcoin now, for example, could be worth $50 in a few months. On a good day, your $5000 may be worth $50,000. The cryptocurrency market moves in a continual cycle of highs and lows.
Unregulated: Because cryptocurrencies are not currently regulated by the government or financial institutions, they are unaffected by the inflation rate, monetary policies, and other economic growth factors used to measure fiat currencies. Instead, the price of cryptocurrencies is impacted by the coin’s supply and demand, the cost of mining, the number of competing cryptocurrencies, the regulation governing its usage and sale, news developments, and the state of its internal governance.
Susceptible to theft, fraud, and other misfortunes: A cryptocurrency exchange can be hacked, and funds from user wallets can be taken. Users may also lose money if they deal with scammers, particularly on untrustworthy sites, or if they move coins to the wrong wallet address, as this is an irreversible operation. If you forget your wallet’s passcode, it may be compromised.
Can be discontinued: A cryptocurrency project may fail for a number of reasons, and individuals who invested in the coin will have to bear their own losses.
Returns: The blockchain technology that cryptocurrencies are based on has the potential to transform the way businesses are conducted in various industries. Thus, crypto aficionados who trust in the future of this technology and invest in it stand to profit handsomely if the projects succeed.
The Future Of Cryptocurrency
We can speculate about the value of cryptocurrencies for investors in the future months and years (and many will), but the reality is that it is still a new and speculative investment with little history on which to build forecasts.
Cryptocurrencies may find their way into consumer digital wallets on a massive scale when government organisations work out a legal framework and taxation structure. Despite the fact that Bitcoin became legal cash in El Salvador in 2021 and the Central African Republic in 2022, the remainder of the world is unlikely to follow suit anytime soon.
Nobody knows what the future of cryptocurrency is like, no matter what an expert thinks or says. That is why it is critical to only invest what you are willing to lose and to stick to more traditional assets for long-term wealth building. Keep your investments minimal, and avoid prioritising crypto investments over other financial goals such as retirement savings and debt repayment.
