Digital currencies or cryptocurrencies are an emerging class of assets that utilize blockchain and distributed ledger technology, the most recognizable being Bitcoin. Since their inception just over a decade ago, blockchain and cryptocurrencies have grown from an intriguing experiment to an integral part of business and enterprise going forward. These networks enable new opportunities for individuals and organizations around the globe.

Some Considerations

While there might be more learning curves compared to traditional assets and markets, cryptocurrencies don’t have to be intimidating, though the basics might be easier for those with experience in other markets or an understanding of computers. In a lot of ways, many cryptocurrencies can resemble both a store of value (gold) combined with a network itself (online service). For example, the Bitcoin protocol is a distributed computer network and the asset $BTC or ‘Bitcoins’ themselves are transacted through this network.

The Good

Cryptocurrencies offer a number of unique advantages compared to what is now considered ‘legacy finance’. Like other decentralized networks such as cloud computing and torrent services, cryptocurrency networks exist around the world mostly as permissionless systems that anyone with an internet connection can access. This gives users the opportunity to transact and exchange without borders, quickly and often with lower costs compared to traditional finance or remittance services. Many of these networks have continuous uptime and enormous computing power behind them, meaning that they are nearly impossible to take offline and some of the protocols themselves are among the most secure networks on Earth.

The Bad

Some potential issues regarding the decentralized nature of cryptocurrencies are the generally regarding one-way spending or irreversible transactions, this is a design feature and not a bug. This is meant to give users sovereign control over their finances, so that in theory no one should be able to take or seize assets. The best comparison would be digital bearer bonds, meaning the holder or custodian of these particular assets is the legal or functional owner. Some complications from this fintech model that users must be aware of are;

  1. A mistake in transacting cannot be reversed, sending funds to the wrong wallet or address could make them irretrievable
  2. Losing one’s password, private keys, or access to the device, software or account that their assets are held on could mean permanently losing access to those funds
  3. Insufficient security habits (sharing your computer, weak or compromised passwords/accounts, malicious hackers, etc.) may result in exploits where funds can be stolen, with little or no chance of third-party intervention or recovering funds

While the networks themselves are very secure, most exploits are the result of poor security habits or design flaws in programs that exist on top of the protocols and networks themselves.

Where traditional finance utilizes brokerages and custodial services for traditional markets, cryptocurrencies have what are called centralized exchanges that resemble brokers. These exchanges provide users with accounts and wallets for different currencies and emulate traditional markets by creating trading pairs between different assets and providing liquidity. While cryptocurrency exchanges are a convenient place to acquire and transact digital assets, it is not recommended to leave large amounts on them for long periods unless they are actively being traded. Should anything happen to the exchange itself (smaller exchanges have gone out of business or scammed users), even large exchanges can be points of failure and tempting targets for hackers. If a user’s account on an exchange is compromised many exchanges do not reimburse or insure individual account theft, only internal exchange holdings are insured generally.

The Ugly

Lastly, it should be noted that while cryptocurrencies are young, there is a lack of regulatory oversight throughout most of the space. For better or worse, US citizens face the most regulatory barriers in terms of which exchanges they can use and what assets they are allowed to trade, though the rest of the world has far less restrictions. Many describe digital assets as the wild west even in 2021, and it is far too easy for almost anyone to create a new token or asset, apply clever marketing, and deceive a new wave of uninformed investors. Many of the larger market cap currencies are there for a reason, as innovative and legitimate projects, but there are far too many projects that are started in bad faith only to enrich the creators. Due diligence has never been more necessary, and finding reliable information is less straightforward when compared to equities and traditional investments.

In closing

Blockchain and cryptocurrencies have enormous potential, not just in terms of making great returns with risk/reward, but also the implications they hold beyond economics and finance for society. Though there are numerous risks, it’s important to understand how significant the rewards can be without losing sight of proper security habits, account management, and doing your own research. Every crypto investor and enthusiast owes it to themselves to understand how the underlying assets and ecosystem works, and though the learning curve may be steeper than normal, the upside is certainly worth the effort.