The Risks and Benefits of Digital Currency
Cryptocurrencies are a speculative investment now but the blockchain technology that underpins them seems certain to have major implications.
The first time I heard the term "Bitcoin" I was sitting in the middle of my local mall waiting to get the rest of my shopping done. I overheard someone say they had completed a payment using some sort of digital currency.
I laughed to myself: That's definitely not going to catch on. Now, years later, I'm eating my words as digital currencies continue to be adopted by major brands and platforms online. Digital currencies began when Satoshi Nakamoto, the pseudonymous inventor of Bitcoin, had a dream to create something no other person had ever done before -- a digital form of cash flow. You could use your own bank account as an example. You can go to the bank and take out coins and bills, of which there a limited number. Money is all about a verified entry in some kind of database of accounts, balances and transactions.
Only "miners" of the Bitcoins can confirm transactions, though in principle, everyone can be a miner. But the miner's job in the cryptocurrency environment is to take transactions and verify them. By providing this service, miners get rewarded with digital tokens.
The growing interests of cryptocurrency.
Cryptocurrencies have been drawing significant interest over the last several months, according to Charles Bovaird, a financial writer and consultant who has worked for State Street, Moody's and Citizens Commercial Banking. He currently holds Bitcoin and Ether, two leading types of digital currency, and believes that the future is bright for digital currencies. "This growing visibility is evident in both Google Trends search data and also the rising market values of the digital currencies themselves," he said.
Zack Friedman, founder and CEO of Make Lemonade whose career has included stints as CFO of a global energy company, hedge fund investing and jobs with The Blackstone Group and Morgan Stanley, said cryptocurrencies have undisputed advantages but a uncertain future. "Proponents of cryptocurrencies cite several key advantages, namely decentralization, anonymity, security and automation," Friedman said. "However, investors are split regarding the stability and merits of cryptocurrencies, with some believing they represent the wave of the future, while others dismiss them as pure speculation."
The benefits of digital currency.
Digital currencies are based on blockchain technology that Friedman said has potential to disrupt currency and much more. "Blockchain technology, which is the backbone of digital currency, has the potential to disrupt financial services by reducing the cost and complexity of financial transactions, while also augmenting transparency," he said. "The implications of blockchain technology are far-reaching, not only in financial services, but in other areas such as healthcare, government, law, education, technology and more."
Bovaird said one of the greatest benefits is that cryptocurrency cannot be counterfeited and transactions cannot be reversed arbitrarily by the sender (as credit card chargebacks can). Further, cryptocurrency transactions provides anonymity. Credit cards operate on a pull basis where the store identifies the transaction and "pulls" the amount of the sale from the card. Cryptocurrency uses a "push" model which prompts the cryptocurrency holder to send exactly what they want to the seller without any other form of information.
One other benefit is how cryptocurrency is not bound by exchange rates, interest rates or transaction charges. In addition, digital currency transactions take place at the same speed, regardless of where the sender and receiver are located.
The risks of digital currency.
Despite the popularity and positive price performance, digital currency is not without risk. Friedman notes that leading investors such as Ray Dalio, founder of investment firm Bridgewater, called Bitcoin a "bubble," while Jamie Dimon, CEO of JPMorgan, has criticized non-flat cryptocurrency, which is currency not backed by a government. Before investing in cryptocurrencies, Friedman says that investors also should consider several risks, including price volatility and regulatory intervention.
"Expect continued price volatility," Friedman said. "Cryptocurrencies represent a new frontier. Therefore, retail investors should expect volatility and significant price swings as markets develop. While cryptocurrencies have experienced explosive growth, they currently remain a relatively small part of the global financial ecosystem. Regulators and policymakers will continue to monitor cryptocurrencies to determine any potential impact to financial stability or broader systemic risk."
The future of cryptocurrency means allowing you to have ultimate control over your money, who you send it to, and what types of fees you don't have to pay. In short, it is slowly becoming one of the fastest adopted forms of payments online because of all of these attributes I just mentioned.
If you would like to learn more about cryptocurrency, take a minute to look up these terms: Bitcoin, Litecoin, Blockchain, Ethereum, and ICO. Bovaird recommends that you browse different cryptocurrency websites to stay up to date on the current technology advances and news happening in the industry.
The benefits of cryptocurrency in today's economy could appear to be earth-shattering, breaking down geographical barriers, and saving the consumer quite a bit of cash on the back end of a purchase. But, cryptocurrency doesn't come without risk, so become familiar with key concepts before becoming an investor.
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