Cryptocurrency is a virtual currency that is resistant to fraud, double-spending and counterfeiting.
Today's world is more heavily digitized than it has ever seen in human history, and the trend seems to be continuing. One of the latest and most significant developments in the digital landscape has been the introduction of cryptocurrencies such as Bitcoin and others and the related technologies that come attached with them.
Here's a look at what cryptocurrencies are, how they work, and why they are so significant in the modern world. We'll also take a look at some of the most relevant cryptocurrencies available today.
What is Cryptocurrency?
This virtual or digital currency is underpinned by cryptography (systems of encryption and cryptographic techniques such as hashing functions, elliptical curve encryption, etc.) that makes it resistant to fraud, double-spending, and counterfeiting.
A key feature of most cryptocurrencies is their use of decentralized networks made possible by blockchain technology that is operated across vast networks of linked computers. Blockchains can be looked at as organizational methods that seek to guarantee the integrity of transactional data and which can be helpful in many areas other than cryptocurrency purposes.
Many experts believe that cryptocurrencies and related blockchain technologies will be instrumental in disrupting and, perhaps, overthrowing such industries as finance, law, and others that have proven to have many inherent weaknesses and inequities. It is worth noting here that the first presentation of blockchain and cryptocurrency technology to the world was made back in 2008 when there was shallow trust in government and banking institutions due to the financial crisis that saw countless people worldwide face financial distress.
Advantages of Cryptocurrency Technology
Privacy and Data Protection
This is one of the main priorities cryptocurrency developers had in mind, and the use of blockchain technology helps crypto achieve this. Operating without the user keys (what authorizes access to an account), any potential hacker will find it almost impossible to access their account, making this a vital security measure.
One targeting traditional bank accounts, on the other hand, might find it much easier to do so and have access to multiple accounts as well. In addition to this, Bitcoin and general cryptocurrency accounts or wallets do not require the provision of personal data such as names, addresses, and so on.
Low Transaction Fees
Cryptocurrencies carry meager transaction fees compared to bank transfers, credit card payments, online payments, wire transfers, and other traditional money transfer methods. In some cases, transfers might even be carried out free of charge. The primary reason for this is that no third parties need to be involved in the process.
As digital assets are essentially made up of 1s and 0s, cryptocurrencies can be split down to any number of decimals as long as the users find it worthwhile. This is different from physical currencies that are restricted by printed or coined currency values.
Portability and Transaction Speed
Crypto holders can access their funds from anywhere in the world as long as they have access to the internet and their private key. Many people choose to store their keys in external storage devices that they can carry with them anywhere, both for portability and security purposes. Carrying out crypto transactions will generally be much faster due to the lack of any third-party involvement, and users can track their transaction status at all times, day or night.
The fact that blockchain technology allows any interested party access to the ledger means nothing hidden concerning transactions. All users will see what amount of crypto has been transferred to which account and at what time.
A finite number of Bitcoins can be mined, and no authority can change this. Once the number of Bitcoins reaches 21 million, there will be no additional ones to be mined. This means that the value of Bitcoin will go up and down according to market forces of demand, rather than the fiat decisions of government agencies that contributed to the Global Financial Crisis of 2008/2009. There will thus be no artificial inflationary pressures acting on it to erode the value of those holding Bitcoins.
Disadvantages of Cryptocurrency Technology
Since crypto prices are determined solely by market supply and demand forces (without regulation by institutions such as a Central Bank), they are especially prone to value fluctuations. Bitcoin has seen many ups and downs in its history, causing many people to become rich on the platform but perhaps just as many lose their investment. Experienced traders tend to fare better in such market conditions than beginners.
Difficulty of Access
As the product of high computer science, understanding cryptocurrencies, their vocabulary, and how they work can be an uphill task for the average person. While interest in the industry has meant that more and more people are taking the time to understand it, it will be a while before a significant percentage of society is on the same page regarding crypto.
One of the major criticisms leveled against crypto is its potential for illegal purposes such as drug dealing, blackmail, ransoming, money laundering, and more. The same anonymity that benefits the average person may quickly be taken advantage of by criminals.
How Does Bitcoin Work?
As the precursor of all the cryptocurrencies on the market today, understanding how Bitcoin works will help understand how all cryptos in general function. Bitcoin remains the most valuable crypto on the market today in terms of economic value and usage, with a market capitalization of almost $1 Trillion and a value of about $50,000 as of September 2021.
Let's quickly break down the general features that make this technology what it is:
- Blockchain: In straightforward terms, this is a particular chain of discrete (1s and 0s) information units (contracts, transactions, emails, etc.) that are grouped in blocks and arranged in chronological order. These are all maintained on a decentralized, distributed ledger that all computers can view with access, making it almost impossible to forge, defraud, or otherwise individually edit the chain without the approval of all the other users on the chain.
- Mining Bitcoin: This is a process whereby individuals contribute their processing power to the Bitcoin network to record new transactions onto the blockchain. Transactions recordings are made artificially difficult and processor power-intensive intentionally so that the network is not overwhelmed by new entries (and potential fraud is averted). Miners are compensated in Bitcoin for their work, which is why it is called mining.
- The Post-Trust Market Environment: This represents that you don't need to trust any third party to keep your Bitcoins or transactions safe. Everyone on the network will be keeping an eye on the decentralized ledger, which makes the chances for mischief almost zero since the chain is long, immutable, and transparent.
- Keys and Wallets: These are how users keep their Bitcoin safe from theft. Each trader will have a private and public key. A public key may be considered a user name, while a private key is more like a password. This double-authentication system makes it easy for anyone to send you Bitcoin when they know your public key but require private key knowledge to send Bitcoin out of an account. For this reason, private keys are kept as closely guarded secrets, and losing them might mean the loss of your Bitcoin.
The Most Important Cryptocurrencies on the Market
The main reason why there are so many crypto variations and coins on the market today is that they are mainly based on the Bitcoin infrastructure, which is open-source. This means that coin creators may take Bitcoin code and tweak it to develop a new crypto offer or join the network itself. Here are some of the most critical coins currently available:
- ETC - Ethereum: This was designed to be a decentralized platform for smart contracts, decentralized applications, and general financial products without restrictions on nationality, ethnicity, or faith. Even those without reliable state infrastructure will have access to loans, insurance, bank accounts, and so on. It has grown to be the second-largest crypto after Bitcoin, with approximately $500 million market capitalization.
- LTC - Litecoin: Because it uses �scrypt' as a proof-of-work system for authenticating blocks on the ledger, LTC can be processed or encoded using consumer-level computers. Bitcoin mining is now restricted to mining groups and institutions. LTC is a popular coin, with numerous merchants now accepting payment using crypto.
- ADA - Cardano: Though still in its infancy, ADA holds a lot of promise as one of the most thoroughly peer-reviewed, experimented-upon, and researched cryptocurrencies in existence today. It was developed by teams of mathematicians, cryptographers, and engineers to provide a platform to fulfil the goals of cryptos such as Ethereum and more.
- USDT - Tether: Developers of USDT chose to tie in the value of this coin with the U.S. Dollar in hopes of stabilizing or protecting it from volatility. It effectively made it possible for traders to complete transactions in dollars on the Blockchain. It has proven to be a popular innovation, as USDT was the fifth-largest crypto on the market as of September 2021, with each token trading at $1.
- LINK - Chainlink: LINK was designed to offer facilitation for smart contracts. It provides a link between contracts set up on platforms such as Ethereum and real-world data outside of it. It makes use of Chainlink Oracles to perform this monitoring and reactive function, with potential uses being in wastewater pollution and policy enforcement, water consumption agreements, etc.
There are plenty of new developments taking place in the world of crypt-currencies each day, which means there will always be something new to learn. Potential investors and traders would do well to gain as deep an understanding of how cryptocurrencies work and the market factors and conditions that determine their value.
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