Cryptocurrency is a digital asset that uses cryptographic encryption to guarantee its ownership and ensure the integrity of transactions, and control the creation of additional units, i.e. prevent someone from making copies as we would do, for example, with file or photo. These currencies do not exist in physical form, they are stored in a digital wallet.
These digital currencies have an impact on the world economy, so, this article explores the relationship between both concepts providing examples in which cryptocurrencies have represented an alternative for the economy. It also analyzes their biggest disadvantage, their volatility, to get a broader picture of what cryptocurrencies represent.
How do cryptocurrencies work?
Cryptocurrencies are an efficient and secure way to carry out operations, since they are based on the principles of cryptography which, by means of a block chain, allows to keep a perpetual record of the transactions carried out.
This block chain is a public registry where all the operations of these digital currencies are kept. However, despite the fact that this ledger allows any user to trace all transactions made by all computers on the network, the information of the people involved is protected.
Similarly, the security of these currencies is not only due to encryption, but also to verification, since the rest of the users validate that the transaction can be carried out correctly on the blockchain.
Characteristics of a cryptocurrency
Cryptography: They use encryption techniques to make secure payments and collections.
Decentralization: They do not need to be controlled by any institution.
No possibility of counterfeiting or duplication: A cryptographic system protects users.
No intermediaries: Direct person-to-person contact.
Transactions are irreversible: Once payment is made, there is no possibility of cancellation.
Can be exchanged for other currencies.
Privacy of use: No need to reveal your identity when doing business.
Advantages of cryptocurrencies:
Low transaction costs, as a consequence of the absence of intermediaries.
Security, as each coin belongs only to its owner.
Transparency, since transactions are incorporated in a freely accessible registry.
It accumulates in a tiny space such as a USB.
Disadvantages of cryptocurrencies:
Volatility of their prices.
Lack of current acceptance by some companies.
As they do not need a regulator such as the Government or the Central Bank and provide privacy, they can be used for illegal transactions.
Cryptocurrencies have been seen as a possible alternative to the current monetary system largely because their technology and multiple advantages have been considered as a determining factor to transform the way in which transactions are carried out around the world.
One of the main advantages of cryptocurrencies is that they do not require an administrator, i.e., they do not depend on governments, banks or any institution to function.
Why is it important for the economy to be decentralized?
Because it allows independence from recessions and economic crises, thus obtaining the highest market price so far. In conjunction, depending on banks and governments is costly for society, due to two main reasons: the first is that in banks transactional systems are very expensive, so having cryptocurrencies reduces commissions and eliminates interest on the operations performed; secondly, the government can not distort the accounts by printing more money thus causing inflation.
Another advantage of this digital currency is that they provide an opportunity for people to "save their capitals" and keep them intact, in addition to being flexible operations that provide great liquidity.
It is because of the above that these digital currencies have quickly gained popularity and "can shake the foundations of the world economy".
Cryptocurrencies have a great instability especially in the last year. Although their price in recent months has recovered, the decline in the price of oil, wars, recessions and the arrival of the coronavirus are some triggers that caused the fall of much of the markets in the value of these currencies. Which leads me to think, is this an indicator that there are more and more people working in this market?
This instability arises because this currency depends on its price in the market; it is based on demand, as it happens in any stock exchange: if many people want to buy what you sell, the price will go up, otherwise, it will go down.
To conclude, it is stated that cryptocurrencies are an alternative, safe and efficient way to exchange goods or services that positively affect the world economy due to their decentralization, great liquidity and flexibility. However, it is necessary to know this market before entering it in order to take advantage of the benefits of this electronic currency.
It is also important to note that, as we have already mentioned, the value of these virtual currencies is volatile and, as with traditional currencies, there are external factors that we cannot control, so that one day you can be earning a lot, while the next day you could be losing out.
