Cryptocurrency is essentially a virtual currency that can be mined, traded, and used to make online payments within a decentralized system. Cryptocurrencies are created for a variety of reasons by individuals and organizations, but they all have a few qualities in common.
It is essential to understand how cryptocurrency projects function, who generates and controls them, and why you'd want to acquire cryptocurrencies. While you could make money with cryptocurrency, there's a considerable risk involved when investing in this digital asset - and you must be wary of cryptocurrency scams.
With this in mind, we'll explain what is cryptocurrency and how does it work - and answer the most commonly asked questions. Let's get to it!
Digital Currency: What Is Cryptocurrency And How Does It Work?
Cryptocurrency is a type of digital payment system that, unlike traditional currencies, does not depend on banks to validate transactions. Cryptocurrencies are digital assets you can get online - within a peer-to-peer payment system that allows anyone to send and receive money.
Rather than being actual money that can be handled and exchanged "in the real world," crypto transactions exist solely as digital entries to a database that describes particular transactions. The transactions made with cryptocurrencies are recorded on a public ledger.
The term "cryptocurrency" comes from the use of encryption to verify transactions. Complex coding is used to store and send cryptocurrency data within wallets and to public ledgers. Also, encryption's purpose is to ensure security and safety.
Bitcoin, created in 2009, is still the most popular cryptocurrency today and was the first cryptocurrency. Much of the fascination with cryptocurrencies derives from the desire to exchange for capital gains. Today, there are approximately 1500 cryptocurrencies available for purchase online.
How Does Cryptocurrency Work?
Cryptocurrencies are based on blockchain technology - a distributed public blockchain ledger that keeps track of all the transactions that are updated and maintained by currency holders. Cryptocurrency units are formed via a process known as "mining" - employing computer power to resolve complex mathematical problems as proof of work and earn crypto currency in return. They can also purchase cryptocurrencies from brokers and keep and spend them via encrypted wallets.
It's essential to remember that you don't own anything physical when you own cryptocurrency. You essentially hold a private key that lets you transfer a record or a unit of measurement from one individual to another without the assistance of a trusted third-party financial institution.
What Is The Main Purpose Of Cryptocurrency?
Cryptocurrencies can be mined and bought on cryptocurrency exchanges. You can use digital wallets with private keys to store cryptocurrency - or you can transfer it to a cryptocurrency debit card (rather than a traditional bank account) to spend cryptocurrency.
Crypto purchases aren't supported on all e-commerce sites, though. Even famous and valuable cryptocurrencies are rarely utilized as retail payment methods. Nonetheless, cryptocurrencies have become popular trading tools due to their increasing value. They're also utilized for cross-border transfers to a limited degree.
Even though they've been around since 2009, decentralized cryptocurrencies - and the underlying technology applications - are still in their development for financial applications, with more to come in the future. The technology might someday be employed to trade bonds, equities, and other financial assets.
Cryptocurrency Transactions & Blockchain Technology
The decentralized, public record of a cryptocurrency's transactions is known as a blockchain. It records and adds completed blocks, including the most recent transactions. They are stored in a chronological sequence, in an open, permanent, and verifiable record. Blockchains are generally managed by a peer-to-peer network that adheres to a specific protocol to verify new blocks and record transactions.
The blockchain is automatically downloaded by each "node" or computer linked to the network. That eliminates the need for centralized record-keeping - and enables everyone to keep track of electronic transactions. The blockchain system produces a record that can't be altered.
The practice of adding new transaction records to the blockchain is known as coin mining. New bitcoins (virtual currencies) are credited to miners within cryptocurrency networks, increasing the overall amount of currencies in circulation.
Mining necessitates specialized software and computing power to solve mathematical problems - which acts as "proof of work," verifying transactions that comprise blocks. The blocks are then periodically uploaded to the public ledger or the blockchain network. As the program solves the transactions, the miner who solves the complex cryptographic problems first is rewarded with a specific quantity of crypto assets.
The more quickly a miner's hardware can handle the math problems, the more probable it is to verify a bitcoin transaction - and receive cryptocurrency as a reward.
Types Of Cryptocurrency
Every currency reportedly has a unique purpose and specification. Ethereum's ether (ETH), for example, is marketed as gas for the underlying smart contract platform. Banks utilize Ripple's XRP to ease transfers across various locations. Bitcoin is still the most extensively traded and discussed cryptocurrency. There were around 18.8 million Bitcoins in use as of November 2021, with a total market worth of around $1.2 trillion.
Many alternative cryptocurrencies, known as "altcoins," have also emerged following Bitcoin's breakthrough. Some are merely forks or clones - while others are actual, new currencies. Solana, Litecoin, Ethereum, Cardano, and EOS are among them. By the end of 2021, the value of all cryptocurrencies in existence had surpassed $2.1 trillion, with Bitcoin accounting for around 41% of the total.
The Main Cryptocurrencies
Here are the most popular cryptocurrencies today:
Bitcoin, which was founded in 2009, was the first form of digital money - and is now the most widely traded. Satoshi Nakamoto created the currency, which is commonly assumed to be a pseudonym for an individual or organization whose true identity is unknown.
Ethereum is a newcomer to the crypto industry with its cryptocurrency, Ether (ETH). It was founded in 2015 and is now the second-largest digital or virtual currency network. It works similarly to the Bitcoin network, letting users send and receive value-based tokens via an open network. The tokens are known as ether and are used to make payments on the network. On the other hand, Ethereum is mainly used to run smart contracts - code scripts that may be implemented on the Ethereum network. Ether's limit operates somewhat differently than Bitcoin's. Yearly issuance is limited to 18 million ether or 25% of the original supply.
Bitcoin Cash (BCH) is a virtual currency and payment system made in 2017 as a result of a hard fork with Bitcoin. A "hard fork" happens when individuals of the Bitcoin community dispute, generally over upgrades to the network's software - in this case, a debate about a plan to expand the block size. The blockchains break in two after a fork, and it's up to the miners and the community to pick which coin to support. After the hard fork, one Bitcoin cash token was usually issued for each coin owned.
In 2011, Charlie Lee (an ex-Google employee) created Litecoin (LTC), peer-to-peer crypto. It was a forerunner of bitcoin, or "altcoin," designed for lower-value transactions - nearly identical in terms of technology, but with some significant changes. For example, Litecoin is four times faster in processing blocks. It also takes more advanced machinery to mine, but the overall amount of coins accessible is four times bigger than Bitcoin, at 84 million.
Ripple was developed in 2012 as a distributed ledger technology. Ripple may be used to track a variety of cryptocurrency transactions and was developed in collaboration with several financial institutions and banks.
Is Cryptocurrency Legal?
The government or monetary authorities grant any fiat currency their "power" as a means of exchange. The Federal Reserve, for example, backstops each $1 bill.
On the other hand, cryptocurrencies aren't supported by any public or private institutions. As a result, making a case for their legal standing in financial jurisdictions proved to be challenging. Cryptocurrencies may be more secure due to their lack of central authority.
The fact that cryptocurrencies mainly operate outside of the current financial infrastructure does not help, either. Cryptocurrency's legal status has ramifications for its usage in everyday transactions and trading. The Financial Action Task Force or FATF suggested in 2019 that crypto wire transactions be subject to the provisions of their Travel Rule, which mandates anti-money laundering.
El Salvador was the first country to accept Bitcoin as legal money for financial transactions as of December 2021. Cryptocurrency policy around the world differs by country.
The Payment Services Act of Japan declares Bitcoin to be legal property. Crypto exchanges are required to gather client information and wire transfer data. Within its boundaries, China has prohibited crypto trades and mining. In December, it was reported that India was developing a platform for cryptocurrency. And in the European Union, cryptocurrency is legal.
Are Cryptocurrencies Safe?
Blockchain is used to create cryptocurrencies. The term refers to the method of recording data into "blocks." It's a rather complex, technical procedure, but the final outcome is a digital ledger of bitcoin transactions that hackers find difficult to manipulate. Plus, transactions require two-factor authentication. You might be asked to enter a login and password and then provide an authentication number delivered to your mobile phone through a text message.
While security measures are in place, cryptocurrencies aren't immune to hacking. Several high-profile breaches have resulted in significant losses for crypto companies. Many cryptocurrency exchanges and wallets have been hacked over the years. Coincheck was hacked for $534 million, and BitGrail was hacked for $195 million - making them the two most expensive cryptocurrency attacks of 2018.
In contrast to government-backed money, the worth of digital currency is entirely determined by the cryptocurrency market. That might result in huge fluctuations that lead to large profits - or losses - for traders. Additionally, Bitcoin holdings are subject to significantly less regulatory oversight than traditional financial instruments such as equities, bonds, and mutual funds.
The Alternative Currency
Digital currencies are better referred to as "alternative currencies" - an alternative to ordinary currencies, that is. As previously stated, they're not commonly acknowledged as a medium of trade today. Cryptocurrencies' future is yet to be determined; they'll either collapse or end up taking over the globe. That's one variable contributing to the crypto market's risks - and higher potential profit.
You can benefit from trading cryptocurrencies. But keep in mind that you are investing funds into a completely unregulated marketplace with many dark corners and unpredictability.