is any form of currency that exists digitally or virtually and uses cryptography to secure transactions. Cryptocurrencies don't have a central issuing or regulating authority, instead using a decentralized system to record transactions and issue new units.
What is cryptocurrency?
Cryptocurrency is a digital payment system that doesn't rely on banks to verify transactions. It’s a peer-to-peer system that can enable anyone anywhere to send and receive payments. Instead of being physical money carried around and exchanged in the real world, cryptocurrency payments exist purely as digital entries to an online database describing specific transactions. When you transfer cryptocurrency funds, the transactions are recorded in a public ledger. Cryptocurrency is stored in digital wallets.
Cryptocurrency received its name because it uses encryption to verify transactions. This means advanced coding is involved in storing and transmitting cryptocurrency data between wallets and to public ledgers. The aim of encryption is to provide security and safety.
The first cryptocurrency was Bitcoin, which was founded in 2009 and remains the best known today. Much of the interest in cryptocurrencies is to trade for profit, with speculators at times driving prices skyward.
How does cryptocurrency work?
Cryptocurrencies run on a distributed public ledger called blockchain, a record of all transactions updated and held by currency holders.
Units of cryptocurrency are created through a process called mining, which involves using computer power to solve complicated mathematical problems that generate coins. Users can also buy the currencies from brokers, then store and spend them using cryptographic wallets.
If you own cryptocurrency, you don’t own anything tangible. What you own is a key that allows you to move a record or a unit of measure from one person to another without a trusted third party.
Although Bitcoin has been around since 2009, cryptocurrencies and applications of blockchain technology are still emerging in financial terms, and more uses are expected in the future. Transactions including bonds, stocks, and other financial assets could eventually be traded using the technology.
History of cryptocurrency:-
In 1983, American cryptographer David Chaum conceived of a type of cryptographic electronic money called ecash. Later, in 1995, he implemented it through Digicash, an early form of cryptographic electronic payments. Digicash required user software in order to withdraw notes from a bank and designate specific encrypted keys before it can be sent to a recipient. This allowed the digital currency to be untraceable by a third party.
In 1996, the National Security Agency published a paper entitled How to Make a Mint: the Cryptography of Anonymous Electronic Cash, describing a cryptocurrency system. The paper was first published in an MIT mailing list[18] and later in 1997 in The American Law Review.
In 1998, Wei Dai described "b-money", an anonymous, distributed electronic cash system.Shortly thereafter, Nick Szabo described bit gold.Like Bitcoin and other cryptocurrencies that would follow it, bit gold (not to be confused with the later gold-based exchange BitGold) was described as an electronic currency system which required users to complete a proof of work function with solutions being cryptographically put together and published.
In January 2009, Bitcoin was created by pseudonymous developer Satoshi Nakamoto. It used SHA-256, a cryptographic hash function, in its proof-of-work scheme.[22][23] In April 2011, Namecoin was created as an attempt at forming a decentralized DNS. In October 2011, Litecoin was released which used scrypt as its hash function instead of SHA-256. Peercoin, created in August 2012, used a hybrid of proof-of-work and proof-of-stake.[24]
On 6 August 2014, the UK announced its Treasury had commissioned a study of cryptocurrencies, and what role, if any, they could play in the UK economy. The study was also to report on whether regulation should be considered. Its final report was published in 2018,and it issued a consultation on cryptoassets and stablecoins in January 2021.
In June 2021, El Salvador became the first country to accept Bitcoin as legal tender, after the Legislative Assembly had voted 62–22 to pass a bill submitted by President Nayib Bukele classifying the cryptocurrency as such.
In August 2021, Cuba followed with Resolution 215 to recognize and regulate cryptocurrencies such as Bitcoin.
In September 2021, the government of China, the single largest market for cryptocurrency, declared all cryptocurrency transactions illegal. This completed a crackdown on cryptocurrency that had previously banned the operation of intermediaries and miners within China.
On 15 September 2022, the world second largest cryptocurrency at that time, Ethereum transitioned its consensus mechanism from proof-of-work (PoW) to proof-of-stake (PoS) in an upgrade process known as "the Merge". According to the Ethereum Founder, the upgrade can cut Ethereum's energy use by 99.9% and carbon-dioxide emissions by 99.9%.
On 11 November 2022, FTX Trading Ltd., a
a cryptocurrency exchange, which also operated a crypto hedge fund, and had been valued at $18 billion,filed for bankruptcy. The financial impact of the collapse extended beyond the immediate FTX customer base, as reported, while, at a Reuters conference, financial industry executives said that "regulators must step in to protect crypto investors." Technology analyst Avivah Litan commented on the cryptocurrency ecosystem that "everything...needs to improve dramatically in terms of user experience, controls, safety, customer service."
Blockchain:-
The validity of each cryptocurrency's coins is provided by a blockchain. A blockchain is a continuously growing list of records, called blocks, which are linked and secured using cryptography.Each block typically contains a hash pointer as a link to a previous block, a timestamp and transaction data.By design, blockchains are inherently resistant to modification of the data. It is "an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way". For use as a distributed ledger, a blockchain is typically managed by a peer-to-peer network collectively adhering to a protocol for validating new blocks. Once recorded, the data in any given block cannot be altered retroactively without the alteration of all subsequent blocks, which requires collusion of the network majority.
Blockchains are secure by design and are an example of a distributed computing system with high Byzantine fault tolerance. Decentralized consensus has therefore been achieved with a blockchain.
What Is Cryptocurrency And How Does It Work
Cryptocurrency is decentralized digital money that is based on blockchain technology and secured by cryptography. To understand cryptocurrency, one needs to first understand three terminologies – blockchain, decentralization, and cryptography.
In simple words, blockchain in the context of cryptocurrency is a digital ledger whose access is distributed among authorized users. This ledger records transactions related to a range of assets, like money, house, or even intellectual property.
The access is shared between its users and any information shared is transparent, immediate, and “immutable”. Immutable means anything that blockchain records is there for good and cannot be modified or tampered with – even by an administrator.
Centralized money refers to the regular money that we use, which is governed by authorities like the Reserve Bank of India. Decentralization in cryptocurrency means there is no similar authority that can be held responsible for supervising the rise and fall of a particular cryptocurrency. This has many benefits over centralized money.
Some of these benefits include the following:
- There is no need for currency owners to “trust” a single governing entity, as everyone in the network has access to the same information that cannot be altered.
- Data remains accessible only to the users of the network and it is heavily secured. Shared ownership also means all users sign off on how accurate the data is, which means there is very little scope for data mismanagement or miscommunication. Think of it as a democracy.
- Security, which is a fundamental part of a blockchain.
Cryptography is the method that secures data from unauthorized access by the use of encryption techniques. Most of the claims that blockchain makes, like privacy and immutability, are enabled through cryptography.
The roots of cryptocurrency technology can be traced back to the 1980s with the invention of what is called a “blinding algorithm”. The algorithm is all about secure and immutable digital transactions. It remains fundamental to the modern-day digital currency.
In 2008, a group of people (currently known under the pseudonym Satoshi Nakamoto) created the guiding principles of the first and leading cryptocurrency in the market today, Bitcoin. In 2009, Bitcoin was launched to the world. But it would be years before it was formally recognized as a means of payment among leading merchants, starting with WordPress in 2012.
The underlying blockchain technology is today used in banking, insurance, and other business sectors. Growing at a compounded annual growth rate of 12.8% since 2021, the cryptocurrency market is estimated to reach $4.94 billion by 2030, thanks to the need to improve the efficiency of today’s payment systems, rise in global remittances and increased need to secure data.
How Does Cryptocurrency Work?
Cryptocurrencies are not controlled by the government or central regulatory authorities. As a concept, cryptocurrency works outside of the banking system using different brands or types of coins – Bitcoin being the major player.
1. Mining,
Cryptocurrencies (which are completely digital) are generated through a process called “mining”. This is a complex process. Basically, miners are required to solve certain mathematical puzzles over specially equipped computer systems to be rewarded with bitcoins in exchange.
In an ideal world, it would take a person just 10 minutes to mine one bitcoin, but in reality, the process takes an estimated 30 days.
2. Buying, selling, and storing
Users today can buy cryptocurrencies from central exchanges, brokers, and individual currency owners or sell it to them. Exchanges or platforms like Coinbase are the easiest ways to buy or sell cryptocurrencies.
Once bought, cryptocurrencies can be stored in digital wallets. Digital wallets can be “hot” or “cold”. Hot means the wallet is connected to the internet, which makes it easy to transact, but vulnerable to thefts and frauds. Cold storage, on the other hand, is safer but makes it harder to transact.
Transacting or investing
Cryptocurrencies like Bitcoins can be easily transferred from one digital wallet to another, using only a smartphone. Once you own them, your choices are to:
a) use them to buy goods or services
b) trade in them
c) exchange them for cash
If you are using Bitcoin for purchases, the easiest way to do that is through debit-card-type transactions. You can also use these debit cards to withdraw cash, just like at an ATM. Converting cryptocurrency to cash is also possible using banking accounts or peer-to-peer transactions.
Types of Cryptocurrencies:-
There are tens of thousands of cryptocurrencies available today with the figure pegged at 10,000 in 2022. Major cryptocurrencies include the following:
Bitcoin:-
Bitcoin is the world’s first widely accepted form of cryptocurrency. Bitcoin is so popular, there was a time when its name was synonymous with cryptocurrency. But potential investors need to know bitcoins have become very expensive. In 2021, the cost of one Bitcoin was $68,000. But the good news is, you don’t always have to buy an entire coin, you can buy smaller fractions of it.
Altcoin:-
Altcoin is the term used for any alternative digital currency to bitcoin. The most popular in this ecosystem is Ethereum – one of the fastest-growing cryptocurrencies in the market. There is also a range of other altcoins in the market today such as Luckyblock, Shiba Inu and Terra.
Crypto tokens:-
The concept of crypto coins vs tokens can be confusing to many. At first glance, coins and tokens appear the same. However, the two have many differences
Coins can be mined, but tokens cannot be mined.
Coins are linked to blockchains, tokens are not.
In terms of utility, they vary in the type of product or service they allow users to purchase.
Advantages:
They are private and secure: The blockchain technology that fuels cryptocurrencies ensures user anonymity. It also assures high levels of security through cryptography, which we discussed before.
They are decentralized, immutable, and transparent: The entire system functions on shared ownership, where data is available to all permissioned members and is tamper-proof.
They are a hedge against inflation: Cryptocurrency makes for a great investment in times of inflation. For example, investors often compare cryptocurrency to gold. One of the reasons behind this is that, just like gold, they are in limited supply, as there is a cap on mining any type of cryptocurrency.
More advantages....
•portfolio diversification
•Protection from inflation,Adaptability
•Self governed &managed
•Cost effective mode of transaction
•Currency exchanges finish smiothly
•Easy transfer of funds
•Short settlement times &low fees
•Exponential industry growth
Disadvantages:-
•Illegal transactions
•Risk of data loss
•Power lies in few hands
•Buying NFTs with other tokens
•No refund or cancellations
•High consumption of energy
•Vunerable to hack
•Decentralized but still operated by some organization
•Some coins not available in other fiat currency
•Susceptible to hacks
Conclusion:-
The cryptocurrencies are a hot topic in the global financial system. There is great volatility of cryptocurrencies exchange rates. With this, there is a high risk of trading these cryptocurrencies. Theirgrowth has been able to gain the attention of many speculators. They are easily portable. It is only afterthe required trust in the cryptocurrencies after which they will be used on a wider scale. If thecryptocurrencies fail to gain that trust, then their boom might decline. They are still in their infancy, and itis not sure as to when they will be maturely traded in the markets globally. Many different cryptocurrencies have gained the required attention. Some nations have started to issue nationalcryptocurrencies (Hofman, 2014). It is quite possible that shortly, the bitcoins might have a way forcryptocurrencies to flourish. Despite the flaws, bitcoins are still considered tour-de-force in the digitalcurrency. It has provided an alternative currency for the less developed countries and has opened thedoors of economic transformation. In this way, it gives the individuals more choices to manage theirfinances. Without regard to bitcoins accomplishing the lofty transformations, the cryptocurrencies areseen to be entering the financial stage and changing the global financial landscape forever.
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