With cryptocurrencies like Bitcoin, Ethereum, Solana, Dogecoin and others rapidly appearing in the market, one huge question still remains unanswered — Is it safe to buy cryptocurrencies? In this article, I will not be providing a yes or no answer to this question but will rather leave it to you to decide whether you want to buy one or not.
What is a cryptocurrency?
A cryptocurrency is a digital currency which acts as a medium of exchange on a decentralised network — Blockchain.
On the technical side, a cryptocurrency is a piece of code (an ERC-20 token in case of the Ethereum blockchain– more on this in another article) that is designed to be cryptographically strong and resistant to any kind of theft.
As a medium of exchange, it works like any other currency such as the USD, GBP or YEN but they do have their differences. Traditional currencies are backed by the government and physical assets such as Gold and Silver while cryptocurrencies are not backed by anything. Their value arises purely from its supply, demand, social value and a little by technical capabilities. Due to this reason they are classified as an asset class of their own. Currently, there has not been widespread adoption of these currencies by big governments and businesses due to their volatile nature, but as countries like Argentina, Bahamas, Panama and El Salvador shift towards making them their legal tender, there has been good progress on gaining the governments attention towards this industry.
Benefits
- Lower fees
Fees charged for cryptocurrency transactions are comparatively very less than those on traditional transactions monitored by banks. You might be wondering that if cryptocurrencies work on a decentralised network with no central authority, who are we paying the fees to? Since the whole network is decentralised, the individuals validating our transactions are the people using the network. Due to the effort they put in to run a node and validate your transactions, they are rewarded with the fees you pay.
2. No middlemen
There are no third parties or middle-men involved, which leads to faster transaction time. These transfers work with a public-private key system and use consensus mechanisms such as Proof-of-Work or Proof-of-Stake to verify the transactions.
Downsides
- Hacks
Though blockchains are secure, there are wallets and bridges connecting various applications that are possible to intercept. Due to this, there may be hacks leading to millions of dollars being stolen. This is not a problem of the cryptocurrency but of the application being used.
2. Volatility
With volatile price actions, cryptocurrencies make it difficult for businesses and individuals to invest money in them. Due to this, there are stablecoins which are pegged at the price of the USD. These coins now make it possible for businesses to enter this sector and utilise the properties blockchain technology has to offer.
Conclusion
Do not take anything in this article as financial advice. The cryptocurrency sector is rapidly advancing. With new technologies and coins coming into play, there will be an opportunity for governments and individuals to stay a step ahead. The best way to buy and trade cryptocurrencies is by doing your own research.
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