Cryptocurrency: Pros & Cons; Cryptocurrency Wallet & Cryptocurrency Mining
Table of Content
- What is Cryptocurrency?
- Cryptocurrency vs Other Currency
- Pros of Cryptocurrency
- Cons of Cryptocurrency
- What is Cryptocurrency Wallet?
- What is Cryptocurrency Mining?
- Final Thoughts on Cryptocurrency
What is Cryptocurrency?
In today’s era, more than often one hears the terms like ‘Digital Currency’ and ‘Cryptocurrency’. Most of the people think that they mean the same thing. But, is it really so? Here, we will try to explain you what is cryptocurrency and how it is different from other digital currency in simpler words.
Cryptocurrency: Cryptocurrency word is formed by using two different words; “Crypto” which means ‘encryption or coding of data’ and “Currency” which means ‘medium of exchange like ordinary money’. So, from this description we can easily understand that cryptocurrency is a kind of money that exists in the virtual or digital world which uses encryption to enable the security of transactions. In other words, it is type or digital money that serves the purpose of ordinary money like dollars, pounds, rupees, etc. but does not have a physical form like banknotes or coins. Cryptocurrency is a new form of digital money.
Cryptocurrency is a type of digital currency that can be used as a means of payment to purchase goods and services. They can be transferred into accounts as well as exchanged for cash. But the other digital currencies have issues like Centralization, Confidentiality and Security. Cryptocurrency is based on the principles of Decentralization. The transactions made through cryptocurrency holders are not regulated or controlled by any kind of financial or governmental authority. It uses cryptography that offers a security system that is very difficult to crack.
Also Read: What is Crypto Currency and How to Invest in Crypto? Top 10 Crypto Currencies
Cryptocurrency V/S Other Digital Currencies
|Decentralization||This is completely decentralized, which means that no state can control it. Rules are set up by the community of cryptocurrency.||Like the traditional banking system, all of it is regulated by central bank or other government agencies. All the transactions are controlled and the exchange rate is set up by regulatory authorities.|
|Transparency||The transactions are publicly available. An account holder cannot be found out but the transaction and amount of money in the system can be tracked.||The access to the information related to the transaction is only allowed to the governmental authority.|
|Security||The transaction once done is added to the blockchain automatically and cannot be reversed. Blocking of Crypto Wallet is not possible and transfer is only possible with the help of Private Key.||Authorities regulating digital currencies monitor all the transactions can mark any particular account or transaction suspicious and block it.|
|Anonymity||Personal information is not required to open a wallet for trading cryptocurrency trading.||Account holders information cannot be hidden. To open account in an app like GPay or PhonePe personal information like name and address is required, moreover it is mostly linked to your bank account.|
If you have been looking for good investment opportunities and are thinking of investing in a cryptocurrency or if you are simply curious of how you can manage your finances with it, then we here at “b4investing” would like to make you aware not only of the potential benefits but also about the drawbacks and loopholes. This will give you a clear view of what to expect and will provide you a chance of having a fruitful interaction with cryptocurrency.
Pros of Cryptocurrency
- Self-governed and managed: The transactions of cryptocurrency are stored by the miners (developers) on their hardware system for which they get a commission or fee as a reward. As the miner is getting a fee it is their job to keep the records up-to-date and precise. The development of any currency dependents hugely on its governance and maintenance.
- Decentralized: the decentralization of cryptocurrency makes it free from monopoly and keeps a check on it that no particular organization can decide on the flow and value of it.
- Transparency: All the transaction related to the trading of cryptocurrency is recorded on the blockchain. The amount of cryptocurrency owned by a particular person is available for viewing at any point of time. This proves to be huge advantage for those who want a more transparent financial system.
- Low Transaction Cost: The fees paid for transaction of cryptocurrency is very low because of the elimination of any third party like VISA etc. to verify the transaction. So, transferring money is easier and cheaper even across border.
- Ease of Transferring money: Governmental policies and restriction make transferring of money across border very expensive and tedious process. Cryptocurrency has made this job easy and is helping people to send money to their family sitting in a different nation. It is easily accessible across the globe.
- Prevents Inflation: Inflation decline the value of a particular nation’s currency. But, cryptocurrency is released with a fixed amount at the time of its launch. The source code mentions the quantity of coins, like only 21 million Bitcoin is released in the world. When the demand will be high the value will increase which will prevent inflation in the long run.
- Absolute Privacy: Cryptocurrency is completely anonymous, which is a boon to people to want to keep their online privacy intact and skeptical of revealing digital data. The chances of theft reduce which ensures security.
- Fast and accessible round the clock: Purchasing goods and services over your mobile phone at any point of time from anywhere is easily possible. There is no restriction with time and place during a transaction through cryptocurrency.
- Ease in exchanging currency: Cryptocurrency wallet helps in converting one currency to another by trading in it, as it can be bought using many currencies like US Dollars, Euro etc. the transaction fee is also very low.
- No limit on the transactions: There are no restrictions on the amount that has to be transferred from one crypto wallet to another held by anyone across the globe.
Cons of Cryptocurrency
- Unregulated and Volatile: The price of cryptocurrency follows the law of demand and supply. So, when regulatory authority is absent volatility comes into account due to market speculations and manipulation. Institutional investment is discouraged as it is a digital asset and completely dependent on faith. A particular cryptocurrency may be worth of fortune today and absolutely worthless tomorrow.
- Can be used for illegal activity: Cryptocurrency is based on cryptography which leads to high privacy and security. So, it becomes difficult for government agencies to track any user by their wallet or keep an eye on their data. A number of incidences have been reported where cryptocurrency was used for illegal activity like trading of drugs. It is also used to convert black money through a clean intermediary and hide its source.
- Operated by its developers: Though one of the major features of cryptocurrency is its decentralized nature but still the flow and amount of a certain currencies is still controlled by its creator or some other organization. The manipulation in its value can be done by them.
- Financial loss due to lost data: If any user losses the Private Key to their wallet, there is no way of getting it back. Cryptocurrency is a digital currency created by secure code that is almost impossible to hack. But if private key is lost the wallet gets locked with all the coins inside it which is a major financial loss.
- No refund: In case of any conflicts between the parties involved or if somebody sends funds to a wrong wallet address the coins cannot be recovered. The lack of refund policy makes it easier to fraud people. The gained attention on cryptocurrency has also attracted many scammers.
- It’s not User-Friendly: Cryptocurrency is the baby of computer science. This makes the vocabulary very hard to understand. The functioning also involved certain amount of technical skill. More people are getting familiar with the concept of cryptocurrency these days but its use is still limited and regulation policy varies from country to country.
- Anonymity: Being anonymous is more of a bane than a boon to the society at large. Terrorists and criminals would use this virtually untraceable platform for their transactions. The black market and dark web are big users of cryptocurrencies.
- Susceptible to hacks: The wallet data stored by exchanges to operate the users ID can be hacked giving access to a large number of accounts. Most exchanges are highly secure but there are incidents reported of hacking and stealing of cryptocurrency.
- Not accepted by all vendors: It is still not accepted by all the vendors. The fluctuation in price and all the money saved in a transaction can also be negligible.
Here, we have presented in front of you the two sides of cryptocurrency, but there is much more that needs to be understood.
What is Cryptocurrency Wallet?
Crypto wallets gives the users a digital solution to keep their “Private Key” – the password safe and secure, that provides access to their cryptocurrency. They allow user to send, receive and spend cryptocurrencies. Users can view or access crypto wallet from smartphones or computers. Crypto wallets do not physically store the asset, but they store “Public and Private Key”. Public key are digital code that are linked to the decentralized blockchain like a bank account number. Private Key is a digital code that is particularly to individual wallet like ATM Pin.
To become a crypto wallet app, a company must:
- Allow users to store private keys linked with a blockchain ledger.
- Provide a method to interact with blockchain to store, receive and send cryptocurrency and also monitor balances.
- Offer security measures so that private key is accessed only by the owner.
Some of the top Cryptocurrency wallets in the world are:
- Coinbase Wallet
- Trust Wallet
- BitGo Cryptocurrency Wallet, etc.
Using an app like Coinbase Wallet or Exodus, gives easy access to the crypto holding. This means:
- Manage all the digital assets in one place.
- Control private keys.
- Send and Receive cryptocurrency to and from anywhere in the world.
- Interact with the user.
- Shop at stores that accept cryptocurrency.
Let us understand this with a simple Example:
For Kanak’s 50th birthday, Kavita wants to send her some money. She decides to send Bitcoin, which has been appreciating in value. Kanak has a cryptocurrency wallet on her Apple iphone, she gives her Public key to Kavita. On 5th April, Kavita sends one Bitcoin to the public key. Once that transaction is authenticated on the blockchain, Kanak becomes the owner of that Bitcoin. Later, Kanak wants to book a flight to Greece. Her travel agent accepts Bitcoin, so she sends the exact amount from her wallet to the agent and in return she receives the ticket from the agent.
What is Cryptocurrency Mining?
Crypto mining is a process of solving baffling mathematical equations to authorize crypto transaction. Some people think crypto mining is creating a new coin altogether, but it is not right. Instead, it is a process of releasing a cryptocurrency from the total supply. It means mining a cryptocurrency already circulating in the market.
Here is a breakdown:
There are 21 million Bitcoin in the world.
Around 18.5 million of these are already in circulation, meaning there are less than 3 million that are yet to be ‘mined’.
They call it ‘mining’ because much like gold, it needs to be extracted from somewhere- but instead of actual mine, people use computers.
When computers solve enough problems- 1MB worth of Bitcoin transaction- they are rewarded with Bitcoin.
When the process was first introduced in 2009, the reward for successful miners was 50 Bitcoins. But every four year, the reward halves. In 2020, the reward was 6.25 Bitcoin. That’s around 281,250 USD. The reward will continue to halve until every single Bitcoin is mined.
Cryptocurrency mining is the process of validating transactions and mining new coins from the block. There are two ways to mine:
- Proof of Work: In this mining hardware solves randomly generated complex puzzles using electricity and computational power and then compensation is given as cryptocurrency to the person who finds the right solution in the fastest time.
- Proof of Stake: It is in a way being a shareholder, so owning a certain number of certain cryptocurrencies to then be able to launch a node and that will be validating transaction and mining new coin out of the block.
If you are thinking that crypto mining is soo simple, why doesn’t everybody do it? The fact is it’s not for everyone because:
- It is Resource Intensive
- It is Expensive
- Return on Investment is not what it used to be
- It may not be Feasible or may be Prohibited in a particular Geographic Location.
Cryptocurrency mining is an interesting alternative to the traditional centralized system that currently operates throughout the world. However, it’s very taxing in terms of computer and power resources and not feasible for many users.
Getting into crypto is not easy but Indian crypto exchanges like WazirX and CoinSwtich created a platform where Indian people can buy or sell crypto with security. WazirX is a popular cryptocurrency exchange app that can be used to trade cryptocurrencies in India.
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Final Thoughts on Cryptocurrency
Every budding technology will have a degree of uncertainty about the future, cryptocurrency is no different. While the popularity is growing and companies race to keep up with the growing demand, it may be too early to know just how big an impact cryptocurrency will have. Gone are the days when industrial empires were built with the help of inherited money, muscle and influence. You can now innovate digitally to become a billionaire by the age of 32 like Vignesh Sundaresan who probably is a digital billionaire.
Governments do not like the idea of private currencies beyond their control. They will probably make it illegal or very expensive to deal in, which is a cause of concern for people investing in cryptocurrency.
On parting thoughts, the ordinary “hand to mouth” folks should definitely stay away from it. Current prices are high but the risk of complete collapse to zero is significant. But for the rich folks looking for ways to diversify their portfolio, putting small slice of their wealth into the new digital scheme may be a worthwhile gamble. The overall decision on whether or not to add cryptocurrency exposure to a portfolio is based on each individual’s assessment of the balance of pros and cons, the main ones we have tried to highlight in this write up.
But, Be Bold!!
- Is cryptocurrency legal in India?
Investing in cryptocurrency is legal in India. Only, cryptocurrencies are not regulated in India. RBI imposed ban on banks from facilitating cryptocurrency transaction in 2018.
- Can you shop online using cryptocurrency?
No, not in India. No company or ecommerce website allow cryptocurrency for shopping.
- Can somebody be trapped in fraud by trading cryptocurrency?
Yes, cryptocurrency is not regulated in India. So, anyone can make virtual coin and start selling it. So, investor has to be careful to select a cryptocurrency and platform for trading.
- Can cryptocurrency replace government issued currency?
Its very difficult to predict future but chances are very less. Government will take more control over cryptocurrencies and introduce new regulations.
- Can cryptocurrencies be converted to rupee?
Yes, any cryptocurrency can be converted into rupee using exchange platform.
- Why do prices of cryptocurrency fluctuate?
Cryptocurrency market works like stock market. So, it goes up and down. Cryptocurrency market is more volatile.
- Why was cryptocurrency created?
The idea behind creating cryptocurrency was to reduce dependency on banks and government.
4 Replies to “What is Cryptocurrency Mining, Cryptocurrency Wallet? Pros n Cons of Cryptocurrency”
You go girl🖖
A much required clarity for a very technical topic . A very detailed yet easy to understand article. Nice work 👍🏻
Well written. Similar to your past articles, this one also gives a very simple yet thorough understanding of the crypto world. Enjoyed reading it.
Thank you so much…..much needed appreciation….thank you for being a loyal ‘b4investing’ reader