What is Cryptocurrency And How Does It Works?

By Rupesh Dhiwar - Published on September 9, 2020
A Brief Explanation About What is Cryptocurrency

Cryptocurrency is a digital currency that is secured by cryptography. This makes it nearly impossible to counterfeit it. Cryptocurrencies are decentralized networks based on blockchain technology. Blockchain technology is a digital ledger of transactions that is duplicated and distributed across the network of computers and the internet.

The Blockchain is not regulated by any authority, which makes them immune to any government interference or manipulation. Die to this, many financial experts believe cryptocurrency can cause a disruption in industries such as finance, politics, and law.

A cryptocurrency (1) is used as a digital asset and form of currency used as a means of exchange between two goods or services, similar to physical currency. Since cryptocurrency is unregulated, it is controversial since its transactions can be traced to illegal activities among normal transactions.

They have a volatile exchange rate and have vulnerabilities within their infrastructure. They are also praised for their portability, divisibility of assets, inflation resistance, and transparency.

How Cryptocurrency Works?

As a digital currency, it is used to connect transactions between two parties. By using a decentralized system, transactions can be made between two parties without the use of their name or another third party entity such as a bank. The Blockchain holds this record for all transactions and users and is a network made for currency holders.

It is created by mining. Mining utilizes computer power that solves complex math equations to generate “coins”. Users can then purchase these coins from brokers and storing them in cryptographic wallets. These wallets are a digital lock and safe for specifical cryptocurrency.

History of Cryptocurrency

It’s difficult to say when Bitcoin was started. Satoshi Nakamoto is the unknown inventor of the currency, and yet he did not intend to even invent it. In late 2008, Bitcoin was announced by Satoshi as “A Peer-to-Peer Electronic Cash System”. Nakamoto’s goal was to support transactions between only two entities. His goal was to digital cash.

The most important feature of his digital cash invention was the fact that it was decentralized and wasn’t monitored by any authorities. Without a central entity, the digital cash was monitored by the users.

In order to use any form of currency, a payment network needed to be developed that included accounts, balances, and transaction records. In order to help keep track of these transactions and records as well as making sure payments aren’t spent twice, a centralized system and authority look over this.

In a decentralized network, the entities doing the transactions keep track of the record. This keeps all transactions valid and recorded without having a record of the user to protect them.

Why Would You Use a Cryptocurrency and What Can You Do With It?

There are many different use cases for Cryptocurrency. One example is by using cryptocurrency to purchase goods. Retailers such as Overstock and Newegg accept cryptocurrency as a form of payment. They can be used to purchase goods or services related to travel, entertainment, and education.

Another example is investing. As the value of cryptocurrency rises and falls, users can purchase shares of cryptocurrency just as one would a stock or fund. Cryptocurrency is unique because it is incredibly volatile, and one can purchase percentages or shares of each coin rather than only one at a time.

Recognizable cryptocurrencies have been valued at amounts close to $20,000 at one point or another, with the peak happening in November 2017 when Bitcoin skyrocketed to this price and valuing the market at around 230 billion dollars.

Cryptocurrencies are considered incredibly high-risk investments due to their volatility. Since their value fluctuates more than any other asset, it can be difficult to maintain. Since it’s unregulated, it’s also a possibility that cryptocurrency can be stolen.

One of the main controversies with cryptocurrency is that since it’s essentially untraceable and can be used in an unregulated environment, transactions point to leading to illegal activity. For this reason, some investors tend to stay away in order to maintain their distance from this type of activity.

From illegal purchases of goods or services, cryptocurrency’s unregulated transaction system can put people’s morale and financial statuses in danger.

Cryptocurrencies are slowly becoming a normal digital asset for companies to use and accept. For businesses, this makes quick and easy transactions with customers as the exchange of value is directly in their hands.

Different Types of Cryptocurrency

There are many different types. The main and first is Bitcoin. It’s the most popular and valuable digital asset in the market and it can be used for a variety of functions. Eventually competing cryptocurrencies began to emerge as “altcoins”.

Altcoins were smaller cryptocurrency businesses, miners and, users that wanted to start their own currency and have their own stories and beliefs. These altcoins form other cryptocurrencies that have their own value and volatility.

( Also Read: A Complete Guide on Bitcoin Halving )

Benefits of Cryptocurrency

  • You manage your transactions

    Since transactions are made between two entities, it’s easier to track and manage transactions through the blockchain. This helps do-away with any discrepancies with transactions since only two parties are involved.

  • You can track your payments at any time

    Being a digital and cloud-based network, the Blockchain can help track these transactions at any time. Since the network is controlled by users and not by any authority, it is much easier to determine these transactions.

  • Your transactions are private

    With a decentralized system for a digital currency, this helps protect the identities of the parties within a transaction. This makes transactions private and makes this type of currency different from other forms.

  • Cost-effective mode of transaction

    Since these transactions take place on a private network through the internet and are digital, there are no fees or extra costs to make these transactions. With fewer parties in-between the main entities, this reduces any middle-men that may add to the transaction.

  • Asset transfers

    With a digital currency, it’s easier to transfer assets to one store to another, in this case, crypto wallets. There are many different exchanges that use cryptocurrency and with the way digital assets work, it’s much easier to transfer this data from one network to another.

  • Greater access to credit

    With cryptocurrencies, transactions happen almost instantly. This is similar to cash; however, it is a completely digital asset. This is also different than say a credit card, which would go through a bank and take several days to fully complete a transaction when cryptocurrency can complete one almost instantly.

  • Easier international trade

    Without exchanges to go through, cryptocurrency is easier to use for transactions no matter where you are in the world. The data transfer of cryptocurrency is quick in every part of the world.

  • Individual ownership

    There is no entity other than the holder that looks over the digital assets. Cryptocurrency is owned by one owner who is the buyer or seller and will interact with another sole owner. This individual ownership brings power back into the people’s (virtual) pockets.

  • Adaptability

    With different cryptocurrencies acting with different features and purposes, the adaptability of cryptocurrency as a whole is much more diverse than any other exchange medium. Certain cryptocurrencies can be used for one specific good or service, investment opportunity, or means of transaction.

  • Strong security

    With the use of encryption and fewer parties involved in a transaction, there is much more security with cryptocurrency. Since crypto keeps transaction entities anonymous, users can feel more secure about their transactions

Disadvantages of Cryptocurrency

  • Can be used for illegal transactions

    For many of the reasons why security and encryption are positive, it can also be negative. Cryptocurrency wallets are difficult to find since they do not have a location attached to them. Transactions are anonymous and done swiftly, with essentially no trace.

    Since cryptocurrency can’t be traced, this can lead to transactions for goods and services that are illegal. Examples of these can be fake scams for investing or setting up fake exchanges/transactions between users.

  • Data losses can cause financial losses

    In the rare occasion that secure information regarding cryptocurrency, such as wallets and organization, a large number of assets can be lost at once. Since the currency is encrypted, it’s also not possible to get it back after.

  • Decentralized but still operated by some organization

    There are still organizations and top users that help to regulate cryptocurrency in the case of users that aren’t as knowledgeable.

  • Price Volatility

    With cryptocurrency still a relative unknown to the general public that isn’t as knowledgeable about it, the price fluctuates immensely. Cryptocurrency is affected a lot by supply and demand, and this is directly tied to mining.

  • Possibility of becoming obsolete

    While it is a newly discovered medium of exchange, this exciting new asset can also crash incredibly fast due to the fact that not everyone may believe in it. While it has the potential to be a main digital asset and medium of exchange, there is also the possibility that this doesn’t happen at all.

How to Invest in Cryptocurrency Safely

  1. Research exchanges

    There are many exchanges that help users exchange assets for cryptocurrency. By doing research on these exchanges and making sure they are legitimate can help protect users from purchasing authentic bitcoin and not getting scammed.

  2. Know how to store your digital currency

    Like any form of currency with value, it’s important to learn how to store it. Without proper storage, assets can easily be lost or stolen. With proper security in place, a user can have peace of mind when securing their cryptocurrency.

  3. Diversify your investments

    By thinking of cryptocurrency as investment assets, it’s important to diversify them. Investing in different assets helps diversify one’s portfolio and also helps spread out assets in the case that values rise and fall. The volatility of cryptocurrency makes diversifying one’s portfolio even more important.

How to Buy Cryptocurrency

  • Using Coinbase and Coinmama

    Coinbase and Coinmama are two popular exchanges that help curate the purchasing of cryptocurrency for users. They are easy to navigate and help provide security for new potential users. It’s possible to buy cryptocurrency using credit cards or digital cash through a bank account.

  • Using Bitcoin ATMs

    In certain cities and areas that accept cryptocurrency, there are ATMs where one can buy Bitcoins.

  • Transferring currency directly to others

    If a user has an online crypto wallet, they can receive and also send cryptocurrency to another user without the need for an exchange of goods and services.

Are Cryptocurrencies Legal?

It is legal in certain countries. Since cryptocurrency itself is not regulated by the government, governments in other countries can choose to determine if the use of cryptocurrency is legal or not.

Iceland, China, and Russia have forbidden the use of cryptocurrency as a medium of exchange in transactions.

Europe has not made an official decision on cryptocurrency status.

Countries such as the United States, Canada, and Australia deem cryptocurrency an acceptable form of payment.

Difference Between Cryptocurrency and Digital Currency

Cryptocurrency Digital Currency
Structure : Decentralized and Unregulated by authority, monitored by users Structure : Centralized, regulated by authority
Anonymity : Entities are protected before, during and after transactions Anonymity : Parties have records that are traceable between all entities involved in a transaction
Transparency : Public records are posted of every transaction by any user Transparency : With multiple parties involved, information is confidential
Transaction Manipulation : Regulated by the community to reduce transaction fraud Transaction Manipulation : With a central authority and multiple parties involved, others can get involved with suspicion of fraud amongst other crimes
Transaction Speed : Transactions can complete almost instantly Transaction Speed : Some transactions can take a couple of days to completely go through
Price Volatility : By being a more unknown asset, prices fluctuate more Price Volatility : With more users using digital currencies, prices can be regulated more and become more accessible

Final Thoughts

Cryptocurrency is still a new asset and medium of exchange for transactions for most people. The origins are unknown, and their use and function are still being discovered to their full potential. However, this doesn’t mean that cryptocurrency doesn’t have its place in today’s world as a digital asset.

Its legality can be questionable to some, and its volatility may steer people away, however, It is still growing and being learned about every day.

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Rupesh Dhiwar |

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