CryptoCurrency Tutorial – 7 What Are The Benefits and Risks of Crypto?

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It is important to know the benefits and risks of any new technology, especially if you are considering dedicating resources to it or investing in it.

Benefits:

Speed – one of the major benefits when sending or receiving crypto is speed, while banks and other payment methods can take days to process payments (especially international payments), most crypto transactions are confirmed within minutes of a payment being sent. As soon as the payment is confirmed, it is available in your digital wallet ready to be used.

Privacy – one of the founding principles of Bitcoin is anonymity. Payments are sent to your Bitcoin address without any other identifying information attached to them. There are no forms to fill out when sending or receiving payments, which makes cryptocurrencies very attractive to those wishing to remain anonymous. As more people are beginning to take their privacy more seriously, especially online, more and more of them will look towards crypto as a way to protect their privacy.

Smaller transaction fees – when sending funds through a third party, there is often a fairly large transaction fee involved and sometimes you pay unfavourable exchange rates plus fees on top. Some fees are as high as 10%. Bitcoin removes the third party from the transaction, meaning payments are sent directly from the sender to the recipient. This allows for much smaller transaction fees. Some additional fees are still payable where a third party becomes involved, for example, when exchanging your Bitcoin to your local currency. However, as competition increases and crypto is more widely adopted, it is likely that these fees will also come down over time.

Secure – the blockchain is designed in such a way that it cannot be altered, it is a permanent record of transactions which have taken place and frequently checked by multiple nodes on the network. New transactions are verified by multiple nodes and cryptographically signed.

No central control – Because the blockchain is distributed, there is no single point of failure and no third party controls it – if it were centralised, it could potentially be open to hacking, espionage, bribery or malicious acts by a disgruntled employee, or manipulation by banks or government. The open, distributed nature of crypto protects against all these things. Bitcoin is open source, which means everybody has access to the code and workings of the software. Members of the community get to propose changes and improvements, and if a consensus is reached, those improvements can be added to the code. Bitcoin was created at a time when the world was in financial crisis, governments were printing money at will (quantitative easing), banks in some countries were preventing people from accessing funds in their accounts and some people even had money removed from their account (referred to as a ‘hair-cut’).

Transparency – the blockchain is a permanent public record: every node on the network has access to it, meaning it cannot be manipulated by a third party. Everything happens in the open and decisions are made by consensus. The whole system is built on trust.

Accessibility – Billions of individuals in developing countries have no access to a bank account, even though many of them have some form of internet access. cryptocurrencies essentially allow people who would otherwise have no access to funds to be able to accept and make payments.

Risks:

Price volatility – the value of any asset will fluctuate over time. We are in a period where cryptocurrencies are receiving a huge amount of press attention, new investors and traders are getting involved in crypto every day and the price to convert crypto to your local currency can change quickly.

Cost of mining increasing (difficulty) – as more nodes are added to the mining pool, the probability of earning rewards for mining can decrease. As the combined processing power of the pool increases, the difficulty of mining must increase to ensure a consistent release of Bitcoin (or other crypto) as blocks are added to the blockchain. This means that mining the more popular coins can become less profitable over time.

New cryptos being created – new coins are being created all the time, some will succeed and create value while others will fail and lose all their value. Buying or mining new coins does carry some risk, which is why it is important to research and to not put all your eggs in one basket.

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