A cryptocurrency is a virtual or digital asset powered by blockchain technology.
The use of blockchain technology enables cryptocurrencies to operate without any central authority as opposed to fiat currencies which are regulated by central banks. Cryptocurrencies are designed to enhance the financial system with power-packed features including peer-to-peer transactions, high-end security, low cost, and speed.
At Glance
● A cryptocurrency is a virtual or digital asset powered by blockchain technology.
● Cryptocurrencies are protected by cryptographic algorithms and thus operate without an intermediary.
● Bitcoin is the first-ever successful cryptocurrency with the largest market capitalization and community.
● The advantages of cryptocurrency are secured, low cost and high-speed transactions.
● The disadvantages of cryptocurrency are high price volatility and lack of clear regulatory frameworks.
Understanding Cryptocurrency
Cryptocurrencies are digital assets built on the idea of data integrity, confidentiality, and authenticity. This concept allows the system to function exponentially well without intermediaries and that reduces the risk of counterparty involvement in record keeping. When we look at modern cryptography, we see all the pieces displayed in the first-ever successful cryptocurrency, bitcoin. Cryptographic algorithms are designed with computational complexity, a hardness assumption of which systems built upon these algorithms are considered computationally secure as they inhabit the power of cryptography.
These algorithms include proof of work(PoW) - an energy-intensive consensus mechanism popularly used by Bitcoin, proof of stake(PoS) - a token-based consensus mechanism used by numerous blockchains including Ethereum to out-source governance directly to asset holders, Delegated Proof of Stake(DPoS) - a democratic consensus mechanism that allows assets holders elect representatives to protect the network and numerous multi-level smart contracts.
As far back as 1983, American cryptographer, David Chaum notably birthed the idea of an anonymous cryptographic electronic money called ecash. Later in 1995, reports have it that he implemented it through Digicash, an early form of cryptographic electronic payments founded by him. Digicash required user software in order to withdraw notes from a bank and specific encrypted keys were also required before they could be sent to a recipient. This allowed the digital currency to be untraceable by the issuing bank, the government, or any third party.
Fast-pace to 2009 with many stories in between, Bitcoin was created by Satoshi Nakamoto with the idea of decentralizing money, giving it a seamless integration for global adoption. It became the first widely successful cryptocurrency as it is known today that more than 83 million Bitcoin addresses have been created.
How Does Cryptocurrency Work?
Cryptocurrency works by enabling the transfer of value through a borderless channel at a low cost yet high speed. As of March 2023, numerous cryptocurrency blockchains can process transactions at a blazing speed of 3 secs and at zero cost, a notable example of this is the Hive blockchain, a delegated proof of stake(DPoS) governed cryptocurrency blockchain.
What Are The Advantages Of Cryptocurrency?
The advantages of cryptocurrency are:
● Decentralization and Immutability
● Low-Cost Transactions
● High-Speed Transactions
● Investment Profits
● Privacy Oriented
By design, cryptocurrency is an ever-evolving technology, thus, has its limits to none as its use cases expand on a daily basis. That said, as of today, there have been many notable events that promote crypto to the open world as an asset with a wide range of utilities. One of many more is the move made by El Salvador to adopt Bitcoin as a legal tender, acknowledging the importance of the asset to its country's economy, people, and the world at large.
Decentralization and Immutability: as aforementioned, the idea and entire structures of cryptocurrencies are based on this. Lacking the interference of third-party services, or being government-controlled, cryptocurrencies are decentralized money built on immutable frameworks, and governed by everybody involved in its diverse consensus algorithms, thereby abolishing the triangular system of governance.
Low Cost Transactions: Cryptocurrencies offer the cheapest transfer rates in the markets, which currently sums up to zero charges with networks like Hive leading the way.
High-Speed Transactions: One of the advantages of transacting via cryptocurrencies is near zero-second transaction time, transactions are almost instant and as aforementioned, cost 0 dollars.
Investment Profits: While the world doesn't treat all currencies as an investment but as a store of value, cryptocurrencies are a bit different and are primarily seen as an investment. Since the inception of Bitcoin, the cryptocurrency market capitalization has grown from $0 to trillions of dollars. Thus, outside being a currency, crypto can be an investment that yields profits over time.
Privacy Oriented: Considering the framework that cryptocurrencies are built on, privacy is one of its many benefits. Although most crypto transactions are traceable, privacy coins are designed to give their users anonymity.
What Are The Disadvantages Of Cryptocurrencies?
The disadvantages of cryptocurrency are:
● Price Volatility
● Lack of Regulatory Clarity
● Investment Security
● Fraud
A system is without a flaw, regardless of its ever-expanding utilities and benefits, cryptocurrencies come with some amount of risks.
Price Volatility: Being an asset with a free market, free and open to everyone 24/7, cryptocurrencies are by far the most volatile assets in the markets. Market movements are extremely difficult to predict, cryptocurrencies can gain crazy value in a short time span and equally lose as much or more. While many people believe this to be the beauty of cryptocurrency, it’s always important for one to be careful trading this asset class.
Lack of Regulatory Clarity: As you may already know by now, cryptocurrencies are not controlled or issued by any governing bank. As privately issued assets that exist and operate via the blockchain that it’s built on, cryptocurrencies are not regulated by the government. While there have been conversations amongst governments of the world to regulate cryptocurrencies, it’s still at the time, an unregulated asset class.
Investment Security: The blockchain is a highly secure setup, however, crypto usage requires a lot of caution as wallets are vulnerable to attacks if not well individually managed. It’s an advantage and a disadvantage that an individual's crypto wallets are inaccessible just by anyone, but are vulnerable if the private keys, mnemonic phrases, and other security tools are not well handled.
Fraud: Where there’s money, there’s bound to be a number of bad players, so, with crypto, it isn’t any different. Crypto has suffered a number of attacks with projects engineered to defraud the community. Additionally, crypto has been a tool for criminals to launder away dirty money. However, considering the traceability of most crypto transactions with the help of the blockchain, it is expected that crypto will be a powerful tool to fight cybercrimes in the coming years.
How To Get Cryptocurrencies?
Cryptocurrencies can be obtained via mining, yield farming, or buying from exchanges. Mining crypto could be done with merely a computer and an internet connection, however, using Bitcoin as a case study, mining isn’t really cost-efficient and so, it is mostly dominated by big pocket firms.
That said, one can obtain cryptocurrencies through yield farming, which in theory is staking some other crypto asset to earn more of the same asset or another. Yield payments are usually obtained from transaction fees accumulated by the network. The last of the three would be buying crypto from exchanges. While there are numerous ways to earn passive income and accumulate crypto assets, the fastest way to obtain crypto is by buying.
One can buy crypto easily through centralized exchanges around the world. Four picks include Coinbase and Binance which are the top exchange in the world. There’s also Kucoin, the one crypto exchange with the most listed altcoins. Okex is yet another reputable exchange to buy cryptocurrency from.
Where Should You Store Your Cryptocurrency?
Cryptocurrencies should be stored in a non-custodial wallet for the most security. Read this guide on cryptocurrency wallets to know the best wallets to leverage to avoid any losses.
What Makes Cryptocurrency Unique?
Cryptocurrencies are unique because of their peer-to-peer system of transactions. The use of blockchain technology, which is a distributed ledger technology that ensures the authenticity and immutability of transactions by building incentives into the network for all nodes to keep the record true enables crypto to function without any centralized third party or intermediary.
What Are The Most Popular Cryptocurrencies?
Bitcoin and Ethereum are the most popular cryptocurrencies. Bitcoin and Ethereum have the largest market capitalization respectively.
Is cryptocurrency a good investment?
That’s up to one’s personal decision, which we recommend thorough research. Cryptocurrency comes with its benefits and applicable risks.
