‘’What is Cryptocurrency’’ a form of digital asset based on a network that is distributed across a large number of computers. This decentralized structure allows them to exist outside the control of governments and central authorities.
The word “cryptocurrency” literally means “hidden currency.” This comes from the fact that the technology used to create and manage them relies heavily on cryptography, which is the art of writing or solving codes.
Cryptocurrencies rely on a technology called blockchain to document and verify transactions. Blockchain serves as a public ledger that lists every transaction ever made using a particular What is Cryptocurrency.
Here are some key things to know about What is Cryptocurrency:
Main Features of Cryptocurrencies
- Decentralized – No central authority controls cryptocurrencies. Instead, they are managed by peer-to-peer networks of computers running open-source software.
- Secure – Cryptocurrency transactions are very secure thanks to cryptography. Users can securely store their cryptocurrencies in digital wallets.
- Anonymous – With most cryptocurrencies, personal information of users is not required to complete transactions. However, some level of anonymity is lost if you buy cryptocurrencies on exchanges that require personal identification.
- Global – Cryptocurrencies operate on global networks and are not tied to any specific country or region. This makes transaction fees lower compared to international transactions through traditional financial institutions.
- Fast – Transactions are typically completed quickly, especially when compared to traditional financial systems which often require several days for transactions to clear.
- Non-reversible – Once a transaction is confirmed on a cryptocurrency network, it cannot be reversed. This protects merchants from the risk of chargebacks.
History of Cryptocurrency
The first modern cryptocurrency was Bitcoin, which was invented by the mysterious Satoshi Nakamoto in 2008 and released in early 2009. The identity of Satoshi Nakamoto has never been confirmed.
Bitcoin was created to function as peer-to-peer electronic cash. It utilized cryptography and an open ledger called blockchain to achieve decentralization, transparency and immutability.
The Bitcoin software is free and available to anyone to download. The network is maintained by “miners” who use specialized hardware to verify transactions and are rewarded with new bitcoins.
After Bitcoin, many new cryptocurrencies emerged using Bitcoin’s design as their basis. These are known as “altcoins.” Some altcoins include Litecoin, Ethereum, and Dash.
Over the years, What is Cryptocurrency have grown tremendously in popularity and adoption. As of September 2022, there were over 20,500 cryptocurrencies in existence with a total market value exceeding $1 trillion.
Different Types of Cryptocurrencies
There are several categories and subcategories of cryptocurrencies:
- Bitcoin – Bitcoin is the original cryptocurrency and accounts for over 40% of the total cryptocurrency market value.
- Altcoins – Any cryptocurrencies that were created after Bitcoin are referred to as altcoins. Popular altcoins include Ethereum, Litecoin, and XRP.
- Stablecoins – A type of altcoin designed to have lower volatility. Stablecoins aim to maintain a stable value by pegging to currencies like the US dollar.
- Tokens – A digital asset native to a specific blockchain. The most popular type is ERC-20 tokens which are created on the Ethereum blockchain.
- Central Bank Digital Currencies (CBDCs) – Digital currencies that are issued and regulated by a central bank. An example is the digital Yuan being tested by China’s central bank.
- Meme Coins – Cryptocurrencies that are based on internet memes or jokes. Examples include Dogecoin and Shiba Inu.
Why Cryptocurrencies Have Value
There are several key factors that give cryptocurrencies value:
- Utility – They provide a way to securely and quickly transfer value globally. Many people also use What is Cryptocurrency for remittances, e-commerce, and other financial applications.
- Scarcity – Many cryptocurrencies are capped at a fixed supply which creates scarcity and drives up demand. For example, only 21 million bitcoins will ever exist.
- Mining Costs – It takes electricity, computing power, and infrastructure to mine most cryptocurrencies. The costs associated with mining creates value.
- Demand – If people desire a cryptocurrency for any reason, demand drives up the value. Some investors and enthusiasts purchase cryptocurrency as speculative investments.
- Perceived Value – If people collectively believe a What is Cryptocurrency has value, then it effectively does have value as money is a social construct.
How Cryptocurrencies are Stored and Transacted
Unlike traditional money which exists in physical form, cryptocurrencies are completely digital. But how are they stored?
Cryptocurrencies are stored in digital wallets. These wallets have a public key and a private key:
- Public key – This key is like your bank account number. You can freely share it so people can send you money.
- Private key – This key gives you access to your funds, like a PIN or password. It must be kept secret and secure.
Some examples of cryptocurrency wallets include:
- Software wallets – Wallets you can access on a mobile device or computer such as Metamask or Exodus.
- Hardware wallets – Physical devices that store private keys offline for security such as Trezor and Ledger devices.
- Paper wallets – Your private and public keys printed physically on paper.
To send What is Cryptocurrency to someone, you need their public key. Transactions are recorded on the blockchain.
Most cryptocurrencies must be “mined” as part of the process that verifies transactions and secures their respective networks.
Cryptocurrency mining involves:
- Using powerful computers to solve complex computational math problems.
- Miners who solve a problem first are rewarded with newly minted coins.
- Completed transactions are recorded into blocks which make up the blockchain.
Characteristics of cryptocurrency mining include:
- Requires significant computing power and electricity.
- As difficulty of problems increase, more power is needed.
- Miners join competitive pools to combine resources and share rewards.
- Specialized mining computers (ASICs), GPUs or cloud mining are commonly used.
- Mining rewards are predetermined for each new coin mined. Rewards decrease over time.
Are Cryptocurrencies Legal?
The legality of What is Cryptocurrency varies by country. For example:
- The United States – Cryptocurrencies are legal though the government has voiced concerns about their potential for illegal transactions. Cryptocurrencies are subject to the same Anti-Money Laundering and Counter-Terrorism Financing laws as traditional money.
- Canada – Canada allows cryptocurrency exchanges provided they register with FINTRAC and comply with AML and KYC regulations. Canadians must report crypto gains for tax purposes.
- United Kingdom – Cryptocurrencies are legal though subject to AML and CTF regulations. Exchanges need registration with the UK’s Financial Conduct Authority.
- China – Cryptocurrency trading is illegal in China since 2021. China is piloting a digital Yuan issued by its central bank.
- India – There is no regulation prohibiting cryptocurrencies though banks are banned from engaging in crypto transactions. Discussions are ongoing about taxation policies and regulation.
Risks Associated with Cryptocurrencies
Like any investment, What is Cryptocurrency carry certain risks:
- Volatility – Cryptocurrency prices can swing wildly up and down over short periods. Their market is still immature.
- Security breaches – Exchanges and wallets can be hacked leading to theft or loss of funds. Proper precautions are required.
- Lack of regulation – Government policies regarding cryptocurrencies remain unclear in most countries. Regulations can impact prices.
- Fraud – Unregulated space increases potential for fraudulent schemes, fake coins, or exit scams. Investors should be careful.
- Private key loss – If you lose access to your private keys, your cryptocurrency funds can be permanently lost.
Should You Invest in Cryptocurrencies?
Here are some things to consider if you are thinking about investing in What is Cryptocurrency:
- Only invest money you can afford to lose. Cryptocurrencies are risky and volatile assets.
- Do your own research before investing in any coin or token. Understand what gives each project value.
- Diversify your investments to manage risk. Don’t put all your money into one cryptocurrency.
- Set goals for when you will sell or take profits to minimize emotion-driven decisions.
- Store your cryptocurrency securely using hardware wallets and safe storage procedures.
- Invest for the long-term. Cryptocurrencies can see big swings week-to-week but have potential over a 5+ year timeframe.
In summary, cryptocurrencies are an emerging asset class with unique properties. They carry promise but also significant risk. With proper precautions, they can be an exciting addition to a diversified portfolio.
Major Cryptocurrencies by Market Capitalization
Below are the top 10 What is Cryptocurrency ranked by market capitalization as of September 2022:
|4||USD Coin||$45 billion|
|7||Binance USD||$18 billion|
This covers the key essentials about the world of What is Cryptocurrency – their technology, evolution, applications and considerations for investors. Despite volatility and risks, the crypto space is pushing the boundaries of transactions, finance and economics.