Cryptocurrency (also known as crypto) is a digital currency designed to work as a medium of exchange. It uses cryptography to secure and verify transactions, as well as to control the creation of new units of a particular digital currency. Many cryptocurrencies are built on blockchain technology, which is a distributed ledger enforced by a distributed network of computers. Cryptocurrencies are distinguished from fiat currencies like the United States dollar or the British pound because any central authority does not issue them, making them potentially impervious to government intervention or manipulation. This article will discuss various concepts of cryptocurrency to help you understand the novel financial innovation.
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How does cryptocurrency work?
The majority of cryptocurrencies function without the backing of a central bank or government. Instead of relying on government guarantees, decentralized technology called blockchain underpins the operation of cryptocurrencies. Cryptocurrencies do not exist as a stack of notes or coins. Instead, they live only on the internet. Consider them virtual tokens, the value of which is decided by market forces created by those seeking to purchase or sell them.
Cryptocurrency is formed through a process known as mining, which entails employing computer processing power to solve complex mathematical problems to earn coins. Users can also purchase the currencies from brokers, which they can then store and spend using encrypted wallets. Blockchains typically function via proof-of-work (PoW) or proof-of-stake (PoS) consensus algorithms. PoW operates based on miners who often designate specific computing machines for the process. PoS, on the other hand, runs on staking. In the staking system, rewards are distributed to help run the network by holding assets in certain designated wallets. A number of PoS assets also allow for master nodes a more complicated staking process that usually requires a certain minimum number of coins.
Who has historically impacted cryptocurrency?
A number of figures have significantly impacted the cryptocurrency industry throughout its time. Satoshi Nakamoto kickstarted the sector with the creation of Bitcoin (BTC). Known for building Ethereum (ETH), Vitalik Buterin has also notably impacted the cryptocurrency movement. With Ethereum came a whole world of extra tokens built on its network called ERC-20 tokens.
Jed McCaleb helped spread Bitcoin’s prominence in the industry’s early days as a result of starting Mt. Gox, a place that frequently hosted Bitcoin trading — despite its original function as a hub for fans of a game called Magic: The Gathering. However, it was rendered infamous when the platform fell apart in 2014. Changpeng Zhao increased crypto-asset availability as one of the founders of Binance, which has grown into one of the largest crypto exchanges. Sam Bankman-Fried, co-creator of the FTX digital asset trading platform, serves as another important individual in the industry that impacts trading, decentralized finance (Defi), and other aspects of the crypto space. Numerous others have also made their mark on the industry, some of whom Cointelegraph lists in its top 100 people in crypto and blockchain for 2021.
Why are cryptocurrencies so volatile?
There is a lot of volatility in the cryptocurrency space due to the industry’s newness. Investors are seeking to experiment with their money to generate riches quickly and figure out how cryptocurrency prices vary and whether they can affect them. The number of people who utilize crypto coins (i.e., utility) and for what purpose impacts their price. The price will rise if more people use them to buy goods and services rather than just holding them.
The value of cryptocurrency is also driven by scarcity. This alludes to the cryptocurrency’s finite mechanism. The Bitcoin protocol sets the maximum amount of BTC that can be mined at 21 million. Therefore, as more people enter the crypto space, Bitcoin’s scarcity will inevitably increase, causing its price to increase. Some coins also use the burning mechanism to increase their value by destroying a portion of the supply. Accounts that hold vast amounts of a cryptocurrency may begin to sell, causing prices to plummet. These accounts are known as whales because they have a significant position and can influence the market if a group of people agrees to sell crypto assets.
Types of cryptocurrency
Different types of cryptocurrencies can be classified into the following two groups:
Coins are designed to be used as a kind of currency and are created on their own blockchain. For example, Ether is a cryptocurrency based on the Ethereum blockchain. “Altcoin” refers to any blockchain-based cryptocurrency that isn’t Bitcoin. The term “altcoin” was coined as a shorthand for “alternative to Bitcoin,” and the vast majority of altcoins were created to improve Bitcoin somehow. Namecoin, Peercoin, Litecoin (LTC), Ethereum, and USD Coin (USDC) are examples of altcoins. Some cryptocurrencies, like Bitcoin, have a finite number of coins that help to generate demand and reinforce their perceived worth. For example, the maximum supply of Bitcoin is capped at 21 million, as determined by the Bitcoin’s creator(s).
Tokens are built on an existing blockchain but are considered to be programmable assets that enable the formulation and execution of unique smart contracts. Outside of the blockchain network, these contracts can be used to establish ownership of assets. Tokens can be used to represent units of value such as money, coins, digital assets, and electricity, and can also be sent and received. Stablecoins peg their values to various fiat currencies or assets, such as gold. Most often pegged one-to-one with the U.S. dollar, stablecoins give users a way to sell into an asset carrying the same value as a national currency, but one that can still be transacted and stored in a crypto-Esque fashion within the ecosystem.
Nonfungible tokens, or NFTs, are yet another type of cryptocurrency, denoting that it is a one-of-a-kind asset and cannot be replaced. A Bitcoin, for example, is fungible, meaning you can exchange one for another and get precisely the identical thing. However, a one-of-a-kind trade card, on the other hand, cannot be duplicated. You’d get something altogether different if you swapped it for a different card. Before interacting with any given asset, it may be important to look up the asset’s type and function depending on your goals. Not all digital assets were created for investment purposes.
Are cryptocurrencies legal?
Regulation has come into play worldwide with the growth of the crypto industry. Over the years, the United States has increasingly stepped up its overwatch of space. The Securities and Exchange Commission (SEC) cracked down on initial coin offerings, or ICOs, after the mania of 2017 and 2018. The Commodity Futures Trading Commission (CFTC) and other U.S. agencies have also engaged in various capacities.
Additionally, crypto regulation outside the U.S. has changed over time, based on evolving regulatory guidelines. The fifth Anti-Money Laundering Directive from the European Union, for example, entails that crypto buying, selling and other operations must comply with certain guidelines in certain regions. Since crypto is a relatively new industry compared with others, legal clarity does not yet exist in terms of requirements for all areas of the space. Part of such clarity includes asset classification. Bitcoin and Ether are viewed as commodities, although categorization for numerous other assets remains unclear.
Advantages and disadvantages of cryptocurrency
A cryptocurrency transaction is usually a rapid and straightforward process. Bitcoin, for example, can be exchanged between digital wallets using only a smartphone or computer. Public and private keys and various incentive schemes such as proof of work and proof of stake are used to safeguard these transfers. Payments in cryptocurrencies are growing more popular among large corporations and in industries such as fashion and pharmaceuticals. Every cryptocurrency transaction is recorded in a public ledger known as the blockchain, which is the technology that makes it possible for it to exist. This allows people to follow the history of cryptocurrencies like Bitcoin to prevent them from spending coins they don’t own, copying transactions, or undoing them. Because blockchain intends to eliminate intermediaries such as banks and internet marketplaces, there are no transaction costs.
However, you’ll likely misplace your virtual wallet or lose your coins. There have also been thefts from the websites that exist to store cryptocurrency on the internet. Because the value of cryptocurrencies like Bitcoin can fluctuate dramatically, some people are hesitant to convert “real” money into Bitcoin. Additionally, there are no standards to protect your business because authorities like the Financial Conduct Authority (FCA) do not regulate the cryptocurrency market. It could lose value and become useless if firms or consumers switch to a different cryptocurrency or stop utilizing digital currencies altogether. Cryptocurrency exchanges are vulnerable to cyber attacks that might result in your investment being lost forever scams are always a possibility with cryptocurrency. Scammers frequently use social media platforms such as Instagram, Facebook, and Twitter to dupe consumers into making these investments. If you believe you’ve been targeted, you should contact national reporting centers like Action Fraud in the United Kingdom or the Federal Trade Commission (FTC) in the United States as soon as possible.