Every cryptocurrency has its own defining characteristics. For example, Ethereum is known for Smart Contracts, Dapps, and DAOs. There are also many things that Bitcoin and other cryptocurrencies share. To understand the elements that digital tokens share, it helps to take a closer look at the transactional and monetary properties of cryptocurrency.
Cryptocurrency Transactional Properties
When it comes to cryptocurrency transactions, there are several elements which must be considered. Some of these relate crypto to any other kind of currency. Others are uniquely related to digital forms of exchange.
The first hallmark of crypto transactions are that they are irreversible once they have been confirmed and added to the blockchain. There is no way to take back the confirmed transaction. This means that once you have sent money to someone else with crypto, the transaction is final. It does take some time for transactions to be confirmed, but this time period is growing shorter as new technologies are introduced.
The irreversible nature of cryptocurrency means that individuals must take more care in using digital tokens. Let’s contrast using crypto to pay for good or services with a traditional payment processor like PayPal. When one makes a payment with PayPal to someone they do not know there may be some buyer protections offered in certain cases. An obvious example of this would be purchases made with eBay. Even after the money has been sent to another party the sender could file a claim if they did not receive their goods.
There is really no way to reverse such a payment with Bitcoin or other blockchain-based cryptocurrency. This could be considered a drawback by some people. In some respects cryptocurrencies lack a safety net. Once the transaction has been completed, the relationship between sender and receiver is closed as far as the blockchain is concerned.
Another transactional property of Bitcoin and other digital assets is pseudonymity. Notice that we did not say anonymity. Transactions made on the blockchain do not necessarily have to be connected to a real-world identity. This does not mean that they are strictly anonymous. The transactions can still be connected to a digital identity. In fact, many people hail blockchain technology because it can be used to create and substantiate a digital identity.
Bitcoins are sent and received using what are known as addresses. These randomized strings of about 30 characters are the basis of the cryptography that is used to facilitate transactions on a blockchain. But they also can serve as a unique digital identifier for those engaged in making transactions.
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Transactions on a blockchain are typically fast, although some platforms are actively working to increase the speed at which exchanges can be made. It is an ongoing challenge to address the scalability of cryptocurrencies such as Bitcoin. These blockchains need to be able to process transactions faster in order to compete with credit cards like Visa and MasterCard.
Global exchange is also a transactional property of cryptocurrency. Bitcoin can be used by people all over the world without concern over geographical borders. Let’s say that you are a freelancer that works from the US. You have clients in India that want to pay with Bitcoin. They can easily do so without the need for expensive currency exchanges and middlemen. Once the Bitcoin from your Indian client arrives in your wallet, you can exchange it with ease at many cryptocurrency exchanges such as Coinbase or Kraken.
The security of transactions on a blockchain is also a positive benefit. The only way to send Bitcoin from a wallet is to have a private key. This is one of the addresses that we mentioned earlier. It is virtually impossible for someone to break the cryptographic keys that are attached to crypto wallets. This gives a level of security that is not found with other asset classes or fiat currency that you have in a bank.
Of course, the security of your Bitcoin wallet is only as good as you are diligent. You must still maintain the possession of your keys and prevent them from falling into the hands of others. A good way to do this is with a cryptocurrency hardware wallet such as the Nano Ledger.
Finally, there are no permissions required to use cryptocurrency. Anyone can download a wallet, purchase Bitcoin, and send it to others. Bitcoin and other crypto tokens do not have a third-party gatekeeper. An example of such a gatekeeper would be the bank that you use to conduct transactions with fiat currency.
Cryptocurrency Monetary Properties
In addition to transactional properties, cryptocurrency also possesses monetary properties that are common to most digital and fiat currencies. Let’s take a closer look at some of those.
Most digital tokens have a limited supply. The number of tokens that can be ultimately created is often a part of the computer code that governs a token’s existence. For example, a fixed number of Bitcoin can be created. The maximum number will be reached sometime around the year 2140. There are no surprises where this is concerned. At any point in time it is possible to determine how many Bitcoins have been created and how many remain to be mined before the cap is reached.
The takeaway from such a system is that it encourages more stability of the asset. Think about the treasuries of the world’s governments. They are able to print money at their own discretion whenever necessary. It has even been suggested by world leaders like President Donald Trump that printing more money is a way to get the country out of debt. Of course, everyone knows that doing this is a recipe for disaster. Introducing more paper bills into the currency system only devalues the dollar.
Cryptocurrencies also have a monetary property that means they are not secured by debt. When you see money in your fiat bank account, all of that money becomes part of managed debt. For example, the bank uses the money you place on deposit to satisfy obligations of other bankers and vice versa. With Bitcoin and crypto this is not a part of the equation. What you see is what you get. End of story.
Let’s say that you have $1,000,000 on deposit at a small local bank. Try walking in there and asking to withdraw your $1,000,000. You will ultimately get your money, but the bank may have to call in debts in other areas to get the cash on hand if you don’t want to accept a certified check. With Bitcoin, the money is always there for you to access whenever you wish.
Both types of properties are important to anyone that is thinking about investing in cryptocurrency for the long term. You may find it useful to create your own notes on the transactional and monetary properties of cryptocurrency for future reference.