What Is Cryptocurrency? Everything You Should Know About
Cryptocurrency is a new type of digital currency that is meant to act as a medium of exchange that lets you buy goods and services, or trade them as a stock for profit. Here’s more about what cryptocurrency is, how to buy it and how to store it safe by protecting yourself.
Crypto currencies are a digital form of currency that can be spend like paper currency to buy goods or services, that uses an online ledger with secured cryptography to secure online transactions. Nowadays many people have invested in these unregulated currencies is to trade for profit, with speculators at times bringing prices up.
Globally, there are more than 10,000 cryptocurrencies in the market but Bitcoin is the most popular crypto currency and it has very volatile price movements this year, on it’s peak reaching nearly $65,000 in April and later losing nearly half its value in May.
Typically, cryptocurrency is electronic-only and does not have a physical form – that graphic at the top of the page is just an artist’s vision of digital currency.
Cryptocurrency appeals to many people because of its ability to be managed without a central bank and therefore concerns around secrecy and subterfuge. It appeals because of its ability to hold value and not be inflated away by central banks that want to print money. It’s also very difficult to counterfeit due to the blockchain ledger system that manages the currency.
Here I will try to explain everything about cryptocurrency, how it works and its significant benefits and risks as well.
The Cryptocurrency Working Method
Cryptocurrencies are generated, traced and runs through blockchain technology, but what exactly is a blockchain? A blockchain is simply a digital ledger of transactions. In a blockchain’s distributed ledger (or database), the currency’s movement is processed by computers in a decentralized network, to ensure the integrity of the financial data and ownership of the cryptocurrency. Think of it like a giant never-ending receipt of all the system’s transactions that is being constantly verified by everyone who can see the receipt.
This decentralized system is typical of many cryptocurrencies, which spurn a central authority. That’s part of the appeal of cryptocurrencies such as Bitcoin – it keeps governments and central banks out of the currency system, reducing their interference and political control.
To this end, in some cryptocurrencies, the number of units of currency is limited. In the case of Bitcoin, the system is organized so that no more than 21 million bitcoins can be issued.
But how exactly does cryptocurrency come to exist? The key way is through what’s called mining, to use a metaphor related to the old monetary system based on gold or silver. Powerful computers, often known as miners, perform calculations and process transactions on the ledger. By doing so, they earn a unit of the currency, or at least a part of a unit. It requires a lot of expensive processing power and often a lot of electricity to perform these calculations.
Owners of the currency may store it in a cryptocurrency wallet, a computer app that allows them to spend or receive the currency. To make a transaction, users need a “key,” which allows them to write in the public ledger, noting the transfer of the money. This key may be tied to a specific person, but that person’s name is not immediately tied to the transaction.
So part of the appeal of cryptocurrency for many is that it can be used somewhat anonymously.
There’s literally no limit to the number of cryptocurrencies that could be created. The range of them is astonishing, and literally thousands of currencies popped up in the last few years, especially as Bitcoin soared into mainstream popularity in 2017. Some of the most popular cryptos include Bitcoin, Dogecoin, Ethereum, Tether and XRP. Even Facebook has launched ‘Libra’ named cryptocurrency by establishing a consortium of industry partners.
Transactions are tied to a random sequence of characters and not to the owners identity, including personal or company data. The popularity of some virtual currencies indicates the scale of demand and supply. It is practically impossible to link contracts with people or companies.
Free From intermediary Authority
The absence of governmental control and regulations eliminate fees and restrictions that could be disadvantageous for users. The flow of cryptocurrency transactions is unregulated by authorities or financial institutions. This limits unfavourable fees and restrictions. However, cryptocurrency owners do not benefit from the protection of financial authorities.
Cryptocurrencies can be stored in special virtual wallets, secured with a private key. This means that only the holder has access to the accumulated funds. In order to increase security, the virtual currency owner should incorporate encryption technology on their storage devices.
No need of Permission – Decentralized
There are no authorities controlling cryptocurrency flow or quotations. Virtual currency trading is not located in one single place. This prevents trading disruptions after hacking attempts. Transaction data is dispersed across the network as it is stored directly by cryptocurrency holders.
The method of cryptocurrency transmission differs significantly from that of traditional currencies. The institutional model relies on banking systems, e.g. incoming and outgoing sessions in the recipient and sender countries. Virtual currency transfers are independent of the user’s location and the process is almost immediate.
Due to the lack of institutional supervision over the virtual currency market commissioned transactions cannot be reversed. If error occurs, for example, incorrect recipient details, there is no organization that can help with the mistake.
Flexibility with Paper Currencies
Holders can use their cryptocurrencies through the rapidly developing tools and services. Converting and exchanging cryptocurrencies into dollars or euros is now possible. These currencies can be funded directly from the cryptocurrency wallet through solutions that enable conversion and exchange.
Frequently Asked Questions About Cryptocurrency
Are cryptocurrencies legal?
There’s no question that they’re legal in the United States, though China has essentially banned their use, and ultimately whether they’re legal depends on each individual country. Also be sure to consider how to protect yourself from fraudsters who see cryptocurrencies as an opportunity to bilk investors. As always, buyer beware.
How many cryptocurrencies are there in the market?
As said in the beginning of this article, there are more than 10,000 different cryptocurrencies are traded globally, according to a market research website. And cryptocurrencies continue to proliferate, raising money through initial coin offerings, or ICOs. The total value of all cryptocurrencies on July 16, 2021, was more than $1.3 trillion — down from April high of $2.2 trillion. The total value of all bitcoins, the most popular digital currency, was pegged at about $599.6 billion — down from April high of $1.2 trillion.
Why are cryptocurrencies so popular?
Cryptocurrencies appeal to their supporters for a variety of reasons. Here are some of the most popular:
Supporters see cryptocurrencies such as Bitcoin as the currency of the future and are racing to buy them now, presumably before they become more valuable
Some supporters like the fact that cryptocurrency removes central banks from managing the money supply, since over time these banks tend to reduce the value of money via inflation
Other supporters like the technology behind cryptocurrencies, the blockchain, because it’s a decentralized processing and recording system and can be more secure than traditional payment systems
Some speculators like cryptocurrencies because they’re going up in value and have no interest in the currencies’ long-term acceptance as a way to move money.
Are cryptocurrencies a wise investment?
Cryptocurrencies may go up in value, but many investors see them as mere speculations, not real investments. The reason? Just like real currencies, cryptocurrencies generate no cash flow, so for you to profit, someone has to pay more for the currency than you did.
That’s what’s called “the greater fool” theory of investment. Contrast that to a well-managed business, which increases its value over time by growing the profitability and cash flow of the operation.
Some notable voices in the investment community have advised would-be investors to steer clear of them. Of particular note, legendary investor Warren Buffett compared Bitcoin to paper checks: “It’s a very effective way of transmitting money and you can do it anonymously and all that. A check is a way of transmitting money too. Are checks worth a whole lot of money? Just because they can transmit money?”
For those who see cryptocurrencies such as Bitcoin as the currency of the future, it should be noted that a currency needs stability so that merchants and consumers can determine what a fair price is for goods. Bitcoin and other cryptocurrencies have been anything but stable through much of their history. For example, while Bitcoin traded at close to $20,000 in December 2017, its value then dropped to as low as about $3,200 a year later. By December 2020, it was trading at record levels again.
This price volatility creates a conundrum. If bitcoins might be worth a lot more in the future, people are less likely to spend and circulate them today, making them less viable as a currency. Why spend a bitcoin when it could be worth three times the value next year?
What are the popular cryptocurrencies?
The size of a cryptocurrency depends on two factors: how many coins are in existence and the price of those coins. Multiply these two numbers together and you get the currency’s market capitalization, or the total value of all those coins. So when experts talk about the largest cryptocurrencies, this is the figure they’re referring to – not the price of an individual coin.
Here are the top cryptocurrencies and their approximate market cap, according to CoinMarketCap, as of June 30:
- Bitcoin – $653 billion
- Ethereum – $263 billion
- Tether – $62 billion
- Binance Coin – $46 billion
- Cardano – $44 billion
- Dogecoin – $33 billion
- XRP – $32 billion
- USD Coin – $25 billion
- Polkadot – $15 billion
- Uniswap – $11 billion
Given the volatility in cryptocurrencies, these numbers can fluctuate a lot even in a short period of time.
How to buy cryptocurrency?
While some cryptocurrencies, including Bitcoin, are available for purchase with U.S. dollars, others require that you pay with bitcoins or another cryptocurrency.
To buy cryptocurrencies, you’ll need a “wallet,” an online app that can hold your currency. Generally, you create an account on an exchange, and then you can transfer real money to buy cryptocurrencies such as Bitcoin or Ethereum. Here’s more on how to invest in Bitcoin.
Coinbase is one popular cryptocurrency trading exchange where you can create both a wallet and buy and sell Bitcoin and other cryptocurrencies. Also, a growing number of online brokers offer cryptocurrencies, such as eToro, Tradestation and Sofi Active Investing. Robinhood offers free cryptocurrency trades (Robinhood Crypto is available in most, but not all, U.S. states).
How risky is investing in cryptocurrencies?
There are several risks associated with cryptocurrencies, you should consider below factors while investing in any digital money.
Loss of confidence in digital currencies
The nascent nature of the currencies subjects them to a high degree of uncertainty. Cryptocurrencies are not backed by a central bank, a national or international organization, or assets or other credit, and their value is strictly determined by the value that market participants place on them through their transactions, which means that loss of confidence may bring about a collapse of trading activities and an abrupt drop in value.
The market risks are idiosyncratic, as the currency trades only on demand. There is a finite amount of the currency, which means that it can suffer from liquidity concerns and limited ownership may make it susceptible to market manipulation. Furthermore, given its limited acceptance and lack of alternatives, the currency can appear more volatile than other physical currencies, fueled by speculative demand and exacerbated by hoarding.
Cryptocurrency Cyber frauds
Since cryptocurrency is essentially a cash currency it has attracted a large set of the criminal community. These criminals can break into crypto exchanges, drain crypto wallets, and infect individual computers with malware that steals cryptocurrency. As transactions are conducted on the Internet, the hackers target the people, the service handling, and storage areas, through means such as spoofing/phishing and malware. Investors must rely upon the strength of their own computer security systems, as well as security systems provided by third parties, to protect purchased cryptocurrencies from theft.
Operational Risk in Cryptocurrency
With a centralized clearinghouse guaranteeing the validity of a transaction comes the ability to reverse a monetary transaction in a coordinated way; no such ability is possible with a cryptocurrency. This lack of paper record is further demonstrated as Bitcoin accounts are cryptographically secured, access to monies contained in an account almost certainly cannot be restored if the “keys” to an account are lost or stolen and subsequently deleted from the owner.
In recent past, A German-born programmer Stefan Thomas made headlines after a lost password rendered his bitcoin stash worth $220 million inaccessible. As Insider earlier reported, the secure hard drive, on which 7,002 bitcoins were stored, was an IronKey.
Some countries may prevent the use of the currency or may state that transactions break anti-money laundering (AML) regulations. Due to the complexity and decentralized nature of Bitcoin and the significant number of participants — senders, receivers (possibly launderers), processors (mining and trading platforms), currency exchanges—a single AML approach does not exist.
Can you convert crypto to cash?
Cryptocurrencies can be relatively easily converted into regular currency such as dollars or euros. If you own the currency directly, you can trade it via an exchange into fiat currency or into another cryptocurrency. Typically you’ll pay a significant fee to move in and out, however.
Those who own crypto via Bitcoin futures can readily sell their positions into the market when it’s open, though you’ll want to look for the best brokers for crypto if you’re trading regularly.
But if you need to access your money immediately, you’ll have to take whatever price the market offers at that time, and it may be a lot less than what you’ve paid for it. The volatility in crypto is even greater than for other high-risk assets. On top of that, there are often substantial fees for moving in and out of the market and you’ll face tax implications from doing so.
There is no doubt that cryptocurrencies are here to stay as technology advances. Public acceptance and confidence will take some time, but the risks will remain the same—some appearing to be more material and elevated than previously. The sequel to this article will examine the methodologies and techniques used to mitigate the risks.