Crypto Academy Week 14 – Homework Post for @levycore | Learn About Cryptocurrency
Many countries around the world are moving towards a digital economy. Today, the term “cashless policy” is often used to justify the purpose of this advancement. In professor @levycore’s lecture for the week, we looked into the role that cryptocurrencies play in all of this. In this article, we’d answer some relevant questions based on the professor’s task questions.
To begin, let’s see the difference between cryptocurrencies and the conventional financial system.
What is the fundamental difference between Cryptocurrency and the conventional financial system?
It is no surprise that people are getting to know about cryptocurrencies in recent weeks. While the individuals interested in cryptocurrencies are few compared to greater number that are actively using the conventional financial system. I would be amazed if there is anyone on earth that have a smartphone and have not yet heard the terms “crypto”and “blockchain.”
Currency
While cryptocurrencies are made of tokens and coins, on the other hand Fiat currencies are used in the conventional financial system. The tokens and coins are issued by projects based on distributed ledger technology, while the fiat currencies are issued by government of the respective countries.
While cryptocurrencies uses encryption to secure transactions, the other conventional currencies are not encrypted. While you can use both type of currencies for transactions, cryptocurrencies are easily trackable.
The standard for most fiat currencies is the US Dollars that is issued by the United States government. On the other hand, Bitcoin is the standard for all cryptocurrencies. It tends to affect the prices of other altcoins during the bull and bear markets. The crypto, Bitcoin m, was founded by an anonymous developer that left the the popular alias Satoshi Nakamoto as his name.
Cryptocurrencies vs Conventional Financial Systems
Cryptocurrency | Conventional financial system | |
---|---|---|
Currency | Coins and Tokens; Bitcoin, Ethereum, Steem | Fiat currencies; US Dollar, British Pounds |
Issued by | Independent users | Country’s government |
Supply | Limited supply (total supply) | No limits |
Storage | Digital, web and hard wallets | Banks |
Security | More secured | Secured |
Transaction speed | Much faster as no intermediaries | Intermediaries slow down transaction speed |
Centralization | Decentralized | Centralized |
Transparency | More transparent as it uses Distributed Ledger Technology | Less transparent |
Supply
Most traditional financial system utilise an infinite supply of currencies. This is because they can simply mint new currencies in order to pay debts. And as a result, the introduction of new notes can lead to inflation. Whereas, majority of cryptocurrencies have a defined supply. Hence, when you check a crypto data aggregator website like Coingecko, you’d most likely notice the total supply of a particular crypto. This is a very big difference in comparison with fiat currencies that are limitless.
Storage
While fiat currencies are mostly stored in banks, cryptocurrencies can be stored in digital wallets, web wallets and hardware wallets. An example of a digital wallet for crypto is Trustwallet and Safepal wallet, while the examples for web wallet are Solana based wallets like Sollet and Phantom wallet. And Trevor wallet is popular example for hardware wallet for storing cryptocurrencies.
Security
When it comes it security, both types of currencies are secured. But generally, cryptocurrencies are more secured because the distributed ledger technology is used, unlike in fiat currencies that are not store in an encrypted ledger. Since I’ve been in crypto, I’ve not experienced any form of hacking. In the financial systems, we often hear of system upgrades in order for them to keep up-to-date with security standards.
Transaction speed
As regards to transaction speeds, it’s usually faster to send a crypto than to send fiat currencies from one country to another in a different continent. Every second there’s a transaction on hundreds of various blockchains. There are no workers that have to manually confirm transactions as it is done in wire transfers. With the elimination of such intermediaries, sending cryptocurrencies is much faster.
Centralization
We are living in an era were people are beginning to prefer decentralisation over centralisation. While cryptocurrencies are generally decentralised, the fiat currencies managed by financial systems are centralized. I love decentralisation due to the non-existence of a central authority that could make shocking decisions.
Transparency
With the aid of blockchain technology, cryptocurrencies transactions (blocks) on the network can be verified by anyone interested. On the other hand, in traditional finance only the sender and receiver can see transactions. So when a receiver does not receive the transaction, he or she cannot easily verify the transaction without involving a third party (the bank) to come to rescue. In that sense, the transparency of cryptocurrencies help to save time.
Why is a decentralized system needed?
Think about it this way: If you found a safe and easy way to do something, would you still want to follow the difficult and complicated way? Well, to simply put more people are getting to know about decentralised systems. And as a result, they are much more interested in using platforms that do not have a central authority.
While in a centralized system, the central authority can simply freeze or seize funds at will, in a decentralised system that is not possible. Users are getting to know that when blockchain technology is employed in decentralised systems, there is a better security as a result.
A decentralised system also take lesser takes fee, unlike in a centralized system that the authority would want some profits. And if the central authority gets greedy, they can simply increase the fees that are charged at the detriment of the end users. Such fees cannot be compared to miners fees that are far less and that help to sustain the network.
Would you prefer a system that a human would have to confirm your transfers? At times, it takes up to a week for international transfers to get to the end user. In decentralised systems using blockchain technology, users can receive currencies minutes and at times even within seconds.
In general, the world is getting to know the relevance of blockchain in this day and age. Everyone wants the safety of funds, and that is what is offered in a decentralised system that is on a blockchain network.
What affects the value of cryptocurrencies?
From basic economics, we can say that the price of tokens is determined by the forces of demand and supply. Well, let’s now go in-depth.
Supply
While the supply of cryptocurrencies is limited, the value is dependent on the circulating and total supply. When the circulating supply increases without an increase in the demand, there’s is usually a drop in value. For example, when a token worth $1.5 with a circulating supply is listed on a big exchange, the demand for the token increases and as result there will be an exponential increase in price.
Speculations
Speculations also have a big impact on the value of cryptocurrencies. Can you remember what happened some days ago when Elon Musk said Tesla has stopped accepting BTC payments? Or do you remember when the news came out that Vitalik Buterin had donated all the SHIB tokens that were gifted to him? Did you notice the impact it had on all other shitcoins?
Last week, when it was announced that the Department of Justice and IRS are investigating Binance, it was not a good day for cryptocurrencies generally. There was a sharp drop in price as result. Just the title alone resulted in a market crash.
Regulations
This could be when countries or states take a stand with regards to cryptocurrencies. It could either be positive or negative. For example it could be ban or even increment in the capital gain tax that crypto traders are to file. Whether good or bad, regulations tend tend affect the price of token.
Today, there’s also more FUD regarding the banning of Bitcoin miners in China. Previously, it was reported that Inner Mangolia in China powered about 8% of Bitcoin mining. Hence, the announcement on the banning of mining did what every FUD does - resulted in a drop in price of BTC.
Human Activities
Similar to all form of trading, when traders are scared for their lives, there’s also likely to be a drop in value of currencies. If we can remember last year during the pandemic, there was a drop in cryptocurrencies, stocks and forex. This what because people literally crashed the market because they did not know what the next day holds.
Announcements
When there’s an announcement that a VC is adding certain cryptocurrencies to their portfolio, the announcement itself drives the value upwards as traders act on their sentiments in buying the cryptos. This has been common in recent weeks. Many traders attribute the rise of Bitcoin price that rode up to 60,000 to the big houses that got involved with the crypto.
Why can't everyone be a miner?
This is because not everyone have the technical ability and the electricity that is needed for mining. For example, while other blockchain have miners, the steem blockachin have witnesses. And the cost of running their servers is not an easy task.
The type of mining is dependent on the blockchain consensus algorithms that is used on the blockchain network. It differs from Proof of Work down to the Delegated Proof of Work that is employed by the Steem network.
In the Proof of Work system, miners are required to lock up some funds in the system for them to be actively contributing to the blockchain network. Whereas on the Proof of Work system, high computing power and device is required for mining.
Why can cryptocurrency transactions be called more transparent?
It can be said that cryptocurrency transactions are more transaction are more transparent than the traditional financial systems because it is easily verifiable. The blockchain technology powers the entire network, and the transactions can be verified by anyone. You do not even have to open an account to certify transactions. For example, to confirm transactions on the Steem blockchain, you do not even have to be logged into a steem account. Visistors can also verify transactions.
A transfer between to addresses on the blockchain distributed ledger can be seen by all. That makes it immutable and easily verifiable. There are blockchain explorers that are designed solely for this purpose. On the other hand, in the financial systems, even if you have an account with a bank, it doesn’t make it possible for you to see transactions on another user’s account.
If you like transparency, then cryptocurrencies are preferable because everything is verifiable. And it is even possible for transactions to be verified by a third party.
Explain how the development of cryptocurrency in your country?
I’m currently in Cyprus, and crypto is hot over here. Although cryptocurrencies is not properly regulated in the country, late last year the Cyprus Securities and Exchange Commission started working on ways that they could regulate cryptocurrencies. While noticing the impacts in other economies around the world, the government seems to be interested in promoting the growth in the country.
Since the cooperate tax rate over here is far lower compared to other nations, it is likely that if capital gain tax is fully implemented it would also be minimal. Sometimes people travel over here to work remotely because of the low tax the government demands from us.
Here, we mostly use Binance, Localbitcoins and Bitpanda for buying and selling cryptocurrencies. Binance has been very helpful because I can trade to to euro which I can use for my day to day needs. I can also trade with Binance to my PayPal account if I want to purchase something from the United States.
Generally, the people over heard are receptive to Bitcoin. We even have a master’s degree course at the University of Nicosia that teaches blockchain technology and digital currencies. About 6 to 8 years, the university also accepted Bitcoin for school fee payment.
Conclusion
Every year, the news about cryptocurrencies keeps spreading to every corner of the world. I would be really surprised to see someone that haven’t heard about crypto over here. It is quite interesting that people are beginning to see the advantages that cryptocurrencies have over fiat currencies. And also seeing how it combines decentralisation with transparency as a result of the blockchain technology that powers the ledger.
I want to use this opportunity to thank professor @levycore for this week’s assignment. We would continue spreading the news about this awesome currency and the technology the powers it.
Hi @eloghosa, Thanks for submitting your homework
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