What is CryptoCurrency? While many people have heard of Cryptocurrency, it is still shrouded in much mystery and misunderstanding.
In simple words, cryptocurrency is decentralized digital money. But you probably already knew that and were looking for a more detailed explanation. You may be wondering how cryptocurrencies differ from actual money in your pocket or your bank account. Fist of all, cryptocurrencies are always digital so you will not be able to hold it in your hand as you would with actual money.
Second, with non-digital money, there is always trust involved. We trust banks to keep our money safe and record transactions in and from it. If we did not trust banks, we would not keep money there and the system would not work. In crypto money, that trust is not necessary because cryptocurrency is transparent, and all transactions are recorded. So how does that work, you ask? We would like to say it’s simple, but it’s not. In order to fully understand what cryptocurrency is, one needs to invest a lot of time into research. However, we have compiled all the must knows of cryptocurrency that will hopefully help you understand what it is and how it works.
How cryptocurrency works
Before we proceed, we first need to understand a few things about cryptocurrency. We already know it’s digital money and not something we can actually hold in our hand. It’s also clear that cryptocurrencies are sent from one user to another, just like transferring money from one bank account to another. Cryptocurrency is also decentralized, which means there is no third-party involved, such as a bank, thus currency goes from one user straight to the other. Cryptocurrencies are also private, as there is no need to give your name, address, etc. in order to use them. All users have two separate keys that work like a user name and password. A public and a private key, the later of which should be closely protected as it grants access to one’s digital wallet, and if lost means loss of the cryptocurrency stored in it.
Let’s proceed to define what blockchain technology is. In simple words, blockchain is a distributed ledger that everyone has a copy of. So for example, those using Bitcoin all have the same ledger. All cryptocurrency transactions from one person to another are recorded on the blockchain, aka in the ledger that everyone has a copy of. Because everyone has all transactions in their ledgers, it makes it highly difficult to fool the system and make fraudulent transactions.
You might also be wondering what is cryptocurrency mining, as that is term mentioned everywhere. Before a transaction is recorded on the blockchain, it first needs to be verified. This is where the so called miners come in. Cryptocurrency miners are the ones doing the verifying and adding a transaction to the blockchain. Miners are users who have mining software on their devices. Miners, or their computing power to be more precise, solve complex mathematical problems in order to verify a transaction, for which they get cryptocurrency. Verified transactions are then added to the blockchain, and cannot be altered in any way. Therefore, cryptocurrency mining is essentially verifying transactions by solving difficult mathematical problems.
For simplicity, let’s imagine a scenario where A wants to send B some Bitcoin. Person A accesses their Bitcoin wallet, selects the amount to be sent and puts in B’s wallet for cryptocurrency address as the receiver. When the cryptocurrency is sent, in order to add it to a blockchain, the transactions needs to be verified. Person C then verifies it by using their computing power to solve the mathematical problem (mines Bitcoin). Once that is done, the transaction is added to the blockchain, where it cannot be altered. For their efforts, C gets a reward, in this case Bitcoin.
History of cryptocurrency?
You may be interested in how cryptocurrency began. While there were attempts at creating functioning cryptocurrency in the 90s, Bitcoin is when it actually becomes a thing. Bitcoin was released by Satoshi Nakamoto in 2009, and is the first working cryptocurrency. Nakamoto described Bitcoin as a peer-to-peer electronic cash system that is completely decentralized, which means there is no one controlling it. Interestingly enough, no one actually knows who Satoshi Nakamoto is, whether it’s a man or a woman, a single person or a group of people. Up to this day, almost 10 years later, Nakamoto’s identity is still unclear.
While at first Bitcoin did not gain much interest, over the years its popularity got bigger and bigger, until in 2017 it exploded. In late 2017, Bitcoin’s price reached almost $20 000 and it became a popular subject of many mainstream media articles. After Bitcoin came many other cryptocurrencies, such as Ether. The Ethereum cryptocurrency began in 2013 and was released in July 2015. It was later split into different blockchains, and the original is now known as Ethereum Classic (ETC), while the new version became Ethereum (ETH). Nowadays, there are hundreds of cryptocurrencies, from successful and well known ones like Ether, to small and relatively unknown coins.
What do you do with cryptocurrency?
Just like with regular money, you can use cryptocurrency to buy something. Granted, places that do accept cryptocurrencies usually only accept Bitcoin, but this may change sometime in the future. Generally, people use cryptocurrencies for investment purposes. They buy certain cryptocurrencies hoping that the price will rise and they will be able to make a fortune. However, cryptocurrencies are very high-risk investments. Their value changes very quickly, and what seemed like a good investment could become a huge loss. Thus, if one is set to invest in cryptocurrency, only the money he/she can afford to lose should be invested. Bitcoin is a particularly risky investment due to its fluctuating price. Back in late 2017 early 2018, Bitcoin was everywhere, with its value rising and going up to $20 000 at one point, making it a very attractive investment to many people, particularly those unfamiliar with the crypto world. One day, the value suddenly dropped, and Bitcoin is worth $7300 at the time of writing.
One thing to mention about the usage of cryptocurrencies, particularly Bitcoin, is that it is the preferred method of payment by criminals. A lot of transactions for illegal goods on the dark web are done in Bitcoin in order to prevent law enforcement agencies from tracking. Remember, you don’t have to reveal your identity to use cryptocurrency. If you’ve ever dealt with ransomware, you will know that the malware usually asks for Bitcoin in exchange for file decryption. Again, that is so that the criminals behind the malware cannot be tracked by authorities.
The advantages and disadvantages of cryptocurrency
- It’s transparent. All transactions are visible to everyone, making hacking highly complex, if not impossible. Remember, everyone has a list of all transactions made, and they cannot be altered. This makes cryptocurrency transactions secure.
- Cryptocurrency allows people from all over the world to send and receive money quickly, and without paying high fees for the transactions. When sending money via bank, particularly to other countries, customers have to pay high fees. In addition, it can take a couple of working days for the money to go through. Cryptocurrency transaction fees, on the other hand, are very low, and the process does not take days.
- Transactions are permanent, which mean there won’t be refunds by scheming customers, as there often is with such payment systems as PayPal. Once a transaction is verified and added to the blockchain, it cannot be altered. With systems like PayPal, customers can do chargebacks, which can end up hurting businesses.
- Cryptocurrency is private. There are certain situations when people want to keep their transactions private, such as when dealing with an oppressive government or an abusive spouse, and cryptocurrencies would help there as they do provide a certain level of anonymity.
- It’s private. We mentioned this as an advantage but it can also be a disadvantage. Cryptocurrency is the preferred method of payment of many criminals because it allows them to hide their identities from law enforcement. For example, all transactions in the Silk Road marketplace on the deep web were carried out in Bitcoin, which provided a certain degree of anonymity to its customers. This privacy can often prevent law enforcement agencies from tracking criminal transactions.
- Its value fluctuates very rapidly thus can be a very bad investment choice. Although it can be a high reward investment due to the value fluctuation, it can also bring about huge financial loss for the same reason. Bitcoin in particular is quite unstable, and not the recommended investment choice for beginner investors.
- If you lose your cryptocurrency or something goes wrong during a transaction, you will not be able to get it back. With non-digital money, you can contact your bank and try to recover your funds or access to your account, however with cryptocurrency there will be no one to contact. It also means that if you made a transaction to a fraud, it’s permanent.
- Accepted only at few vendors. In most countries, you will not be able to pay with cryptocurrencies anywhere, and online vendors do not necessarily accept them either.
How to buy cryptocurrency
Due to its popularity, Bitcoin is quite easy to obtain. There are Bitcoin ATMs in many different countries, and they can even be bought using gift cards. Also, all cryptocurrency exchange places will allow you to buy and sell Bitcoin. Smaller cryptocurrencies, basically all except Bitcoin, are a bit harder to obtain. While they don’t have ATMs, you can buy them from all kinds of online exchanges. However, there is some degree of research necessary in order to choose the best exchange service to get the best prices.
If you are interested in what kind of cryptocurrencies are out there, here are some of the best cryptocurrencies with brief descriptions.
- Bitcoin – the first functioning cryptocurrency. It went mainstream in 2017 and the Bitcoin price reached $20 000 at its peak, then steadily dropped to the current $7300. The most popular cryptocurrency in general, and a preferred payment method of criminals. You can often encounter ransomware asking for payment via Bitcoin as that prevents them from being tracked by law enforcement.
- Ethereum – is a blockchain platform for decentralized applications, which enables smart contracts. Its currency is Ether, which is one of the most popular cryptocurrencies that is currently worth around $600.
- NEO (previously known as Antshares) – is the first blockchain project to be launched in China and is described as a distributed network for the smart economy. NEO cryptocurrency is currently worth around $50.
- Litecoin – is a fork of Bitcoin and can generate blocks four times faster than Bitcoin. Currently, Litecoin cryptocurrency is worth $115.
- Monero – one of the steadily rising cryptocurrencies that primarily focuses on privacy. It hides the sender, recipient and amount sent in the transaction, which allows people to stay private on a much higher level. At the time of writing, Monero cryptocurrency is worth $160.
- Ethereum Classic – the original version of Ethereum. Ethereum was forked in 2016, resulting in two cryptocurrencies, Ether or Ethereum and Ethereum Classic. At this time, Ethereum Classic cryptocurrency is worth $15.
- Ripple – Ripple cryptocurrency isn’t mined like most others. It doesn’t confirm transaction with mining, but instead with a consensus of the network participants. Currently, Ripple cryptocurrency is worth $0.65.