What Is a Cryptocurrency?
A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers. A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation.
How do cryptocurrencies work?
Cryptocurrencies use decentralised technology to let users make secure payments and store money without the need to use their name or go through a bank. They run on a distributed public ledger called blockchain, which is a record of all transactions updated and held by currency holders.
Advantages of cryptocurrency
it is a secure payment method, and has some distinct advantages over more traditional forms of payment:
- Lower fees – Transaction fees are lower with bitcoin than with credit cards, and when cryptocurrency is not exchanged, it also eliminates the need for bank charges.
- Fraud reduction – A payment made with bitcoin cannot be reversed after the fact. This is different from credit card payments, which can be reversed using chargebacks, a feature often exploited by fraudsters.
- Instant payments – Credit card payments can take days or even weeks to come through. Meanwhile, cryptocurrency offers instant transfers.
- No barriers – Cryptocurrency makes international trade more accessible by removing barriers and restrictions to trade, ultimately making it easier to accept payments in different currencies.
- Attract new customers – As bitcoin is still a fairly new method of payment, offering it as an option for your customers could help you bring in new business.
- Get ahead of your competition – By being an early adopter of cryptocurrency, you can gain a competitive advantage over your competition.
As cryptocurrency becomes more widely embraced, businesses should be keeping a close eye on how this technology develops and consider how it could be used to their advantage
Disadvantages of cryptocurrency
Cryptocurrencies suffer from several drawbacks that have led many (such as famed investor Warrant Buffet) to refer to them as the next “bubble”. As such, it is important to identify and to understand the drawbacks and obstacles that may refrain mainstream adoption of these technologies.
Drawback #1: Scalability
Probably the biggest concerns with cryptocurrencies are the problems with scaling that are posed. While the number of digital coins and adoption is increasing rapidly, it is still dwarfed by the number of transactions that payment giant, VISA, processes each day. Additionally, the speed of a transaction is another important metric that cryptocurrencies cannot compete with on the same level as players like VISA and Mastercard until the infrastructure delivering these technologies is massively scaled. Such an evolution is complex and difficult to do seamlessly. However, some have already proposed several solutions, including lightning networks, sharding, and staking as options to overcome the scalability issue.
Drawback #2: Cybersecurity issues
As a digital technology, cryptocurrencies will be subject to cybersecurity breaches and may fall into the hands of hackers. We have already seen evidence of this, with multiple ICOs getting breached and costing investors hundreds of millions of dollars this summer alone (one of these attacks by itself resulted in the loss of $473 million). Mitigating this will require continuous upkeep of security infrastructure, but we are already seeing many players dealing with this directly, and using enhanced cybersecurity measures that go beyond those used in the traditional banking industries.
Drawback #3: Price volatility and lack of inherent value
Price volatility, tied to a lack in inherent value, is a major problem, and one of the specifics that Buffet referred to specifically a few weeks ago when he characterized the cryptocurrency ecosystem as a bubble. It is an important concern, but one which can be overcome by linking the cryptocurrency value directly to tangible and intangible assets (as we have seen some new players do with diamonds or energy derivatives). Increased adoption should also increase consumer confidence and decrease this volatility.
Drawback #4: Regulations
Buffet also touched on this problem in his talk:
“It doesn’t make sense. This thing is not regulated. It’s not under control. It’s not under the supervision [of] any…United States Federal Reserve or any other central bank. I don’t believe in this whole thing at all. I think it’s going to implode.
