Here's a quick explainer on Bitcoin and cryptocurrencies, the latest craze of the financial world.
Bitcoin and other cryptocurrencies are taking the financial and economic world by storm. With the current volatility, fluctuation and spike in the value of cryptocurrencies, a lot of investors are starting to take notice, hoping for quick returns. Here’s everything you need to know about Bitcoin and other cryptocurrencies.
A cryptocurrency is a digital currency that isn’t controlled by any regulatory authority. Typically, all fiat currencies (legal tender) like the US dollar or the Indian rupee are controlled by the central bank of the respective country. But in the case of cryptocurrencies, there’s no one who controls the currency. They use a decentralized control mechanism as opposed to a centralized control, used in fiat currencies. The supply of cryptocurrencies is always fixed unlike fiat currencies.
Cryptocurrencies use cryptography to secure themselves. Bitcoin is the first cryptocurrency created in 2009. In addition to bitcoin, there have been countless number of currencies that have been launched across the world. Cryptocurrencies don’t involve a third party to clear a transaction between a buyer and a seller. The entire transaction happens on a peer-to-peer basis. In general, a currency transaction happens when a bank or any other financial intermediary acts as a third party for a fee.
Most people look at cryptocurrencies as assets. But with assets come cash flows. For example, equity, real estate, or for that matter fixed income, have cash flows attached to them. Cryptocurrencies are more like commodities than assets as they do not have any cash flows. They are more like digital gold or commodities.