Cryptocurrencies: Digital Money Redefining the Financial System

Cryptocurrency is formed by using the words “crypto” and “currency” together. Security in cryptocurrencies is not guaranteed by any bank, etc., as in fiat currencies. It is provided by encryption algorithms, not by the intermediary institution. In summary, crypto money is money that has a digital status and is managed entirely by algorithms. It is thought that cryptocurrencies emerged as a reaction to the existing banking system during the economic crisis in 2008. It has gained a place on the world agenda with the Bitcoin currency, which was first introduced by a person or team named Satoshi Nakamoto. In his work titled "A peer-to-peer electronic cash system", Nakamoto proposes a payment system in which two parties can manage the financial process with an encrypted electronic key instead of intermediaries to ensure security in payment transactions. This structure defends the idea that, unlike the known authoritarian banking and financial institutions, the management should be entirely in the hands of the individuals performing the transaction. Based on this ability of cryptocurrencies, it can be said that it will cause radical changes in the current financial system. However, unmanageability makes these currencies an invaluable opportunity for illegal activities. Some studies argue that illegal activities, especially money laundering, have become easier with cryptocurrencies. Cryptocurrencies are based on a technological infrastructure called Blockchain. In this structure, every transaction is recorded in a block. Once a data block is full, the existing data block is connected to the new data block via code. This is where the chain logic comes from. Blockchain actually works with a virtual ledger logic. Every transaction made here is recorded transparently, but no data pertaining to the person performing the transaction is kept.

Characteristics of Cryptocurrency

Cryptocurrencies have different features than fiat currencies. These features are valid in all processes from the way money is obtained to determining its value in the market.

a) Production Method: Cryptocurrencies are not printed in any physical environment compared to fiat currencies. Software and hardware resources are needed to produce them.

b) Supply and Demand Balance: The supply and demand balance in cryptocurrencies is limited to the investment in the relevant currency. In fiat currency, the central authority can print money when needed.

c) Production Authority: Anyone who wants to own the relevant currency can produce cryptocurrency. The only requirement is to have sufficient software and hardware resources. As for fiat currencies, the authority to produce them belongs to central banks authorized by states.

d) Storage and Portability: Cryptocurrencies are stored online or offline in electronic environments called virtual wallets. They are not physically immovable. Fiat currencies can be stored physically in our pockets or in our accounts at brokerage firms.

e) Value Volatility: The market value of cryptocurrencies changes frequently and at higher rates than fiat currencies. The reason for this may be the lack of state assurance in cryptocurrencies.

Advantages and Disadvantages of Cryptocurrency

Advantages

a) Speed: Thanks to the blockchain infrastructure, transferring money has become very fast.

b) Unmistakable: Unlike fiat currencies, they cannot be counterfeited thanks to their digital structure.

c) Transaction Process and Fee: Information about the person or institution performing the transaction is not recorded. In addition, there is no transaction fee for cryptocurrency transfer since the process is done by miners.

d) Security: Since cryptocurrencies cannot be carried with us via cash or card, the security risk is low.

Disadvantages

a) Control: Since cryptocurrencies do not have a central management, they are likely to be used in illegal activities.

b) Acceptance: Cryptocurrencies have not been accepted by many companies or individuals because they are thought to be impractical for use.

c) Speculativity: Cryptocurrencies are constantly changing in terms of value.

d) Danger of Cyber Attack: Since Cryptocurrencies are produced and managed in a network environment, they are constantly exposed to the danger of cyber attack.