Cryptocurrency: a financial instrument of the XXI century

Perhaps you already know all this, and are a veteran in the field of cryptocurrency. Or maybe you are completely new to cryptocurrency, but you can’t wait to learn and understand more. Well, then let’s talk about what is a cryptocurrency?

Cryptocurrency is a digital asset. But what does this mean?

First of all, cryptocurrencies are completely virtual assets, and there are no coins or paper money that you could use or store in the traditional way. Although some cryptocurrencies do represent real-world objects (more on this later), the value of most cryptocurrencies is associated with the intangible advantages that they offer, such as ease of transportation and transfer, security and reliability for online payments, and, in many cases, being a reliable means of saving and a potential investment opportunity.

We have already touched on this a little, but it is important to understand that cryptocurrencies serve a variety of purposes. For example, millions of sellers currently accept them as payment for goods or services. Can you imagine paying for groceries or haircuts with cryptocurrency? This is quite possible thanks to businesses that accept cryptocurrency directly, and other companies such as PayPal and BitPay, which act as crypto payment processors for businesses that want to accept cryptocurrency but receive cash instead.

You may have heard how Bitcoin and Ether (another major cryptocurrency) are compared to gold and silver. How is this possible if gold and silver are shiny, physical and have been used for thousands of years? Many users understand that there is significant value in an asset that is not controlled by the government or a company that can simply create more of them whenever they want. Have you ever wondered why the purchasing power of the US dollar continues to decrease every year, while the value of gold and Bitcoin is growing? This is because the US government and US banks continue to “print” trillions of dollars annually, which simply did not exist before. Meanwhile, the “creation” of new gold or BTC on an annual basis is negligible for comparison.

Why trust in cryptocurrency is increasing

The right question to ask in relation to any asset in which you may be going to invest a lot or a little money.

Perhaps one of the most valuable offers of cryptocurrencies is that they can be completely separated from the control of the government, companies or any individual. Many cryptocurrencies have reached a complete, or almost complete level of decentralization, which simply means that the cryptocurrency is completely managed and controlled by the people who use it.

If you are concerned about the fact that the cryptocurrency is controlled by a community of ordinary, normal people, and not by an all-powerful government or bank, remember that most people are just like you and me. They want the cryptocurrency to retain its purchasing power. They want to use the cryptocurrency for any purpose for which they bought it. And since the majority of cryptocurrency users are normal people, such as you and me, it is extremely difficult for an attacker, for example, or the government, to take control of the cryptocurrency for “evil” purposes. People just won’t allow it.

For the success of cryptocurrencies, it is also extremely important that they are safe. We won’t get too carried away with the technical aspects of the crypt, but for now it’s enough to know that many cryptocurrencies are protected by some of the most complex encryption tools that exist in the modern world (for example, SHA-256 for Bitcoin).

The most important aspect of cryptocurrency security is probably the part of the software on which it is built: the blockchain. Simply put, the blockchain is a digital record of all transactions that have ever been performed using the cryptocurrency that runs on it. Blockchains for most cryptocurrencies are publicly available, which means that anyone with Internet access can view the entire list of cryptocurrency transactions at any time, and anywhere.

Blockchains are immutable, and no one can cancel a transaction and take back the money that you sent or received. They are protected by thousands or tens of thousands of computers around the world, on which software is actively running at any given time.

Types of cryptos

So far, we have talked mainly about public cryptocurrencies, such as Bitcoin and Ether. These are cryptocurrencies that you most likely heard about from the news, on social networks, or from relatives or acquaintances who, in your opinion, were not in their right mind when Bitcoin and other cryptocurrencies were growing in price by 300% or more in 2020.

However, there are other types of cryptocurrencies that you may not have heard of until this moment.

One kind is digital tokens which are directly linked to the value of an asset or commodity, physical or otherwise. The most recognizable of these digital tokens are called “stablecoins”.

The value of a stablecoin is pegged to a national currency, such as the US dollar, ruble, euro or Japanese yen, and is usually supported by them. Since stablecoins are digital versions of the fiat currencies people use every day, they are easier and more convenient to transfer than via a physical currency or a bank, while they have almost no risk of losing value, since they are directly linked to the national currency through real reserves or indirectly through algorithms.

In fact, stablecoins have been so successful that various governments, such as the UK, China and the US, are currently preparing or launching pilot programs of “Central Bank Digital Currencies”, which are simply stablecoins created by the government. Of course, they can no longer be called a cryptocurrency, and they may not necessarily be on the blockchain.

Although stablecoins are the most recognizable type of digital tokens, there are many others that reflect the value of other assets, such as precious metals, art and real estate.

Another type of tokens is what is more suitable to be called “private” cryptocurrencies, since they are controlled by a third-party organization, and not exclusively by users. For example, JP Morgan Chase recently created “JPM Coin”, which it declares”a digital coin designed to make instant payments using blockchain technology”.

A similar, slightly older, private (depending on who you ask) cryptocurrency is XRP, one of the largest cryptocurrencies. XRP was created and is largely managed by Ripple. Although these companies are likely to claim that they provide value that is not shared by public cryptocurrencies, there is also a significant risk that private cryptocurrencies that are not shared by public cryptocurrencies carry: the risk of bankruptcy of the company or circumstances affecting the viability and value of the cryptocurrency.

In this regard, XRP is a perfect example, having lost almost two-thirds of its value in December 2020 due to the fact that the US Securities and Exchange Commission (“SEC”) sued Ripple, stating that XRP is an “unregistered security”.

Why use cryptocurrency?

The decision to use or not to use cryptocurrency is very personal and unique for everyone. Regardless of your individual circumstances, you should make every effort to research cryptocurrency and may want to consult with an expert or investment adviser before buying it. Most importantly, understand that all cryptocurrencies, even Bitcoins, are relatively new, and carry a significant risk of partial or complete loss for various reasons.

No one will decide for you why you should or should not buy cryptocurrency. But let me give a few general (paraphrased) reasons that often sound in the crypto space:

1. “The current financial system is broken, it excludes too many people and only makes the rich richer and the poor poorer. Cryptocurrencies are open to everyone, and everyone can enjoy their benefits”.
2. “Only the owner has access to the cryptocurrency. Neither the government, nor the bank, nor the thief can take them from you if you don’t let them.”
3. “Some cryptocurrencies (for example, BTC) will retain their value, because due to the inflationary printing of money by governments, prices will rise”.

It is worth saying that the main reason why many people use cryptocurrencies is financial freedom and the opportunities that they provide. Cryptocurrencies can be a great way to accumulate and preserve wealth.

Cryptocurrencies and the communities built around them do not need to know who you are in order to work successfully, so anyone is free to join and take advantage of the benefits. History can perpetuate the creation of cryptocurrencies as the greatest financial revolution the world has ever known. In any case, do not miss the chance to learn more about cryptocurrency and how it can improve or even change your life.