Cryptocurrency : definition
Cryptocurrency is a virtual currency alternative to traditional money, it takes its name from the combination of two terms “cryptography” and “currency”, also called crypto-asset, crypcryptographic currency or even cyber-currency.
Moreover, the term cryptocurrency is not unanimous, for this reason two schools of thought present themselves:
- The first current considers cryptocurrency as a currency;
- The second current rejects the term cryptocurrency and uses the term crypto-asset instead, on the grounds that cryptocurrency does not fulfill the functions of a currency.
Through this distinction we can cite two kinds of definitions:
- Crypto-assets are virtual digital assets that rely on blockchain technology through a decentralized ledger and encrypted computer protocol. For this trend, the crypto-asset is not a currency, its value is determined solely by supply and demand.
- A cryptocurrency is an electronic, or virtual, currency, because it has nophysical form. It is a currency issued peer-to-peer, exchanged on a decentralized computer system, or blockchain, it allows the purchase of goods or services without using a bank, and independently of any monetary policy. It is secured by cryptography rather than by the authority of a central bank.
What is cryptography
It is a method of protecting information that passes through codes to ensure that it is notused only by people who have the decryption code.
This can be a password, a fingerprint, or any other element that allows identification.
In general, cryptocurrency is defined by three characteristics:
- It is completely virtual and not issued by any bank or institution;
- Its value is assured by its encryption;
- It uses blockchain (an internet-based ledger system where transactions are recorded) and a decentralized peer-to-peer system (a group of computers that store and share files).
Cryptocurrency units are created online through a computer process called “mining.”
What is mining
Mining is a surveillance process, by which Internet users (miners) verify transactions and ensure network security through the use of specialized computer hardware. It should be noted that their computers are put in competition and the one who wins the transaction validation receives new bitcoins in exchange.
Disadvantages of cryptocurrencies
Despite the many advantages that characterize them, cryptocurrencies suffer from certain limitations, such as:
Volatility
Unlike gold and silver, which are characterized by their relatively stable value, cryptocurrencies are volatile, no one truly knows their value. Speculation and enthusiasm can lead to significant price fluctuations.
Vulnerability
Cryptocurrency has the particularity of not being linked to any central authority, it escapes the control of States and banks, and no authority ensures the security of electronic safes, meaning that holders have no recourse in the event of theft by hackers.
Regulation
Cryptocurrency regulation is still evolving. Different countries and jurisdictions are implementing varying regulations. This uncertainty can be challenging for investors and businesses operating in the cryptocurrency space, as they navigate compliance requirements and potential legal risks.
Crime
Cryptocurrencies represent a new means of money laundering and fraud, and a tool for financing crime due to their anonymous nature and opaque operation. This creates a new niche for cybercrime.
Complexity
The cryptocurrency industry is quite complicated, both in terms of the jargon used and how it works, requiring a lot of time to understand its universe. This situation will be much more complicated for those who are not part of the digital generation, who find the concepts of cryptocurrency and blockchain very abstract. This complexity makes investing in this niche very risky.
Bitcoin: the most widely used cryptocurrency
There are thousands of cryptocurrencies with different uses, but the most well-known and famous of them is the Bitcoin. Introduced in 2009, it alone represents between 40% and 70% of the total capitalization of virtual currencies. Moreover, a bitcoin has gone, in just a few years, from a value of 30 cents to nearly 60,000 dollars.
It should be noted that new units are regularly created, but at a fixed and decreasing production rate year after year.
Unlike traditional currency, the number of bitcoins in circulation is limited by their creation protocol, which stipulates that the number of units produced will stop at 21 million in 2140.
As a reminder, bitcoin, like the various cryptocurrencies, is traded exclusively online and is based on a computer protocol of encrypted and decentralized transactions, called blockchain.
What is a blockchain
Blockchain ledger is a record of transactions that can be viewed online, also known as a general ledger. It stores information in a way that makes it harder to alter or transform. When buying, selling, or exchanging crypto assets, each transaction appears on a blockchain.
The growing list of records, called blocks, are linked together. Computer networks independently verify each transaction, time-stamp it, and add it to a growing chain of data. This process makes transactions irreversible, and the information recorded in the blockchain cannot be altered or deleted.
Risks inherent in the use of cryptocurrencies
There are several risks associated with using cryptocurrency :
- Being a victim of hacking, fraud and scams;
- Cryptocurrencies are unstable and their value is extremely unpredictable and very sensitive to macroeconomic developments;
- Lack of regulation and protection;
- The deposit is not protected, no guarantee isoffered by central banks;
- Having difficulty using your crypto assets in the event of a technical problem;
- Loss of access to crypto assets if the private key is forgotten;
- Loss of cryptocurrencies in case of deception in the public address of the payment recipient, because the transactions are not reversible.
Indeed, transactions made with cryptocurrencies are not reversible once verified and confirmed on the blockchain.
This means that it would be impossible to:
- Cancel payment for something not received when it is already paid for;
- Recover your crypto assets unless the seller agrees to return them;
- Stop or cancel a payment.
Conclusion
In accounting terms, cryptocurrencies are listed on corporate balance sheets as intangible assets with an indefinite life, which does not allow companies, during periods of cryptocurrency depreciation, to record these declines as “losses”, which has prompted the Financial Accounting Standards Board (FASB) to propose changes that would better reflect the economics of crypto assets held by companies.