When we buy or sell things, the payment is usually processed by banks or a credit card company. But the problems with this process is that the companies often take a cut of the transactions and we have to trust these companies to protect our data from hackers.
To solve these problems, a unique currency was introduced that guarantees security by being based on the science of cryptography – a math-based way of protecting information. This type of currency is called a cryptocurrency and only exists in computer networks.
Simply put, its digital money that's instant, private, and free from bank fees.
Benefits
When you send the special currency, the money goes directly to the receiver, without involving any middlemen. And at the same time, the transaction is broadcast to the entire network and recorded permanently, which means it is impossible to fool the system.
The costs of making payments are lower and the transactions are faster especially across countries, and even those people across the globe who don’t have banks accounts, can buy or sell goods and participate in the global economy.
Risks of using digital currency
However, there are some risks of using cryptocurrency. The transaction in most cryptocurrencies are anonymous and some cryptocurrencies can even be untraceable. This can make it easier for the “bad guys” to make payments without being noticed.
At the moment, also cryptocurrencies are highly volatile. Also they can’t process large amounts of transaction quickly just yet, and are not even widely accepted.
The authorities all over the world are worried about the cryptocurrencies’ appeal to the traders of illegal goods and services and moreover, they are worried about their use in money laundering and tax evasion schemes.
Volatility
Although cryptocurrencies have seen huge gains since its inception more than a decade ago, there's also been plenty of volatility along the way. After reaching nearly $20,000 back in late 2017, bitcoin suffered yet another drop of more than 80 per cent to fall below $3,500 by early 2019.
The reason for volatility have been widely attributed to the public perception of cryptocurrencies still being quite dichotomous, and the fact that crypto has had smaller market sizes as compared to established forms of currency.
Adding to this, it has been extensively proved that cryptocurrency wealth distribution is even more skewed – the few with large stakes in a cryptocurrency hold disproportionate amounts of power over its pricing.
Yet in just the past year, the crypto token has bounced back yet again. In the first weekend of February, bitcoin climbed back through the $10,000 level. It was a year high, but more importantly, analysts said this showed that interest in the cryptocurrency remains stable even amid all the volatility.
Ethereum, perhaps the second most valued cryptocurrency, has recorded the fastest rise a digital currency ever demonstrated. Since October 2016, its value rose from $11 (Dh43) to currently over $175 (Dh650).
Views change with evolution
“Despite the volatility, the recent price rise to multi-year highs backs the recent change in perception that investors now treat crypto like safe-haven assets like gold and other currencies,” said Nik Patel, cryptocurrency analyst and blogger. (The prices of safe-haven assets rise when there is a larger uncertainty in the market)
Despite the volatility, the recent price rise to multi-year highs backs the recent change in perception that investors now treat crypto like safe-haven assets like gold and other currencies
In the past, trying to find a merchant that accepts cryptocurrency was extremely difficult, if not impossible. These days, however, the situation is completely different.
Launched in 2009, Bitcoin (BTC) is currently the world's largest cryptocurrency by market cap and is the most recognizable digital currency to date. Bitcoin is created, distributed, traded and stored with the use of a decentralized ledger system known as blockchain.
(“Blocks” on the blockchain are made up of digital pieces of information. When a block stores new data it is added to the blockchain. Blockchain, as its name suggests, consists of multiple blocks strung together.)
Growing use
There are a lot of merchants - both online and offline - that accept Bitcoin as the form of payment. Bitcoins can be used to pay for hotels, flights, jewelry, apps, computer parts and even a college degree.
Other digital currencies like Litecoin, Ripple, Ethereum and so on aren’t accepted as widely just yet. Things are changing for the better though, with Apple having authorized at least 10 different cryptocurrencies as a viable form of payment on App Store.
A recent PwC survey of financial executives from all over the world found 24 per cent are familiar with blockchain technology, while a Global Fintech survey from last year reported 77 per cent of banking and financial institutes will have adopted blockchain as part of their systems this year.
Still hot?
Many people believe that cryptocurrencies are the hottest investment opportunity currently available. Indeed, there are many stories of people becoming millionaires through their Bitcoin investments.
Although crypto has received criticism from some quarters, the currency has shown enough promise to be validated by some very credible backers.
Facebook has announced the release of Libra in 2020, which will give 1.7 billion people who don't have bank accounts the ability to transfer or receive digital currency from anywhere in the world. Ethereum, a cryptocurrency and decentralized computing platform, has also received major interest from Microsoft and Google.
A number of worldwide surveys in 2019, commissioned by bitFlyer, SharesPost and Greenwich Associates, that three-quarters (70 per cent to 80 per cent) of separate groups between 5,000 to 10,000 people believe they will still exist in some form.
High-risk?
However, it is widely suggested that cryptocurrencies are high-risk investments.
If you decide to invest in cryptocurrencies, Bitcoin is obviously still the dominant one. However, since the start of 2017 its share in the crypto-market has fallen from an initial 90 per cent to currently little over 60 per cent.
While it’s very easy to buy Bitcoins other cryptocurrencies aren’t as easy to acquire. There are many options currently available, with some coins being privacy-focused, others being less open and decentralized.
While it’s very easy to buy Bitcoins other cryptocurrencies aren’t as easy to acquire. There are many options currently available, with some coins being privacy-focused, others being less open and decentralized.
(Apart from bitcoins, other options of cryptocurrencies include Ethereum, Ripple, Litecoin, Tether, Bitcoin Cash, Libra, Monero, EOS, Bitcoin SV and Binance Coin – according to an increasing order of ranking by Investopedia.
The exchanges where cryptos are increasingly traded and currently active, in no particular order, include Bitbuy.ca, ChangeNOW, Coinbase, Kraken, Cex.io, ShapeShift, Poloniex, Bitstamp, Bitsquare, LocalBitcoin, LinkCoin, Binance, Gemini, Huobi.)
Taxable?
In terms of taxation, cryptocurrencies are treated very differently from country to country. In the US, the Internal Revenue Service ruled that Bitcoins and other digital currencies are to be taxed as property, not currency.
For investors, this means that accrued long-term gains and losses from cryptocurrency trading are taxed at each investor’s applicable capital gains rate, which stands at a maximum of 15 percent.
Legal troubles?
As cryptocurrencies are becoming more and more mainstream, law enforcement agencies, tax authorities and legal regulators worldwide are trying to understand the very concept of crypto coins and where exactly do they fit in existing regulations and legal frameworks.
“With the introduction of Bitcoin, the first ever cryptocurrency, a completely new paradigm was created,” said Patel. “Decentralized, self-sustained digital currencies that don’t exist in any physical shape or form and are not controlled by any singular entity were always set to cause an uproar among the regulators.”
No governance
While Bitcoin appears at glance to be a well-established virtual currency system, there are still no uniform international laws that regulate Bitcoin. Bitcoins are not issued, endorsed, or regulated by any central bank. Instead, they are created through a computer-generated process.
A lot of concerns have been raised regarding cryptocurrencies’ decentralized nature and their ability to be used almost completely anonymously
“A lot of concerns have been raised regarding cryptocurrencies’ decentralized nature and their ability to be used almost completely anonymously,” Patel added. “The authorities all over the world are worried about the cryptocurrencies’ appeal to the traders of illegal goods and services and moreover, they are worried about their use in money laundering and tax evasion schemes.”
As of 2019-end, Bitcoin and other digital currencies are outlawed only in Bolivia, Ecuador, Columbia, Vietnam, China and Russia. Other jurisdictions, however, do not make the usage of cryptocurrencies illegal as of yet, but the laws and regulations can vary drastically depending on the country.
(Fungibility is the state of being interchangeable. For example, money has fungibility because there is no difference between one dollar and another dollar. Likewise, stocks of the same type in the same company and commodities of the same quality are generally fungible.)
Fungibility is completely essential to the concept of currency, whether they be crypto or otherwise.
However there are currencies that aren’t fungible, but these are designed to be special. It’s best to think of these kinds of tokens as representing unique, collectible items. Consider precious gems like diamonds, for example – they come in all different sizes, and each one is uniquely different and as important as the next.
Crypto Kitties are one such non-fungible crypto or token.
