Hello everyone, this is a homework write up on cryptocurrencies.
WHAT IS THE FUNDAMENTAL DIFFERENCE BETWEEN CRYPTOCURRENCY AND THE CONVECTIONAL FINANCIAL SYSTEM?
In a convectional financial system, the transaction model is centralized. The transactions use a third party or an intermediary let's say a bank. And you must follow the bank's policies if you want the transactions to be completed and this attracts administrative costs that you pay immediately or at the end of the month.
On the other hand, Cryptocurrency is a virtual currency or asset formed digitally and managed digitally and this is decentralized. The transactions do not require intermediaries. Payments take place directly between the sender and the recipient. The transactions are recorded on a system called blockchain. Blockchain technology is the platform used in transactions of cryptocurrency.
WHY IS A DECENTRALIZED SYSTEM NEEDED?
In the convectional financial system, let's take the bank as an example, the bank holds the money of its customers for them. This means that there is a single place of storage and also a single entity in charge, this is centralization. In this, one does not have full control or ownership of his money. If there is anything like an outage or technical issues with the bank as we experienced sometimes in my country, you cannot have access to your money or perform any transaction.
Decentralization on the other hand is the opposite. You don't have a single place of storage and you do not have a single entity in charge. Decentralized systems gives you full access or ownership and control of your own money. There is no downtime. So there is increased efficiency. There is high level of transparency as you can see the balance of each account and transaction history in a completely public ledger. There is no hidden charges unlike in the convectional financial system where a bank may take some hidden charges for a transaction you did through them. Everyone is welcome to join the network in respective of your country, age or background.
WHAT AFFECTS THE VALUE OF CRYPTOCURRENCIES?
There are a lot of factors that can affect cryptocurrencies.
- The acceptance of a cryptocurrency by users can affect the value.
- A high demand for a particular crypto will raise its price. Conversely, a low demand for the currency will lower the price.
- If there is increased demand and reduced supply leading to what we call scarcity, the value of the currency will go up.
- The cost of producing a coin also affects the value. If a currency has a high cost of production, that is much energy and resources are put into its mining, it will affect its value.
- The utility of a cryptocurrency is also a factor. A cryptocurrency is designed to be used within a particular blockchain ecosystem. So, if the demand for the platform services increases, definitely the value of the currency used on the platform will increase.
- Since most of the cryptocurrencies are issued by private blockchained companies, how people perceive the image and efficiency of the company is a factor.
- Another factor is the perceived value of the project of a particular currency. If the projects keeps developing, achieving one bench mark after another, creating lucrative partnerships or maybe launching user friendly softwares, it will become more valuable in the eyes of the market.
- Regulation is a factor too and this varies from one country to another. Most country will follow their own policies. Some policies of a country are stricter on cryptocurrency than others. The more restrictive the regulations are, the more likely the crypto price may fall.
- Updates on the code is another factor. Updates to the code are added to improve the performance of the cryptocurrency. Now, if the update has been announced but the changes do not work, the investors may start losing confidence in the project hence, leading to fall in the value.
WHY CAN'T EVERYONE BE A MINER?
There are some good reasons why everyone cannot be a miner.
- The equipments and power you need as a miner are expensive. You need a dedicated computer, a specialized hardware and these are very expensive. You also need electricity and like in my own country were electricity supply is very poor, even with a generator plant, you cannot still have constant power supply.
- The process of mining requires expertise because it involves solving complex mathematical calculations to add blocks to the blockchain system.
- There is too much risk. You can spend heavily in mining and still will not get anything.
WHY CAN CRYPTOCURRENCY TRANSACTIONS BE CALLED MORE TRANSPARENT?
Blockchain technology which is the platform where cryptocurrency run is a digital ledger. It is a public record of digital transactions. Anyone can view all the transactions done at will. Unlike in convectional financial system where a bank for example can anonymously do anything she wanted with the funds of her account holders, you can't do that in blockchain, because everything is open. If the bank is using blockchain, Blockchain will force the bank to act within the light of the day, as every of her decisions and practices are clearly seen by everyone.
EXPLAIN HOW THE DEVELOPMENT OF CRYPTOCURRENCY IS DOING IN YOUR COUNTRY?
In my country Nigeria, the Central Bank of Nigeria (CBN) issued a circular earlier in February this year, ordering all banks and other regulated financial institutions to stop their dealings with any cryptocurrency exchanges and accounts dealing in digital currencies. The spokes person said that cryptocurrencies are issued by unregulated and unlicensed entities and as such, using them is against the existing law as they are not legal tender.
My country's Central bank did not place any restrictions on cryptocurrency in general and is not discouraging people from trading them but has banned transactions on cryptocurrency in the regulated financial institutions. So, the local cryptocurrency community has resorted and migrated to peer to peer platforms.
It is true that cryptocurrency market appears to continue to grow, one still needs to equip himself with much knowledge before investing in it. A person also need to acquire the relevant skills to enable him invest.
I am grateful to Professor @levycore