Unlike fiat currency, cryptocurrencies do not exist in the real world, neither have a physical form nor a bank or entity printing them. The validation of all financial operations using cryptocurrencies happens in the nodes of a blockchain network, in which users validate and confirm the transactions as legitimate.
However, there’s much more to observe, so keep reading this article to find out about the real nature of cryptocurrencies.
Understanding the Nature of Cryptocurrencies – The Essential Aspects
Nowadays, you can buy a wide array of different digital assets in the comfort of your home. You can buy XRP, Bitcoin, Ethereum, EOS, Litecoin, and hundreds of other coins/tokens and store them in a crypto wallet.
Although blockchains may differ in terms of mechanisms and validation systems (e.g., PoW, PoS, interoperability, etc.), all cryptocurrencies have common principles that make them similar in nature.
Unlike regular money, there is no government entity nor regulatory body regulating cryptocurrencies. However, it is worth noting that investors who hold larger amounts of a specific coin/token (a.k.a, whales) can cause price fluctuations depending on their actions.
Speaking of price fluctuation, it is one of the very characteristics of digital assets. Precisely due to their flexibility, cryptocurrencies do not have the same limits as regular stocks, bonds, and other traditional assets.
For instance, brokerages and order book companies in the stock market cannot use privileged information to deliberately cause price fluctuations to a certain asset. In the crypto world, this type of prohibition does not exist.
Hence, the prices of digital assets can suffer massive impacts depending on a wide array of events, such as the expectation for a set of regulations, the tweets of a billionaire CEO, a massive influx of capital from industry-leading companies, etc.
The crypto wallet functions as the storage unit of cryptocurrencies. There are several types of crypto wallets, divided into two main categories – hot and cold wallets. Hot wallets are those that need a connection with the internet, while cold wallets are offline wallets.
The security of a wallet is based solely and exclusively on its private keys, which are similar to codes that protect transactions. Like other types of virtual data, if your wallet is hacked and/or stolen, it is hard to recover the money and find the culprit.
A coin/token is not tied to a specific person but is tied to a cryptographic key. As crypto transactions do not need any sort of middlemen or intermediaries, it is easier to preserve user anonymity.
In a crypto transaction, none of the users are identified during the process, which is a dual reality. While it is good due to the preservation of anonymity, it’s hard to know who the other party is if things do not go as expected.
Variations in Legality Across the World
Not all countries consider cryptocurrencies legal. In most countries, their status is still undefined, as governments and other traditional entities do not know how to deal with the innovative nature of digital assets.
For example, while Germany officially authorized the use and exchange of cryptocurrencies within their territory, Russia does not prohibit them but considers any other currency other than the Russian Ruble illegal.
Is it Possible to Trust the Cryptocurrency Market? – An Honest Analysis
The price fluctuations in Bitcoin and other cryptocurrencies certainly expose investors to a lot of insecurity, as there is no predictability at a reliable level. For example, most Bitcoins are still concentrated in a few hands, many of which are in China.
Recent news showed how the Chinese government is putting a lot of effort into curbing tax evasion, prohibiting mining cryptocurrencies, and surrounding crypto enthusiasts with trouble.
In this case, as most Bitcoins are still in China, bad news on the other side of the planet could lead not only Bitcoin but the whole crypto industry to plummet in a short period.
While cryptocurrencies promote the idea of banking system independence, it puts them in a world of legal uncertainty. An example of this is the situation with the private company that controls Tether, the most used stablecoin within the industry.
Also, crypto wallets tend to be frequent targets for hackers, meaning the risk of loss can be immeasurable. Hence, all it takes is a little “hardware problem” and your cryptocurrencies can suddenly “cease to exist”.
Undoubtedly, the crypto industry is one of the most profitable segments in the current economic scenario. In this context, the growing popularity of cryptocurrencies demonstrates their potential both as a reserve of value and as substitutes for regular money.
However, nothing in life is perfect – neither are cryptocurrencies. While they are innovative and profitable assets, it is crucial to pay attention to the risks associated with them, especially when it comes to price volatility and storage security.