Cryptocurrency and How It Affects the Financial World
Introduction
Background
Cryptocurrency is a virtual or digital currency usually secured using cryptography to make it almost impossible to double-spend or counterfeit. It is a digital asset based on a system that allows for its distribution across many computers (Kirkby, 2018). Most cryptocurrencies operate under decentralised systems based on Blockchain technology, defined as a form of distributed ledger enforceable by a distinct network of computers (Furneaux, 2018). A critical characteristic of cryptocurrencies is that they are usually not issued by any dominant authority, thus rendering them hypothetically immune to manipulation or government interference (Nica et al., 2017). Cryptocurrencies can be obtained by being purchased from cryptocurrency exchanges or mined. However, not all e-commerce businesses and websites accept payments using cryptocurrencies despite their increasing popularity (Lee, 2022). Bitcoin has emerged to be the trendsetter in cryptocurrencies, ushering in a wave of other cryptocurrencies pegged on a decentralised peer-to-peer network (Tapscott and Tapscott, 2018). It continues to lead in cryptocurrencies in terms of popularity, market capitalisation, and user base. Besides Bitcoin, other types of cryptocurrencies include Ethereum (ETH), Litecoin (LTC), Cardano (ADA), Ripple (XRP), Polkadot (DOT), Dogecoin (DOGE), Stellar (XLM), Binance Coin (BNB), Monero (XMR), and Tether (SDT) among others. Each cryptocurrency is considered to have different specifications and functions (Garcia and Garcia, 2019). For example, banks use Ripple’s XRP to facilitate transfers in other geographic locations.
Importance of the Topic
The rapid growth and advancement in science and technology, especially in the financial sector, has led to recent breakthroughs and the adoption of new Fintech, such as cryptocurrencies (Zhao, 2021). Cryptocurrencies have significantly reduced the level of dependence on financial intermediaries leading to the spontaneous growth of the digital economy. The ideals of decentralisation that cryptocurrencies carry contribute a lot to their popularity; nonetheless, their volatility increases their risks (Campbell-Verduyn, 2018). Cryptocurrencies offer several incentives to entrepreneurs globally, and it has facilitated their reach to the international markets instead of remaining in the national markets. Investors have been able to form connections in addition to developing trust with markets that were initially not accessible (Krasilnikov, 2018). Although the uptake of cryptocurrencies is expanding steadily and gaining popularity in the financial sector, traditional financial institutions, including commercial banks, are hesitant to adopt these digital assets (Aljosha et al., 2017). This is based on the shallow understanding that their inherent risks override their potential advantages. However, developing a thorough comprehension of these digital currencies among traditional financial systems and their clients will change their general perception leading to a positive drive towards a new era of efficiency and innovation (Grabowski, 2019). This essay will undertake a critical review of the literature to develop an understanding of cryptocurrency and its effects on the financial world using a wide range of associated sub-themes such as origin, essential concepts, operations, legality, impact on economic and money markets, and the benefits and limitations of cryptocurrencies. The paper will highlight how cryptocurrencies impacted the financial world during the COVID-19 pandemic. The topic of the essay further demonstrates its importance by seeking to debunk myths and misunderstandings that reduced the uptake of cryptocurrencies.
Objectives of the Essay
This essay seeks to address the following objectives:
- To critically analyse the benefits and limitations of cryptocurrencies on the financial world.
- To highlight the critical concepts in cryptocurrencies that affect their operations and use in the financial sector.
- To analyse the impact of cryptocurrencies on the financial and money markets.
