Dubai: If you’re new to cryptocurrencies, you may have had your doubts when stashing a small portion of your savings in an investment that isn’t tangible or physically visible. But knowing how your crypto transactions are kept safe from fraudsters can help influence your investment decisions.
“The internet has created a digital economy in which countless transactions take place every day. Without cryptic digital encryptions keeping your cryptocurrency transactions secure, your financial data would be accessible to everyone,” explained Brian Deshell, a UAE-based cryptocurrency trader and analyst.
“Different cryptocurrencies use different configurations of encryption methods to achieve their stated purpose, which is to grant various levels of transaction and user anonymity. Cryptology is the study of techniques for secure communication and how information can be concealed from unauthorised access.”
How cryptocurrency transactions are built to be secure
In recent years, digital transactions are made secure with the technology of ‘blockchain’, i.e. a highly cryptic digital ledger of transactions. This is also the central technology behind digital assets like cryptocurrencies, but what makes this work is its cryptic nature. This comes from cryptology.
“Cryptic digital encryptions are what gives you confidence in your electronic transactions involving digital currencies. This is integral to getting your money back on time, an overcast to any investment you make,” said Brody Dunn, a UAE-based investment advisor at a wealth management firm.
“This is the primary reason why encryption is used in electronic transactions to protect data such as account numbers and transaction amounts, digital signatures replace handwritten signatures or credit card authorisations, and public-key encryption provides confidentiality.”
Encryptions lower transaction cost of having brokers
So, as this science essentially helps keep information regarding a transaction secure, and since a blockchain is distributed to all users of a cryptocurrency, information regarding transactions is essentially tamper-proof.
Additionally, this encryption allows for transactions without the need for an intermediary, like a bank, broker, or any intermediary institution. This reduces transaction costs, meaning it enables you to go ahead and directly make a transaction by yourself without shelling out much money to brokers.
“Without such digital encryptions, hackers can easily access your brokerage accounts and steal money. But with time stamping, a cryptographic technique that can certify that a certain electronic transmission was delivered at a particular time, it gets very hard for hackers to tap into,” added Dunn.
Drawbacks to the use of encryptions in digital currency
In general, digital encryption is an important way of achieving data confidentiality, user authentication and ‘non-repudiation’. However, there are some costly drawbacks to using cryptography to encrypt cryptocurrency transactions.
To keep digital currencies secure, cryptocurrency users are also asked to use a personalised crypto wallet with a ‘private security key’, a secret number used to send encrypted messages using cryptography. However, losing the key to your wallet could mean losing funds, warned Deshell.
“As cryptography is a complex computing function, digitally encrypting large amounts of data about transactions requires a lot of electricity. This is why ‘Quantum’ computing - which is far more powerful than more traditional computing - is being developed for commercial use,” added Deshell.
“‘Quantum’ computing may eventually be required to break the current encryption methods used in cryptocurrencies, and this may not only deem traditional cryptographic transactions as defunct, but it will also raise the cost of transacting cryptocurrencies in the future.”
Key takeaways
As the amount of digital information and communication expands exponentially in the digital world, according to industry experts, understanding how encryptions works is vital to keeping your crypto investments safe, meaning they prove their use when you buy or sell cryptocurrencies.
“Apart from securing the communication in the presence of third parties, use of digital encryptions in crypto transactions has many applications, aside from the primary reason being to keep a non-tangible investment secure,” added Dunn.
“This technology also gives rise to greater number of ways to invest in its development beyond cryptocurrencies, as more and more businesses in recent years are making use of the technology to keep their investments and day-to-day operations secure.”
So, instead of only chasing cryptocurrencies to reap the financial benefits of this credible science, Dunn evaluated that investors can also stand to profit by investing in companies that use such encryption technologies to build their respective financial products and services.
