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Cryptocurrencies are becoming common in the financial world. There is a likelihood you have already come across it and if not yet, you will soon.
It first came into the limelight in 2009 with the launch of the first bitcoin white paper. The paper described a new form of currency created through blockchain technology.
This currency would be decentralized and uncontrolled. Very few people then had an understanding of the magnitude this innovation would have on the global financial system. Today, the cryptocurrency market is worth trillions of dollars and is available in almost all global countries.
Cryptocurrencies exist digitally as digital money. They are not tangible nor visible. They are developed through blockchain technology.
One of the questions in every beginner’s mind is how do you have money that you can’t see and touch? To answer this question, we need to understand how the money we currently use operates.
Fiat Currency (Normal Money)
This is the money we currently use. Some examples include the USD(Dollar) and the EUR (Euro).
Characteristics of this form of currency include;
- Limited in Supply
Cryptocurrencies have most of the above characteristics but without central control. They operate freely void of any control authority including the central banks. This is referred to as decentralization. The opposite of this is centralization. A characteristic of the fiat money we use today.
Currently, there are thousands of cryptocurrencies in circulation. Below is a list including some of the major ones;
How Are Cryptocurrencies Created?
The process of creating cryptocurrencies is called mining. This entails the use of computing power to complete some preset algorithms. Once that is complete, you are rewarded with new cryptocurrencies. This is a common process, especially for the leading cryptocurrency Bitcoin.
Being digital money, cryptocurrencies exist purely in digital form. The process and requirements of mining differ with the type of cryptocurrency as below,
- Pre-mining before releasing into the market.
- Continuous mining after market release.
Mining some cryptos like Bitcoin is an extremely difficult task. It requires huge capital investment both in infrastructure, energy, and skills. To give an example, the amount of power used in mining Bitcoin exceeds power consumption in Argentina.
Some of these requirements make it impossible to mine some currencies at individual levels. In the case of the amount of electricity needed, this eliminates a majority of countries with unreliable and inadequate power supply.
The huge amount of electricity used for the mining process has attracted criticism as some of it originates from burning fossil fuels. Though there aren’t conclusive on the effect of mining on climate change, this criticism is negatively affecting some cryptocurrencies. An example is a decision by Tesla to stop accepting bitcoin transactions.
The pricing of cryptocurrencies is based on various factors including.
Market forces influence the demand and supply of cryptocurrencies. An Example is Bitcoin. During its release, Bitcoin was worth below $100. Today, through the effects of market forces, it is worth over $30,000. Some of the market forces include;
- Government policies
- Currency uses
- Inflation Levels
- Influencers effect.
This is a group of cryptocurrencies whose price is pegged to an existing financial asset. Some of these include;
- National Currencies (Dollar, Pound)
- Commodities (Gold, Silver)
- Commercial papers
Stablecoin pricing is dependent on the price movement of the pegged financial asset. An example of a stable coin is Tether (USDT). Tether is valued at the dollar rate. This means that one USDT equals one Dollar.
Central Bank Digital Currencies (CBDC)
These are cryptocurrencies created and managed by individual countries. Their pricing is pegged to the value of the national currency.
They have the characteristics of cryptocurrencies but operate through centralization. An example of a CBDC is the Chinese Digital Yuan also known as e-CNY. This is the first CBDC currency in the market. Though it is still in the trial phases, the majority of countries are either researching or developing theirs.
Where to buy and sell Cryptocurrencies
Buying and selling happen through trading platforms. Trading in them is easy as trading platforms have increased over time. Due to the decentralized nature of cryptocurrencies, the market never closes. You can trade them any time of the day through the year. This is different from both the stock and forex markets that have an opening and a closing time.
To buy and sell cryptocurrencies, you need to open an account with a broker. This process involves sharing your identification documents for verification. Once verified, you are ready to top up your account to facilitate your first transaction.
Below are some of the Top 10 platforms where you can buy and sell cryptocurrencies.
You could be asking yourself where the cryptocurrencies are stored. Once you acquire some, you get a digital wallet where you store them. Named after the physical wallets that we use; digital wallets operate the same but online.
Cryptocurrencies exist in form of unique digital addresses. The address is used for verification purposes in blockchain to complete a transaction. You should always ensure your wallets are safe to avoid losing your cryptos. There have been cases of loss from illegal wallets access.
As the number of cryptos increases, so Is the competition. Currently, Bitcoin is the most successful cryptocurrency to date. Though its dominance is indisputable, competitors are taking advantage of its weakness in chipping away some of its markets.
Other than competing with themselves, cryptos are also competing with the established traditional monetary systems. These include the fiat money and money remittance systems.
Uses of Cryptocurrencies.
Each cryptocurrency is developed with a specified role to play. Key examples include;
- Ripple XRP is offers Real-time settlements
- Bitcoin is a transactional currency
- Tether (USDDT) is used as a stablecoin
- Monero is a transactional currency
- Dogecoin is fun making coin
Hence, cryptocurrencies have different uses. You can also note that both Bitcoin and monero have similar use. This is a key example of competing coins though they are structurally different.
Challenges facing Cryptocurrencies
Though there have been successes in the use and development of cryptocurrencies, some Challenges are hindering them from achieving full potential. These include;
High transactional costs
Transacting in cryptocurrencies remains an expensive experience as the fees remain high. This has discouraged the majority of potential users and merchants from embracing them.
Currently, the use of cryptocurrency remains low. High fees have made it difficult to compete with the competing traditional alternatives.
Low transaction speeds
Cryptocurrencies’ transaction speeds are slower compared to the competing channels. This makes them unattractive to the users in the retail space. There is some effort to launch faster cryptos. However, much work remains before they can match up with the competitors.
The majority of people are yet to understand the whole concept of blockchain, cryptocurrency, and decentralization. It has remained a concept for the few elites who are the minority. The long-term success depends on sustained marketing and training users on the benefits of cryptocurrencies.
Some critics argue that some of these cryptos are geared to function as Ponzi schemes. Some developers have been accused of employing the pump and dump approach. This involves manipulation the price upwards intending to cash in.
This approach only benefits the early buyers in turn disadvantaging late investors.
Cryptocurrency regulations vary depending on the country. The industry is still new and most of the regulators are still trying to understand them before formulating proper policies
There seems to be a mixed approach to the direction taken by the regulators. Some have completely banned them. However, some countries seem to embrace the idea.
Regulations are key in creating the direction and frameworks of the industry. Lack of the same keeps most investors away from these assets. This undermines the long-term viability and usage of these currencies.
Inadequate regulations have attracted illegal money transfers through cryptocurrencies. As decentralized assets, it is very difficult to trace both the sender and recipients of funds making it attractive for criminals to move funds with little or no accountability.
Future of Cryptocurrencies
Cryptocurrencies continue to attract attention across the world. As technology improves, some of the challenges present today will be adequately handled into the future. these include the aspects of transactions speeds and fees.
This improvement will attract more users making them more valuable.
Most analysts agree cryptocurrencies will remain some of the most sought-after investment assets. This is because they continue to offer huge returns to the investors.
The aspect of decentralization is key in eliminating middlemen that make the traditional alternatives slow and bulky.
Regulators are likely to play a bigger role in the future. Some of these may include;
- Introducing enhanced anti-money laundering policies
- Registering the currency developers
- Introducing trading rules to prevent the pump and dump Ponzi Schemes.
- Availing funding to support technology development and enhancement.
As blockchain becomes attractive to a variety of industries, cryptocurrencies could be used as a bridge in ensuring these ecosystems runs smoothly.
We are still in the young stages of cryptocurrency development. Decentralization combined with little or no regulations means they are high-risk investment assets. This type of asset requires experience and adequate knowledge before investing in them. This helps in identifying those that are of high value from the low-value scams.