Cryptocurrencies: a guide to the workings, benefits and risks of this medium of exchange

There has been a lot of talk in recent years about cryptocurrencies like bitcoin, and about people who invest in them. These digital currencies are not issued by central banks, and are increasingly gaining ground in the world of finance and technology. According to a survey carried out by the Statista portal, 16% of Spain's population use or possess cryptocurrencies. But do you know exactly what they are and how they work?

The Library Guide titled Cryptocurrencies includes content in various formats to enable you to get to grips with the workings of cryptocurrencies, the types of cryptocurrencies and their benefits and risks, and to help you understand what blockchain technology is.

To get started, the first section of the Library Guide suggests some websites, articles and videos that simply explain the basics of cryptocurrencies and blockchain. It presents concepts such as satoshis, smart contracts, tokens, the various types of cryptocurrency wallets – such as cold wallets and hot wallets –, and non-fungible tokens (NFT).

Cryptocurrencies. What are we talking about?

The Library Guide includes information on how blockchain technology works, which is what makes digital currencies possible, although it has many other applications. In simple terms, it is a database that in the case of cryptocurrencies acts as a kind of ledger and securely records the transactions that take place with a digital currency, while maintaining the privacy of its users.

As this post in the Tecnología++ blog explains, to understand cryptocurrencies you can first think about how a conventional payment with a credit card is made. When a buyer makes a payment in a shop, there must be a large intermediary (a bank) that handles and verifies the transaction. However, this middleman disappears with cryptocurrencies, and it is the community of users itself that collaboratively verifies transactions and records them publicly. That's why the cryptocurrencies system is said to be decentralized and distributed.

The Library Guide provides a detailed explanation of the workings of blockchain and cryptocurrency miningthroughout this process.

The users themselves can take part in a process called cryptocurrency mining, in which they validate monetary transactions and participate in issuing new digital currencies. Using computers, miners compete to solve a cryptographic puzzle to be able to create each of the blocks in the chain, which contain the information about the transactions. They receive payment in return, and the new block is registered and can no longer be modified.

Types of cryptocurrencies

The bitcoin was created in 2009 thanks to an individual or group of people going by the pseudonym Satoshi Nakamoto. It is one of the most widely recognized cryptocurrencies, and it monopolized the market until recently. Many other virtual currencies have been created in the years since then. As of today (January 2023), the website CoinMarketCap has registered about 20,000. The major currencies in the market include Ethereum (ETH), Tether (USDT), and Binance Coin (BNB).

The Library Guide includes a section listing the types of cryptocurrencies. 

Advantages and drawbacks of cryptocurrencies

Blockchain technology has some advantages such as privacy, security of information and, in theory, independence from third parties. According to Víctor Garcia-Font, a member of the Faculty of Computer Science, Multimedia and Telecommunications and a researcher in the KISON research group at the UOC, one of the main benefits of this technology is its potential. "Anyone can easily create their project based on a token, a digital asset that has an owner, like a bitcoin. This means that highly innovative and ground-breaking projects can be created", he explained.

However, Garcia-Font believes that this can also be a double-edged sword, since "people can create an innovative business, but one with weak foundations that it's ultimately impossible to put into practice", or it could be nothing more than a scam. For this reason, this expert warns that "it's very important to be very well-informed about the project behind a cryptocurrency before getting involved with it". 

The content of the Cryptocurrencies Library Guide examines the benefits and drawbacks of this medium of exchange. 

Elizabet Ruiz-Dotras, a member of the Faculty of Economics and Business at the UOC and a researcher in the DigiBiz group, believes that cryptocurrencies can be very profitable for those who invest in them, as long as the risks involved are taken into account. "They are a serious investment alternative which can make a lot of money, but you can also lose a lot of money", she said. According to this expert, the high degree of price volatility of cryptocurrencies must be taken into account. While the value of bitcoin was $60,000 in October 2021 (its all-time high), it had more than halved by September 2022, to $20,000. 

Cryptocurrency mining also requires very powerful hardware that consumes a lot of energy. A specific section of the Cryptocurrencies Library Guide is given over to cryptocurrencies' impact on the environment, with studies that examine their environmental footprint and look at their consumption compared to the current system, and the possible alternatives.

Access the library guide and take a look at the content curated by the UOC Library staff.

Experts

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  Albert Cervera

  Operative subgroup: Librarian for Economics and Business, vocational training and advanced-level training courses for professionals Operative group: Library for Learning