Why the panic about cryptocurrencies?

by Alexander Beard, on Mar 4, 2019 6:10:25 AM


With cryptocurrencies being a relatively new phenomenon, it’s understandable that those who are yet to learn the ins and outs might approach them with a sense of scepticism. After all, any financial undertakings should be approached with a certain degree of caution, and with a solid understanding of the processes and the risks that come along with them.

With traditional currencies, since the departure from the gold standard, we rely on governments and central banking authorities to assign value to the denominations we use for trade. It’s a system that has worked for us up until this point with no need for an alternative, and it works because we trust in the ledgers keeping track of our transactions by banks across the world.

Where people generally feel at unease with cryptocurrencies is that the ledgers which track our transactions are replaced by a decentralised, anonymous, digital blockchain. Central banking authorities and governments are replaced by advanced algorithms which act as guarantors for the money. In theory, this isn’t anything new as we’ve happily put our trust in such algorithms to keep our chip and pin cards and our passwords secure in the past. Using independent blockchains, separate from a central authority which can hold a monopoly, allows transactions to take place not only more quickly, but also more cost efficiently.

Cryptocurrencies are no different from traditional currencies in that there are people out there who take the opportunity to commit fraud. One particular highly publicised example was from Australia in 2017, when AUD $2.1million losses were reported as being due to cryptocurrency fraud. Although this number is not to be discounted, the total losses attributed to fraud overall were AUD $340million so, in reality, less than 1% of all reported fraud was related to cryptocurrency.

We’re hardwired to fear change and be sceptical of new developments, and we’re much more likely to hear about isolated incidents of fraud than the masses of generally safe transactions. That being said, if you do decide to start using cryptocurrencies, make sure you’re sufficiently protected so you don’t find yourself in the position of one of the unlucky few who fall victim to fraud.

Topics:InvestmentsRisksTips