Cryptocurrencies are digital assets that are exchanged on decentralized computer networks between people with virtual wallets. They are secured by cryptography and recorded publicly on distributed ledgers known as blockchains. Bitcoin, launched in 2009 by the pseudonymous software engineer Satoshi Nakamoto, is the most prominent cryptocurrency. Its popularity soared in recent years, reaching trillion dollar valuations and attracting mainstream investors. Its advantages include cheaper and faster money transfers, capital gains potential, and its lack of dependence on third parties. Its disadvantages include price volatility, high energy consumption for mining activities, and use in criminal activity, including money laundering and sanctions evasion.
Despite their volatility, cryptocurrencies are widely used as intermediaries for international money transfers. For example, in the remittance economy, fiat currencies are converted into Bitcoin and then transferred to recipients abroad, eliminating many of the costs that banks and monetary institutions charge. Moreover, cryptocurrencies can be used to circumvent restrictions on the transfer of funds by government agencies and law enforcement.
In addition, the security of cryptocurrencies is largely provided by their distributed nature, which prevents centralized entities such as banks and governmental bodies from controlling them. But they are still vulnerable to theft by hackers, software bugs, and other technical problems that can cause massive investor losses. In fact, they also face a host of regulatory risks, from their spot market status to the Securities and Exchange Commission’s interpretation of what constitutes a security. With its rapid evolution, the crypto industry keeps participants, observers, and regulators on their toes.