What is a cryptocurrency?
In order to better understand what the concept of cryptocurrency corresponds to, it is essential to specify what a currency is.
Basically, a currency is any instrument that members of a community agree to use as a unit of account (to set prices), as a medium of exchange (to buy goods and services) and as a store of value ( to build up savings).
Over time, the nature of money has evolved considerably, from commodity money (salt, cowries, pearls) to virtual money (cryptocurrencies, video game money, etc.), passing through fiat money ( coins and notes) and scriptural money (cheques, etc.).
These different changes in the currency are justified by the fact that the ways in which society operates evolve and thus meet the new expectations of consumers.
In this sense, cryptocurrencies have emerged to meet the needs of confidentiality and freedom as well as to create a climate of trust in a transactional environment that completely dispenses with central banks (which issue fiat currencies) and commercial banks (creators by excellence of scriptural currencies).
A cryptocurrency (also called crypto-currency or crypto-asset) can therefore be defined as a decentralized virtual currency that allows peer-to-peer exchanges without going through a trusted intermediary (such as a bank, a data transfer network, etc.) money, or a mobile money operator for example).
What are the different types of cryptocurrencies?
Cryptocurrencies each have their own characteristics that are aimed at a certain use. Thus, we can distinguish :
- coins: these are crypto-currencies that have their own blockchain network. They can be used as a means of payment to send money, pay transaction fees, pay for hosting applications on the blockchain, etc. Examples include Bitcoin (BTC), Ether (ETH) and Tezos (XTZ).
- Tokens: these are crypto-assets that evolve on existing blockchains. They are created to develop an economy around a product or service or to provide additional functionality that brings the virtual user experience closer to those consumables present in the real world (stocks, bonds, trading cards, health credits, etc.).
Crypto-currencies can also be distinguished according to whether they are volatile or non-volatile. Those whose price is stable are called stablecoins. These are crypto-currencies whose price is backed by a fiat currency (US dollar, euro, CFA franc, etc.). They combine the stability of fiat currencies with the advantages of crypto-currencies.
What are the benefits of cryptocurrencies?
As mentioned above, crypto-currencies can be used as both a currency and an investment tool, and for each of these functions, they have advantages.
- Low transaction costs: With crypto-currencies, there is no need for a middleman to exchange money. Transactions are processed by computers at minimal costs compared to those imposed by banks or money transfer networks.
- Fast exchanges: Crypto-assets allow you to pay and get paid almost instantly.
- Freedom of exchange: here, there is no limit on the amount to be transferred or withdrawn. Moreover, you can transfer money to whoever, wherever and whenever you want without having to justify it.
- Profitability: crypto-currencies are known for the instability of their prices. Thus, the value of an asset can increase by 2 or even 10 times in a relatively short time, allowing its holder to get richer. However, volatility is a double-edged sword since it is also possible to see the value of a crypto-currency decrease sharply and cause the fall of its holder. This is why it is important to be well informed before investing and to invest only the amount you are willing to lose.
What are the disadvantages of cryptocurrencies?
While they have some strengths, crypto-assets have characteristics that hinder their adoption, including:
- Legal insecurity: the fact that crypto-currencies are not managed by public authorities puts them in an uncertain legal framework. In most countries of the world, their legal status is unclear and the regulation of the sector remains complicated. As a direct result, there is a proliferation of scams that take advantage of the legal vacuum to extort money from the unwary, giving crypto-currencies a bad name.
- The admission limit: cryptos can only be used as an exchange medium by people who accept them as currency. As this community is currently small, it is not possible to do much (buy food, pay bills, ...) with crypto-currencies for the moment.
- Volatility: it hinders the adoption of cryptos in the sense that it is difficult to price goods based on a currency whose price is unstable. For example, a ballpoint pen priced in crypto-currencies may be worth 100 francs at 8am and 50 francs at 8:10am. This does not encourage many merchants to adopt this currency.