What is Cryptocurrency

Cryptocurrency is a virtual currency that relies on cryptographic proofs to validate transactions. However, many people are confused about cryptocurrencies. So, in this tutorial, we will learn what is cryptocurrency. Moreover, we will also illustrate the following set of topics.

  • What is Cryptocurrency
  • What is Crypto in Cryptocurrency
  • Why do cryptocurrencies have value?
  • History of Cryptocurrency
  • Traditional Currency vs Cryptocurrency
  • How does cryptocurrency work
  • Advantages of Cryptocurrency
  • Disadvantages of Cryptocurrency
  • Applications of Cryptocurrency

What is Cryptocurrency

A cryptocurrency, in a nutshell, is a virtual or digital currency designed to be used as a means of trade. Moreover, it also works similarly to real-world cash, with the exception that it doesn’t have a physical form and relies on cryptography for its functionality.

Cryptocurrencies work independently and do not involve any central bank or authority. Cryptocurrencies work independently and do not involve any central bank or authority. Also, new coins will only be introduced if specific conditions are fulfilled.

What is cryptocurrency
What is cryptocurrency

For example, new bitcoins are generated only when miners add a block to the main chain. And in the case of bitcoin, the maximum limit is set to be 21 million not more than this.

Cryptocurrencies like Bitcoin or Ether can either be bought from some crypto exchange platforms or can be mined. However, purchasing Crypto is not permitted on all eCommerce sites. Moreover, some well-known cryptocurrencies like Ethereum & Bitcoin are rarely used for any sort of purchase.

Read Ethereum Nodes and Clients

What is Crypto in Cryptocurrency

The word “crypto” in cryptocurrency represents various cryptographic and encryption approaches. These approaches include public-private key pairs, elliptical curve encryption, hashing, etc.

Let’s understand cryptography in little more detail.

Cryptography is a technique of encrypting and decrypting communication. And it helps to secure communication from the presence of malicious third parties, such as those that seek to steal your data or listen in on your conversation.

Cryptography employs computational techniques that include the use of SHA-256 hashing, a public key, and a private key.

For example, Bitcoin uses SHA-256 as a hashing algorithm. Additionally, a public key is just a public address that serves as a user identity. And a private key is just a secret key that helps in user signature.

Why do cryptocurrencies have value?

Similar to any other currency, cryptocurrency holds some value to function as a medium of trade. But, how does cryptocurrency holds some value?

Now, the value of cryptocurrency all depends upon a demand and supply cycle. The supply of a cryptocurrency is determined by the number of new coins constructed and the number of existing owners who desire to trade their coins.

There are a variety of things that influence the demand for cryptocurrencies. First, the value of holding the coins will specify how much demand grows. This also indicates that if the crypto transactions are fast, smart contracts become more prevailing, and more businesses begin to adopt crypto, demand for crypto will rise.

Furthermore, cryptocurrencies are gaining in popularity as a means of storing value.

Read Ethereum Wallets & How Ethereum Wallet Works?

Traditional Currency vs Cryptocurrency

Now that we understand what is a cryptocurrency let’s, understand how this cryptocurrency is different from traditional fiat currency.

Traditional fiat currency is a type of money that is authorized and managed by various government agencies. Additionally, the central bank of a country and government is responsible for the currency’s value.

Traditional Currency vs Cryptocurrency
Traditional Currency vs Cryptocurrency

On the other hand, a cryptocurrency is a virtual currency with a digital representation of value. Also, it is backed by blockchain technology and is based on cryptography.

Unlike traditional currency, most crypto is completely decentralized and operates on a peer-to-peer basis. Moreover, cryptocurrencies are typically only supported by the trust of their users.

Traditional Currency vs Cryptocurrency: Similarity

Till now, we have seen cryptocurrency and fiat are two very different types of currency. Both types of currency are utilized as a medium of exchange in the market. However, both have one more thing in common when it comes to their digital forms.

Cryptocurrency is well-known for being a digitally native asset. Fiat currency, on the other hand, is also held in electronic form by worldwide organizations. According to certain research, about 10% of the world’s money exists in the form of printed cash. And rest of the money is stored in digital form.

Even though cryptocurrencies are illegal in a few countries, most internet users can already access and utilize the most popular cryptocurrencies.

Traditional Currency vs Cryptocurrency: Key Differences

  • Traditional currencies are administered through a centralized hub-and-spoke arrangement, whereas many cryptocurrencies are run through a decentralized network with no middlemen.
  • Cryptocurrencies can reduce transaction fees and make transactions more cost-effective. However, in the case of fiat currencies, the presence of middlemen frequently leads to considerable fees being paid to customers.
  • Cryptocurrency aspires to cut out middlemen, reduce costs, and increase user access and control. Still, in comparison with fiat currency, cryptocurrency lacks support and price stability.
  • In the case of the traditional currency system, there can be a central point of failure. For example, the central server goes down, Denial of Service attack, etc. But, for most cryptocurrencies, there is no central point of failure.

Advantages of Cryptocurrency

In this section, we will discuss some of the key advantages of cryptocurrency.

Advantages of Cryptocurrency

1. Decentralized Nature

  • One of the key benefits of cryptocurrencies is their decentralized nature.
  • It is a system where centralized intermediaries such as banks and monetary organizations are not required.
  • As a result, a system based on cryptocurrencies eliminates the risk of a single point of failure.

2. Secure

  • Cryptocurrencies aim to make transactions between two parties secure.
  • It also executes transactions without the use of a trusted third party such as a bank or credit card provider.
  • Moreover, private and public keys, as well as various rewarding schemes such as proof of stack and proof of work, are used to secure such decentralized transfers.

3. Faster Transactions

  • Cryptocurrencies have always been regarded as the fastest method of exchange.
  • In cryptocurrency, transactions are lightning-fast, including both international and domestic.
  • Because there are minimal challenges, the verification takes extremely little time to complete.

4. Cost-effective

  • A user’s transaction costs are decreased to a negligible or nil level with the use of cryptocurrencies.
  • However, it accomplishes this by removing the requirement for third-party verification, such as VISA or PayPal. Due to this, there are no additional transaction costs to pay.

5. Exchangeable

  • Several currencies, such as the US dollar, the European euro, and the British pound, can be used to purchase cryptocurrency.
  • Moreover, we can exchange one currency for another via trading in cryptocurrencies, across several wallets, with minimal transaction costs.

Disadvantages of Cryptocurrency

Everything comes with some advantages and disadvantages and the same is the case with cryptocurrency. With a large set of advantages, cryptocurrency also has some demerits. So, in this section, we will discuss some main disadvantages of crypto.

1. Illegal Activities

  • Because cryptocurrency transactions provide such high levels of secrecy and security, it’s difficult for anyone to track or monitor any user.
  • Due to this, criminals are increasingly using cryptocurrency for undesirable operations such as money laundering and unlawful purchasing.

2. Not completely decentralized

  • Cryptocurrencies are supposed to be decentralized, with their wealth spread between multiple parties on a blockchain.
  • But, in practice, there is a lot of power in the hands of a few people. These investors have the ability to manipulate the coin’s price in order to generate large price fluctuations.
  • Even heavily traded coins, such as Bitcoin, rose in value three times in 2017.

3. High energy consumption

  • One of the main disadvantages of cryptocurrencies is their mining which consumes a lot of energy.
  • Mining famous cryptocurrencies necessitate a significant amount of energy, sometimes equivalent to that consumed by entire countries.

4. Vulnerable to hacking

  • Though cryptocurrencies aim to be extremely secure, still other crypto sources, such as exchanges and wallets, are vulnerable to hacking.
  • Moreover, over time, many crypto exchanges and wallets have been hacked, resulting in the theft of millions of crypto.

5. Volatile Price

Price volatility is a problem for cryptocurrencies on public exchanges. For example, Bitcoin’s value has risen and fallen rapidly, reaching a high of $17,738 in December 2017 before plummeting below $7,575 in the following months.

What is Cryptocurrency
What is Cryptocurrency

History of Cryptocurrency

Though Bitcoin is considered to be one of the first cryptocurrencies. However, the idea of cryptocurrency was introduced way before Bitcoin. So, in this section, we will discuss the history and origin of cryptocurrency.

Early age of Cryptocurrency

The technical fundamentals of cryptocurrency extend back to the early 1980s, when David Chaum, an American cryptographer, created a technique named “blinding“. The method enabled parties to communicate secure, immutable information, setting the framework for future electronic cash transfers.

After this, almost 15 years later, a white paper related to a virtual currency named B-money was introduced by an accomplished software developer named Wei Dai. This white paper featured many of the essential elements of current cryptocurrencies, such as advanced anonymity safeguards and decentralization.

But, B-money, on the other hand, was never used as a method of exchange.

Boom of Bitcoin

Bitcoin is commonly considered the first modern cryptocurrency, as it was the first publicly traded medium of exchange. Also, it combines decentralized control, user privacy, blockchain-based record-keeping, and built-in scarcity.

Satoshi Nakamoto, a pseudonymous individual or group, initially outlined it in a white paper published in 2008.

In early 2009, Satoshi Nakamoto made Bitcoin available to the general public, and a core of ardent supporters began exchanging and mining the currency.

Ethereum and many others

The cryptocurrency market is dominated by Bitcoin. And as its popularity grew, other currencies based on the same blockchain technology were launched. Ethereum is the most notable Bitcoin alternative, with the second-largest market cap in the crypto industry. However, there are plenty of other options.

So, over a while, many cryptocurrencies came into the market. For example, Polkadot, Cardano, Binance Coin, Litecoin, XRP, etc.

How does cryptocurrency work

Cryptocurrencies are based on the blockchain, a decentralized public database that keeps track of all transactions. Cryptocurrency units are formed through a process known as mining.

Mining entails employing computer processing power to solve complex mathematical problems in order to earn coins. Users can also purchase the currencies from traders, which they can then store and spend using encrypted wallets.

So, wallets are the places where we will store our cryptocurrency, and to operate any cryptocurrency, we use a pair of public/private keys. Moreover, these keys enable to transfer of a unit of crypto from one person to another without the involvement of a third party.

Applications of Cryptocurrency

Cryptocurrency’s popularity has grown tremendously in recent years as people want to use this digital asset as an alternative form of payment. And since the introduction of Bitcoin and Ethereum, the world of cryptocurrency has been the center of attention.

So, in this section, we will discuss some of the main areas of cryptocurrency application.

Transferring Funds: The first well-known application of cryptocurrencies that practically everyone is aware of transferring funds. Moreover, it offers financial transactions at low cost and high speed. Retail banking customers, fintech companies, venture capital funds, and institutional investors are all showing a greater interest in this technology.

Storing Wealth: Apart from cash, cryptocurrencies act as a safe, censorship-resistant alternative repository of wealth. Unlike traditional banks, which are prone to hacks, thefts, and malpractices. In the case of crypto, only authorized personnel with private keys can access wallets. As a result, authorities will never be able to freeze a personal digital wallet.

Crypto-based gaming: The expansion of the gaming business, combined with cryptocurrency games, has produced an entirely new trend. Cryptocurrency-based games are becoming increasingly popular for a variety of reasons.

For example, crypto-based games can provide advantages such as faster and decentralized payments, genuine ownership for players.

So, in this tutorial, we have learned what is cryptocurrency. Moreover, we have also illustrated the following set of topics.

  • What is Cryptocurrency
  • What is Crypto in Cryptocurrency
  • Why do cryptocurrencies have value?
  • History of Cryptocurrency
  • Traditional Currency vs Cryptocurrency
  • How does cryptocurrency work
  • Advantages of Cryptocurrency
  • Disadvantages of Cryptocurrency
  • Applications of Cryptocurrency