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The New Era: Cryptocurrencies

Over the last few years, cryptocurrencies have significantly grown in prominence. Despite their rise, many still don’t know or fully understand what cryptocurrencies really are. With this in mind, Turnerlittle.com decided to provide a clear starter guide on cryptocurrencies including their potential pros and cons.

What is Cryptocurrency?

Cryptocurrency is essentially a digital currency which is used to make payments of any value without any fees. Unlike fiat currency (e.g. Euro, US Dollar etc) – cryptocurrencies are not regulated nor controlled by any banks, centralised financial establishments or governments. Instead, users on a network validate every transaction to primarily make sure that the same digital ‘coins’ are not being spent twice by the same person.

Who created Cryptocurrencies?

Bitcoin, the first cryptocurrency, was created by Satoshi Nakamoto in 2008. Despite many efforts to identify Satoshi, he or she remains anonymous but is credited with inventing the concept of cryptocurrencies.

Photo credit: REDPIXEL.PL/Shutterstock 

How do Cryptocurrencies Work?

Cryptocurrency runs on something called a ‘blockchain’, which is a decentralised ledger run by “miners”, whose powerful computers keep a record of all the transactions made and held by currency holders as well as solving complicated maths problems to generate more coins. To avoid a blockchain being vulnerable to any potential exploitation from opportunistic hackers, data is therefore stored across a network.

What are the Main Benefits of Cryptocurrencies?

Transparency

With the blockchain monitoring all transactions – once a transaction is completed and recorded on the open ledger it cannot not be changed. Transactions are available for authentication for anyone at any time. No person, organisation or body – regardless of stature and authority can manipulate – thus providing an added dimension of security.

Inflation

Traditional currencies are prone to experiencing the effects of inflation as economies prices fluctuate (per their ‘Retail Price Index’ and Consumer Price Index’) and central banks print more money. Certain cryptocurrencies such as Bitcoin are less likely to experience this as there are a finite number to ‘mine’.

Greater Control

Users of cryptocurrencies can make payments and store money without the requirement of using their name or going through a bank – this beneficially protects individuals from identity theft. Transactions also cannot be faked or reserved.

Photo credit: Nata-Lia/Shutterstock 

What are the Main Drawbacks of Cryptocurrencies?

Mistrust

Despite their growth over the last few years, cryptocurrencies are still in their infancy with regards to public awareness. Those that do know about cryptocurrencies, there seems to be mistrust amongst them as they do not fully understand how it all works.

Not Recoverable

Whereas banks and building societies have their customers covered in the unfortunate scenario of a security issue such as having their details stolen or account compromised – cryptocurrencies cannot be recovered as there are currently no mechanisms to do so.

Untraceable

For those seeking to engage in criminal/illegal activates, the untraceable nature of cryptocurrencies can make them a very attractive proposition. This association highlights the ‘dark’ nature of cryptocurrencies whereby unscrupulous individuals and groups can use it to avoid detection.

Conclusion

As with physical currency, cryptocurrencies has flaws. With the price of Bitcoin hitting a record high early this year and as other cryptocurrencies grow in importance – they will actively improve them to make them more attractive to a wider audience. This includes further education on its function and competitive advantages over traditional currencies.

Photo credit: Yeexin Richelle/Shutterstock 

Turner Little and its affiliates do not provide tax, legal or accounting advice. Material on this page has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.