What is Cryptocurrency

What is Cryptocurrency? A Beginner’s Guide to Digital Currency

What is cryptocurrency? This digital alternative to money certainly isn’t a scam or a passing trend. It may be difficult to imagine a currency like crypto that challenges traditional notions of money and financial transactions. But cryptocurrency is here to stay, and it’s time to understand what cryptocurrency is and how it will affect the future of finance.


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What is Cryptocurrency?

Cryptocurrency is a digital or virtual form of currency that relies on cryptographic technology, a method of securing information using complex mathematical algorithms to secure financial transactions, control the creation of more units, and verify the transfer of assets. Unlike traditional currencies issued by governments, known as fiat currencies, cryptocurrencies are decentralized and operate on a technology called blockchain. This decentralization means no central authority, like a bank or government, controls or regulates cryptocurrencies. Instead, cryptocurrency offers a peer-to-peer method of conducting financial transactions so users can buy, sell, and trade cryptocurrencies directly with each other without using a third party. 

Cryptocurrency and Blockchain Technology

Like a ledger used as a record-keeping system to organize financial transactions such as debits and credits, blockchain technology acts the same for cryptocurrency transactions. Blockchain is like a ledger that records all transactions across a network of computers. Each transaction is stored in a “block” and linked to previous transactions, creating a chain of verifiable and permanent records. This technology ensures transparency and security and prevents double-spending of digital currencies. This ledger is then distributed across the entire network to all digital currency holders. The security of blockchain technology eliminates the need for intermediaries like banks. So, no bank, government, or other third party has control of cryptocurrency, and anybody can own it.  

Since the inception of Bitcoin in 2009, many other types of cryptocurrencies have been created.

Bitcoin 

Bitcoin is the first and most well-known cryptocurrency. Created by an anonymous individual or group known as Satoshi Nakamoto, Bitcoin introduced the concept of a decentralized currency. Due to its value and limited supply of 21 million coins, Bitcoin is often referred to as “digital gold.” Companies like Tesla have also invested in Bitcoin, further legitimizing its role in finance.

Ethereum

Ethereum is a cryptocurrency and blockchain platform that enables developers to build decentralized applications and execute smart contracts. Smart contracts are agreements with predefined rules written in code, eliminating the need for intermediaries.

Ethereum’s native currency, Ether, is used to pay for transactions and computational power on the platform. NFTs are created using Ethereum’s smart contract technology, which allows for creating unique, indivisible digital assets stored on the Ethereum blockchain.

Binance Coin

Binance Coin is the native token of Binance, one of the world’s largest cryptocurrency exchanges. Initially launched on the Ethereum blockchain, it later migrated to Binance’s proprietary blockchain. Binance coin is used to pay transaction fees on the Binance exchange and participate in token sales.

Ripple

Ripple aims to facilitate fast, low-cost international money transfers. Ripple’s network enables seamless cross-border payments, making it an attractive option for banks and payment providers.

How is Cryptocurrency Created?

Cryptocurrency, such as Bitcoin, is created using a process called mining. Mining allows new coins to be created and transactions to be verified on the blockchain. Miners use powerful computers to solve complex mathematical problems. Once a problem is solved, the miner adds a new block of transactions to the blockchain.

Cryptocurrency that can’t be spent and is used for investments isn’t mined. Instead they are created through what is referred to as a hard fork. A hard fork creates a new chain in the blockchain, where one fork follows a new path and the other follows the old one.

Why Invest in Cryptocurrency?

There are many benefits to investing in cryptocurrency. Digital currency is accessible to everyone, and setting up a cryptocurrency account, referred to as a wallet, can be much faster and less of a hassle than opening a bank account. Your wallet will remain secure as long as your password, called a private key, remains safe. 

With no central authority or intermediary involved, transaction fees can be much lower. Decentralization also reduces the risk of manipulation by governments or banks. As some cryptocurrencies like Bitcoin have a cap on the number of coins that can be created, it may provide protection from inflation, which is a risk when governments decide to increase the money supply. 

Cryptocurrency also offers investors diversification in their portfolios, in addition to traditional stocks and bonds because it is an alternative asset class

Different Uses of Cryptocurrency

Cryptocurrencies have a wide range of applications, including the following.

Payment

Cryptocurrencies like Bitcoin are increasingly used for online and offline payments. Retailers such as Starbucks and Whole Foods accept cryptocurrency as payment, enabling users to purchase goods and services without traditional financial intermediaries.

Investment and Trading

Many people view cryptocurrencies as an investment opportunity. Platforms like Coinbase and Binance allow users to trade cryptocurrencies, hoping to profit from price fluctuations. As mentioned above, Bitcoin has been referred to as “digital gold” due to its store of value.

Decentralized Finance (DeFi)

DeFi is a growing sector within the cryptocurrency space. It provides financial services like lending, borrowing, and trading without intermediaries and using Ethereum-based smart contracts.

Remittances

Cryptocurrencies are ideal for international money transfers due to their low fees and fast processing times. Platforms like Ripple facilitate quick cross-border payments, making them popular in countries with limited banking infrastructure.

Risks of Owning Cryptocurrency

Despite the benefits of owning cryptocurrency, there are some risks.

Volatility

Cryptocurrency prices can be extremely volatile. For instance, on March 12, 2020, Bitcoin plummeted from $7,935 to $4,826, a decline of over 39% in one day. Sudden price swings can lead to significant gains or losses, deterring some users from adopting them as a stable currency.

Regulation

Governments worldwide are still developing comprehensive regulations for cryptocurrencies, creating some uncertainty for investors and users. China initially banned cryptocurrencies in 2021 but has since allowed people to own the digital currency with some restrictions. 

Security Concerns

While blockchain technology is secure, cryptocurrency exchanges and wallets can be vulnerable to hacking and theft. High-profile hacks, like the Mt. Gox incident, have resulted in millions of dollars in losses. Mt. Gox was one of the early cryptocurrency exchanges based in Tokyo, Japan. The exchange suffered huge losses after being hacked between 2011 and 2014. 

Is Cryptocurrency Worth the Investment?

Cryptocurrency is the first alternative to traditional money and the institutions that control the financial system. Digital currency may still seem like a new technology, but it is evolving rapidly and becoming an acceptable form of payment by some major retailers. 

But, like with all investments, it’s imperative to understand how cryptocurrency works and consult an advisor to help assess whether it should be part of your portfolio. There may be a potential for high returns, but not without risk.

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Nadia Tahir is a freelance writer and content creator. She mostly writes in the areas of lifestyle and personal finance. She also enjoys writing on her blog about motherhood at This Mom is On Fire.

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