What is Cryptocurrency | Why You Need To Know About Cryptocurrency?

 Cryptocurrency Definition:

All you need to know about investing in cryptocurrency.

What Is Cryptocurrency?

Cryptocurrency is a class of digital currencies, most of which are secured via decentralized computer networks. Cryptocurrencies are different from fiat currencies such as the U.S. dollar, which are backed by federal governments and central banks.

Cryptocurrencies are essentially private, digital currencies. Cryptocurrency investors see it as a store of value and a means of payment or exchange, like other forms of currency, but without relying on the policies of a central government. Bitcoin and other cryptocurrencies allow entities anywhere in the world that are connected to the internet to transfer value within minutes without the need for a bank or other intermediary.

How Does Cryptocurrency Work?

Transactions in Bitcoin, Ethereum and other leading cryptocurrencies are verified and secured via a blockchain framework that uses a network of nodes that independently records each transaction and updates a public ledger. This ledger system creates many different copies of the same transaction record, which provides a deep level of security. The blockchain software is "open source," meaning anyone can download the software and contribute to the public ledger. Once all the computers in the network agree on a transaction, it is permanently recorded in the blockchain.

Different blockchains use different methods of verifying transactions. Bitcoin uses proof-of-work, or PoW, verification, in which cryptocurrency miners compete to verify transactions by solving complex mathematical puzzles using powerful computers. In return, the miners earn newly minted cryptocurrency. Proof-of-stake, or PoS, cryptocurrencies choose transaction validators based on the number of coins they have staked, or locked up, to the network.

Cryptocurrency investors access their currency via a special password called a private key. Investors must enter their private key to send or receive cryptocurrency. Crypto investors store these keys in cryptocurrency wallets. Wallets can be either hardware devices similar to USB sticks or mobile app software that users can access on their phones. Wallets connected to the internet are known as "hot" wallets, while wallets not connected to the internet are "cold."

Bitcoin:

Bitcoin is by far the most popular cryptocurrency in the world, with a market capitalization that at times has reached $1 trillion. Bitcoin was the first cryptocurrency, having started trading in 2009. Since its launch, Bitcoin’s price has skyrocketed, but it has experienced several periods of busts along the way. In addition to being the most popular cryptocurrency, Bitcoin is also the most useful. Bitcoin is accepted as payment at more than 7,600 global merchants, according to Cryptwerk. Bitcoin also made history in June 2021 when El Salvador became the first country in the world to make Bitcoin legal tender.

Altcoins:

Bitcoin was the first cryptocurrency, but thousands of other cryptos have sprung up since Bitcoin was launched. These other cryptocurrencies are collectively known as altcoins. Ethereum is by far the most popular altcoin and is second in value to Bitcoin. The Ethereum blockchain was the first to introduce smart contracts, code that allows it to run decentralized applications, or dApps. Litecoin was created in 2011 with a focus on faster transaction confirmation times than Bitcoin. Solana is a relatively new cryptocurrency that features a unique system of proof-of-history, or PoH, and PoS transaction verification that consumes far less energy than Bitcoin, making it a potentially greener alternative. While Bitcoin is currently the cryptocurrency market leader by a wide margin, altcoins account for most of the global cryptocurrency market cap.

Stable-coins:

Stablecoins are a subset of cryptocurrencies that attempt to peg their value to an external reference, such as the U.S. dollar or the price of gold. Stablecoins are backed by a reserve asset, making their price movements far less volatile than other cryptos. Cryptocurrency traders often rely on the stability of stablecoins to move in and out of other cryptocurrencies quickly without paying large fees. Popular stablecoins include Tether and USD Coin, both of which are pegged to the price of the U.S. dollar.

Digital Tokens:

Digital tokens are assets that are similar to cryptocurrencies but are issued by a specific project to serve a purpose within that project. A token may represent an ownership stake in the project, a method of payment within the project’s ecosystem or a right to participate in the project’s network. Like coin tokens at an arcade, digital tokens have little value or utility outside of the specific project for which they are created. A nonfungible token, or NFT, is a type of token that represents ownership of a unique item, such as a digital collectible or piece of art.

Why You Need To Know About Cryptocurrency?

Some cryptocurrency investors see crypto as the future universal mode of global commerce. Others see cryptocurrency as the standard currency of the internet. Still others see cryptocurrency as an investable asset class and an alternative to gold as a store of value and a hedge against inflation. Cryptocurrency also could grant financial freedom to people living in parts of the world with limited or no access to banks.

Up to this point, cryptocurrency hasn’t come close to replacing fiat currencies as the world’s preferred way to make financial transactions. However, cryptocurrency has become extremely popular as a speculative investment. The price of Bitcoin is up more than 5,000% in the past five years, while the price of Ethereum is up more than 50,000% in that time.

Pros of Cryptocurrency:

Cryptocurrency is useful in making cross-border financial transactions, which can otherwise be difficult and costly. It also has a high degree of anonymity, which makes it difficult for specific transactions to be traced back to individual users. Blockchain technology provides both security and transparency, given that all transactions are publicly recorded in the ledger. Cryptocurrency also allows users to complete transactions free from the interference of governments, banks or other central authorities. Finally, up to this point, cryptocurrency as an asset class has also been an extremely good long-term investment.

Creator of Cryptocurrency:

Bitcoin was created by a person or group of people named Satoshi Nakamoto, the pseudonym listed on the 2008 white paper that described how Bitcoin would work. Over the years, several people have publicly stepped forward claiming to be the real Satoshi, but none have provided sufficient evidence to prove their identities. In the first seven months after Bitcoin’s creation, Satoshi reportedly mined as much as 1.1 million Bitcoins. Those Bitcoins would be worth more than $50 billion as of December 2021.

Cons of Cryptocurrency:

Most top cryptocurrencies are extremely volatile, making them unreliable stores of value in the short term. Decentralization may protect against government interference, but it also means there is no central cryptocurrency bank or Federal Deposit Insurance Corporation to prop up the value of a cryptocurrency if it is falling or reimburse investors if cryptocurrency is lost or stolen. While global governments can’t prevent users from making cryptocurrency transactions, they can potentially restrict or tax cryptocurrency transactions and even make them illegal entirely. Finally, although the list of global merchants that accept cryptocurrencies as payment is growing rapidly, most stores and financial institutions still don’t accept cryptocurrencies, limiting their usefulness as an alternative to fiat currencies.