Everything you should know about cryptos
Crypto currencies – or cryptos – offer new ways of making payments. But what are they? What are their pros and cons? And how do they work? Read all about it in our summary below.
Bitcoins, ethers, libras, stablecoins – what are cryptos?
Cryptos are digital balances managed with cryptographic algorithms. This means a crypto has no physical appearance. Rather, it is an encrypted code similar to a password. There are various kinds of cryptos. You may have heard of bitcoin, but there are hundreds more, such an ether, litecoin and ripple. There are also stablecoins. They are cryptos whose value is linked to the value of a regular currency or, for example, gold. Examples of are tether and libra, the stablecoin that Facebook has launched. The aim of stablecoins is to make cryptos suitable as a day-to-day means of payment.
Cryptos and stablecoins – pros and cons
There are benefits and drawbacks to cryptos. The biggest benefit is their accessibility. You can use cryptos to pay or get paid without the involvement of any other party, such as a bank. A drawback is the fact that the value of most cryptos is very volatile. As a result, they can quickly lose much of their value. This makes them unsuitable as a means of payment. By contrast, a stablecoin could be used for payment. But this requires that its provider reduces the risks of money laundering, tax evasion, and privacy infringements and protects consumers. These risks occur because the accessibility and anonymity of cryptos make them vulnerable to illicit activities
Central banks and cryptos
Central banks issue paper banknotes. For example, the European Central Bank (ECB) issues euros, and the Federal Reserve issues US dollars. Nowadays, most of our money is in digital form, however. Just think of your own bank balance. This money originates from commercial banks. But central banks also keep an eye out. They supervise these commercial banks. If things should ever go wrong at a bank, we can rely on the Deposit Guarantee Scheme (DGS) in the Netherlands. This scheme guarantees up to EUR 100,000 per person if a bank licensed by De Nederlandsche Bank (DNB) should go bankrupt. The only other way to try not to lose your money, is to keep cash, but many people find this cumbersome nowadays. Moreover, cash is used less frequently. This has made cryptos more attractive for some people.
The value of cryptos is not safeguarded in any way. This is because they are issued independently of commercial or central banks. You will therefore run a greater risks if you hold cryptos. After all, if a crypto loses much of its value and causes you to lose a large sum of money, no central bank will help you out. This is where a central bank digital currency (CBDC) could be useful, because this is issued by a central bank. Such a CBDC does not yet exist, but the ECB and DNB are exploring the options for introducing such a digital currency jointly issued by central banks.
Blockchain – how cryptos work
Many cryptos work on the basis of blockchain technology. This technology enables users to record digital transactions jointly. This means that no other party, such as a bank or civil-law notary, is involved in the transaction. A blockchain comprises hundreds of computers all over the world that verify every change in a database. This makes the technology very difficult to hack. In turn, this explains why users trust cryptos, even without the involvement of a central bank.