Breaking Down Cryptocurrency: Everything You Need to Know
The internet has been buzzing about the rise of cryptocurrency for years. Even with all this talk, the average person often doesn’t understand the nature of bitcoin and how it works. It certainly makes sense why-- much of the material one can find online about crypto is loaded with tech buzzwords and can be difficult to grasp if you don’t know the lingo.
We believe everybody should be able to , easy to understand information about bitcoin. If this sounds like you, you’re in luck. We put together a guide to understanding how cryptocurrency works, how it is used as a medium for exchange, and everything you need to know about how safe bitcoin is in the context of money transfers and remittance.Check out our handy guide below!
Breaking Down Cryptocurrency: Everything You Need to Know
Cryptocurrency doesn’t have to be such a difficult concept. Let’s break down how crypto works in simple terms.
How Crypto Works
When one asks what bitcoin is, the generic answer is usually “Bitcoin is an international and decentralized payment network that operates on a peer-to-peer basis.” This isn’t exactly the easiest answer to understand.
Put simply, bitcoin makes it possible for individuals to send and receive money online. It’s similar to traditional currencies, but with a few key differences.
Bitcoin is essentially a list of people’s names and bank account balances. This is also what today’s banking systems are as well. One’s bank isn’t really holding that money in a bank vault-- it’s simply a number on a database. Bitcoin is the same, but the difference is that everyone has access to the bitcoin list. The bank doesn’t just have this information-- everyone that has a copy of the list can see this information as well.
Sharing this list is beneficial in a number of ways. Let’s consider a traditional bank. If Person 1 wants to send Person 2 money, they would tell their bank and the bank would rearrange the numbers on their list to ensure that money is transferred from Person 1’s account to Person B’s account. With Bitcoin, the bank isn’t needed. It’s simply a list that both Person 1 and Person 2 have access to. Person 1 will simply subtract the number from their balance and add it to Person 2’s name. There’s no middleman, the process is very fast, and it costs pennies to transfer.
Anybody can change the list and send their edit toe others to let them know they’ve made a transaction. Of course, this isn’t quite as simply as it seems. Keep in mind these key features of bitcoin and cryptocurrency:
● Nobody can steal money from you because you can only subtract bitcoin from yourself. However, you can add bitcoin to any person’s balance. You will need to prove you are the owner of your list before engaging in any transfers through a single password. Part of what makes bitcoin so secure is that there is no way for someone to access this password (unless you tell someone or leave that information open and available)and it cannot be changed-- so make sure you remember it.
● You can access the bitcoin list easily. It’s essentially just a type of computer program. You’ll need to download the Bitcoin software to become part of the network. Once you’ve joined, the network will automatically note that you’ve made an account and will send you a copy of the global transaction list. This might sound a bit chaotic, as this list is constantly being updated. Blockchain and mining prevent the issue of double-spending.
● Some may wonder why removing the“middleman” or banks is a good idea. After all, aren’t banks helpful? They store your money, help you pay for your transactions, etc. However, not everyone has access to a bank. About 1.7 billion people globally cannot access modern bank services, which makes it incredibly hard to invest and grow wealth efficiently. With bitcoin, all you need is a phone or computer and access to the internet to store and transfer money. As cryptocurrency grows in popularity and technology is evolving, it’s becoming easier to take control of one’s finances.
● Just as well, having a middleman facilitates power concentration. If one entity (the bank) behaves in an unethical manner, the entire system is compromised. Think of how many times int he last year alone the news has been full of instances of banks not updating their security, leaving many with stolen funds and compromised information.Just as well, banks can charge extremely predatory fees. Bitcoin is not controlled by any one group-- it is instead controlled by everyone collectively that uses it.
● Bitcoin and other crypto currencies are held together by the blockchain. Blockchain is a database that stores data in blocks that are chained together. New data that is entered creates a new block. This block is filled with data and is chained to the next block, creating the chronological list that we use.
The Value of Bitcoin
With all of this information on hand, you might be wondering why anyone would be particularly invested in having bitcoin. To put it simply, bitcoin is changing the way we view money.
We want to use traditional money because it is the currency that most people use, you can buy whatever you please with it, and we can expect it to maintain its value.
With bitcoin, there is a limited supply. It’s rarer than traditional currency and it cannot be created. This, in turn, allows one to own a scarce currency and eliminates the need to gather more money to pay higher amounts for things that were once cheaper. Bitcoin is just a list with names and balances that could battle inflation, put more power into the hands of those that use it, and offers the kind of security that many people want.
Using Crypto to Send Currency to Another Party
The remittance industry involves the processes and organizations that make it possible for people to send money from one country to another. Many immigrants around the world use remittance technology to send money they’ve earned in one country to their families in another.Unfortunately, the remittance industry is not exactly an optimal one. There are many entities involved in single money transfer, such as banks, financial institutions, and currency converters. This results in two major issues: It can take a long time for money to make it to point B, and the cost of these transfers can be very high.
Crypto could not only improve this process, but also has the potential to completely disrupt the remittance industry. Because the nature of blockchain is lightning fast, individuals could receive funds from another country within mere seconds, rather than multiple business days.Blockchain is also very inexpensive to use, and could thus cut down the fees associated with money transfers. Just as well, crypto could help fund the millions of people around the world who are un bankable or do not have access to bank accounts.
The use cases of cryptocurrency in the remittance sector aren’t based on pure speculation, either. In a research study conducted by Amine Soufaih for the University of Pennsylvania, the tangible use cases of crypto and blockchain-based technology in the international remittance sector were explored.
“Blockchain is disrupting many traditional industries including financial services,” the study reads, “In the case of remittance payments, blockchain is seen as a promising technology that can revolutionize the way we send and receive money. Traditional players like Western Union and Moneygram are facing new entrants in this market such as blockchain startups.Through our analysis of the remittance industry and its current competitive landscape, it seems that it is very likely that blockchain will disrupt the space and completely change it in the next few years. Some of blockchain’s benefits in remittances discussed in this paper consist of reduced costs, increased speed, and the possibility to offer remittance services for the unbanked population.”
This isn’t the only research study to compile evidence of blockchain’s potential disruption power in the remittance world. A research study conducted by Friederike Rühmann, Sai Aashirvad Konda, PaulHorrocks, and Nina Taka for OECD found that blockchain could significantly reduce the cost of remittance, which has traditionally been quite expensive for both the sending and receiving parties. While blockchain will not make such solutions free, it can reduce the financial burden on senders and receivers inrural areas.
“The mere use of blockchain technology is unlikely to solve the problem of last-mile delivery in
cash,” notes the abstract of the study, ”The extent of financial exclusion particularly in rural areas is likely to be a barrier for cutting down the intermediaries. The potential use of digital identities for KYC facilitation raises questions about possibilities of data misuse thereby deepening the existing political asymmetries. While it is important to recognize the opportunities of stablecoins for remittances, there is also a need to look at some of the risks posed by stablecoins.”
The study does dive into the fact that blockchain technology is still relatively young and immature, and thus projects outlined in the study require further experimentation to determine how safe blockchain is in the remittance industry. This raises the question-- Is cryptocurrency safe enough to implement into the remittance world?
Cryptocurrency is Safer Than You Think
Many non-supporters of bitcoin tend to note the lack of safety when it comes to cryptocurrency. While it’s still in its developing stages and far from perfect, it’s an incredibly secure type of currency when compared to the traditional dollar.
The nature of blockchain technology makes bitcoin and other types of cryptocurrency more secure by nature than, say, traditional digital transactions like money transfers and online banking. However, it’s still important to understand that these services use top of the line technology to encrypt funds digitally. Many banks also offer fraud protection, so if one’s account is hacked, the bank will be able to return a certain amount of the missing funds. Typically, many consumer-oriented personal banks insure their customers’ funds for up to a million dollars.
Still, the technology that is used to ensure that cryptocurrency investments are secure and safe are also quite effective. Some people who invested in cryptocurrency back at its onset have lost their passwords and have no way to correctly reset it. This, naturally, wouldn’t happen with a regular financial account or bank service, which almost always offers various ways to reset one’s password easily. To put it simply, crypto is as secure as it gets.
It’s worth considering the negative side of crypto in terms of safety. Just because cryptocurrency is secure doesn’t necessarily mean that it is safe. Market volatility and no federal regulation are the two main pain points of crypto, depending on what you see as a negative.
Where all banks are FDIC insured for up to$250,000 per account, bitcoin isn’t insured at all. There is no federal regulation or control over crypto, so if something bad happens to the company that is currently holding your crypto investments, you’ll simply lose your money with no other options. Still, many believe that this is still a positive, as federal agencies cannot control crypto or the money people invest.
Market volatility, however, is a bit of a problem. Like any stock or investment, crypto fluctuates quite a bit. With traditional banks, your money fluctuates slightly based on inflation, so it’s very unlikely you’d lose money overnight. With crypto, the market is volatile and a single coin can fluctuate 20% or even more. To put it simply, cryptocurrency can be a bit more difficult to predict that a regular, traditional investment.
Regardless, crypto is still developing and growing. We can expect it to become an even more secure solution in the coming years, especially in the context of remittance and international money transfers.