Definition:
A crypto currency is a digital asset designed to work as a medium of exchange wherein individual coin ownership records are stored in a digital ledger or computerized database using strong cryptography to secure transaction record entries, to control the creation of additional digital coin records, and to verify the transfer of coin ownership.
- It typically does not exist in physical form (like paper money) and is typically not issued by a central authority.
- Each crypto currency works through distributed ledger technology, typically a block chain, which serves as a public financial transaction database.
- Bit coin, first released as open-source software in 2009, is the first decentralized crypto currency. Since the release of bit coin, over 6,000 altcoins(alternative variants of bit coin, or other crypto currencies) have been created.
Advantages Of Crypto Currency:
Transactions:
One of the advantages of crypto currency transactions is that they are one-to-one affairs, taking place on a peer-to-peer networking structure that makes “cutting out the middle man” a standard practice. This leads to greater clarity in establishing audit trails, less confusion over who should pay what to whom, and greater accountability, in that the two parties involved in a transaction each know who they are.
Asset Transfers:
One financial analyst describes the crypto currency block chain as resembling a “large property rights database,” which can on one level be used to execute and enforce two-party contracts on commodities like automobiles or real estate. But the block chain crypto currency ecosystem may also be used to facilitate specialist modes of transfer.
For example, crypto currency contracts can be designed to add third party approvals, make reference to external facts, or be completed at a specified date or time in the future. And since you as the crypto currency holder have exclusive governance of your account, this minimizes the time and expense involved in making asset transfers.
More Confidential Transactions:
Another one of the great advantages of crypto currency is that each transaction you make is a unique exchange between two parties, the terms of which may be negotiated and agreed in each case. What’s more, the exchange of information is done on a “push” basis, whereby you can transmit exactly what you wish to send to the recipient – and nothing besides that.
Transaction Fees:
There may be some external fees involved if you engage the services of a third-party management service to maintain your crypto currency wallet, but another one of the advantages of crypto currency is that they are still likely to be much less than the transaction charges incurred by traditional financial systems.
Greater Access to Credit:
Digital data transfer and the internet are the media facilitating the exchange in crypto currencies. So these services are potentially available to anyone who has a viable data connection, some knowledge of the crypto currency networks on offer, and ready access to their relevant websites and portals.
Easier International Trade:
Using the peer-to-peer mechanism of the block chain technology, cross-border transfers and transactions may be conducted without complications over currency exchange fluctuations, and the like.
Individual Ownership:
Perhaps the greatest of all advantages of crypto currency is that unless you’ve delegated management of your wallet over to a third party service, you are the sole owner of the corresponding private and public encryption keys that make up your crypto currency network identity or address.
Adaptability:
There are currently over 1200 unique crypto currencies or altcoins in circulation worldwide. Many are quite ephemeral, but significant proportions have been created for specific use cases that illustrate the flexibility of the crypto currency phenomenon.
For example, there are “privacy coins” which help mask your identity on the block chain, and supply chain tokens which can facilitate supply chain operations for various types of industries.
Strong Security:
Finally, the strong encryption techniques employed throughout the distributed ledger (block chain) and crypto currency transaction processes are a safeguard against fraud and account tampering, and guarantors of consumer privacy.
Disadvantages of Crypto currency:
1: Scalability
Probably the biggest concerns with crypto currencies are the problems with scaling that are posed. While the number of digital coins and adoption is increasing rapidly, it is still dwarfed by the number of transactions that payment giant, VISA, processes each day. Additionally, the speed of a transaction is another important metric that crypto currencies cannot compete with on the same level as players like VISA and MasterCard until the infrastructure delivering these technologies is massively scaled. Such an evolution is complex and difficult to do seamlessly. However, some have already proposed several solutions, including lightning networks, sharding, and staking as options to overcome the scalability issue.
2: Cyber security issues
As a digital technology, crypto currencies will be subject to cyber security breaches, and may fall into the hands of hackers. We have already seen evidence of this, with multiple ICOs getting breached and costing investors hundreds of millions of dollars this summer alone (one of these attacks by itself resulted in the loss of $473 million). Mitigating this will require continuous upkeep of security infrastructure, but we are already seeing many players dealing with this directly, and using enhanced cyber security measures that go beyond those used in the traditional banking industries.
3: Price volatility and lack of inherent value
Price volatility, tied to a lack in inherent value, is a major problem, and one of the specifics that Buffet referred to specifically a few weeks ago when he characterized the crypto currency ecosystem as a bubble. It is an important concern, but one which can be overcome by linking the crypto currency value directly to tangible and intangible assets (as we have seen some new players do with diamonds or energy derivatives). Increased adoption should also increase consumer confidence and decrease this volatility.
4: Regulations
Buffet also touched on this problem in his talk:
“It doesn’t make sense. This thing is not regulated. It’s not under control. It’s not under the supervision [of] any…United States Federal Reserve or any other central bank. I don’t believe in this whole thing at all. I think it’s going to implode.”
Even if we perfect the technology and get rid of all the problems listed above, until the technology is adopted by federal governments and regulated, there will be increased risk in investing in this technology.
Other concerns with the technology are mostly logistical in nature. For example, changing protocols, which becomes necessary when the tech is being improved, can take quite a long time and interrupt the normal flow of operations.
5: The takeaway:
With all the potential barriers to mass adoption, it is logical that experienced investors like Warren Buffet choose to err on the safe side of this technology. And yet, we know that crypto currencies (and the block chain technology) will be here to stay. They offer too many of the advantages that consumers seek in a currency today; decentralization, transparency, and flexibility being chief among these. Expanding the discussion to everything that block chain can accomplish across numerous industries doubly reinforces this point.
Crypto currency in India:
Both the government and the RBI have confirmed that crypto currencies, including bit coin, are legal in India. Parliament Member Dr. Subramanian Swamy said “crypto currency is inevitable.”
Future of Crypto Currency:
Some of the limitations that crypto currencies presently face – such as the fact that one’s digital fortune can be erased by a computer crash, or that a virtual vault may be ransacked by a hacker – may be overcome in time through technological advances. What will be harder to surmount is the basic paradox that bedevils crypto currencies – the more popular they become, the more regulation and government scrutiny they are likely to attract, which erodes the fundamental premise for their existence.
While the number of merchants who accept crypto currencies has steadily increased, they are still very much in the minority. For crypto currencies to become more widely used, they have to first gain widespread acceptance among consumers. However, their relative complexity compared to conventional currencies will likely deter most people, except for the technologically adept.