The Advantages and Disadvantages of Cryptocurrency in 2023

Cryptocurrency, a type of digital or virtual currency, possesses cryptographic technologies that ensure secure online transactions without the need for intermediaries.

Oct 16, 2023 - 20:30 Updated: Oct 16, 2023 - 20:32

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The Advantages and Disadvantages of Cryptocurrency in 2023

Cryptocurrency, a type of digital or virtual currency, possesses cryptographic technologies that ensure secure online transactions without the need for intermediaries.

A cryptocurrency is a type of digital or virtual currency that uses cryptographic techniques to protect it. It allows for secure online transactions without intermediaries. The term "crypto" pertains to the security measures employed in these transactions, such as encryption algorithms and cryptographic techniques like hashing functions and public-private key pairs. However, it's crucial to note that the Indian government does not support cryptocurrencies.

While the Indian government is exploring digital currencies of its own creation, it currently rejects established cryptocurrencies.

So, what exactly is cryptocurrency?

Cryptocurrencies are immune to government interference due to their lack of central authority. Many cryptocurrencies operate on decentralised networks based on blockchain technology. A cryptocurrency functions as a digital currency within a vast network of computers. Its decentralised design ensures quick and cost-effective money transfers that are resistant to single points of failure. However, there are barriers to widespread cryptocurrency acceptance, including price volatility, potential illicit usage, high energy consumption for mining coins, and the absence of a governmental guarantee or permission.

Cryptocurrencies act as a means of storing and exchanging value using blockchain technology—a public ledger system that records and tracks network transactions. A blockchain consists of blocks containing transaction data joined together in an immutable chain that cannot be altered or erased. Nodes within the network play various roles—from storing data to verifying transactions—ensuring the database's integrity without relying on a single point of failure.

Now let's explore the benefits of using cryptocurrency:

1. Inflation Defence:

Cryptocurrency, such as Bitcoin, is seen as a defence against inflation since its supply is strictly limited. With a finite total quantity of coins, the value of cryptocurrencies like Bitcoin can increase when traditional currencies undergo inflation.

2. Transactional Speed:

Cryptocurrency transactions can be completed within minutes, offering a quicker alternative to traditional banking systems that often take days or even weeks to finalise transfers.

3. Low Transaction Costs:

Using cryptocurrency eliminates the need for third-party verification services like VISA, resulting in minimal or zero transaction fees for global cash flows.

4. Decentralisation:

Cryptocurrencies challenge currency monopolies and free money from government control. Without any central authority determining their value or flow, cryptocurrencies provide a secure and independent form of digital money.

5. Portfolio Diversity:

Investing in cryptocurrencies adds diversity to investment portfolios due to their market independence from conventional assets like stocks and bonds. Combining assets with low correlation helps achieve more stable returns.

6. Accessibility:

Investing in cryptocurrencies only requires a computer or smartphone with an internet connection. Opening a bitcoin wallet does not require identity checks or a credit history, making it faster and simpler than traditional banking processes.

7. Security:

Cryptocurrency transactions are secured through private keys and blockchain technology, ensuring that only those with access to the private key can make changes. The distributed network of computers verifies transactions, safeguarding them against tampering.

8. Transparency:

Blockchains provide open and transparent monitoring of money transfers, reducing corruption risks associated with centralised systems.

9. Privacy:

Cryptocurrency transactions maintain privacy as they do not require third-party interactions and contain no personal information about the user. Some cryptocurrencies focus on enhancing user privacy further.

10. Quick Currency Conversion:

Cryptocurrency exchanges and wallets allow investors to trade various cryptocurrencies and convert currencies with minimal transaction fees, making currency conversion swift and efficient.

Despite these advantages, it's crucial to consider the drawbacks of cryptocurrency:

1. Lack of anonymity:

Cryptocurrency transactions may leave a digital trail, making them pseudonymous rather than completely anonymous, potentially enabling government intervention.

2. 51% Attacks:

There is a risk of a 51% attack on blockchains, where one or a group of miners gain control over more than 50% of the network's mining hash rate. This can lead to various malicious actions within the network.

3. High energy consumption:

Most cryptocurrencies rely on energy-intensive proof-of-work consensus mechanisms, which contribute to excessive electricity usage and environmental concerns.

4. Limited Transaction Regulations:

Cryptocurrencies lack comprehensive transaction regulations, leading to challenges in resolving issues and establishing refund or cancellation policies.

Regarding the legality of cryptocurrencies in India:

India does not have a centralised authority regulating or issuing cryptocurrencies as payment methods. Consequently, dealing with cryptocurrencies involves risks, as there are no specific rules governing their use. While cryptocurrency is not explicitly prohibited in India, recent tax measures have sparked debates about its legal status.

The Indian Finance Minister has imposed taxes on digital assets, raising questions about the legality of cryptocurrencies. Although bitcoin remained unregulated in India until 2022, the government introduced taxes on cryptocurrency profits and implemented a tax deducted at source (TDS) mechanism. However, an official memorandum from the Government of India is still waited for full recognition and legalisation of cryptocurrencies.

Moreover, cryptocurrency taxation in India presents its own complexities:

Cryptocurrency transactions are subject to income tax and goods and services tax (GST). Investors must maintain detailed records of their gains and losses when dealing with virtual assets. A 30% tax applies to earnings from transferring digital assets, while TDS is levied if the buyer's payment exceeds the threshold limit. Losses from virtual asset investments cannot be offset against other income.

In conclusion:

Cryptocurrencies can be purchased through cryptocurrency exchanges in India; however, they are not widely used for retail transactions within the country. While there are risks associated with cryptocurrency investments, their benefits cannot be ignored. With secure and quick transactions, cryptocurrencies offer advantages that traditional banking systems may lack. It is essential for crypto investors to be fully aware of the risks involved before making any investment decisions.

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