By now you all would have heard about cryptocurrencies at the very least. Some of you are now well-versed in it, and some of you have already begun trading with crypto-assets. Some of you probably have digital wallets installed with floating cryptocurrency balances.
But there are still several of us who do not understand the makings and machinations of the digital-age currency.
What is Cryptocurrency?
It is like digital money, and just as you use regular cash or credit cards to make transactions in the physical world, you can use cryptocurrency to purchase goods and services in the digital world.
However, it is not like the money you are used to; in fact, cryptocurrency is decentralized and exists only in the digital form.
Decentralization
A key feature of cryptocurrency is decentralization. Unlike traditional currencies issued by governments, cryptocurrencies operate on a technology called the ‘blockchain.’
The blockchain is a public ledger that records all transactions across a network of computers. There is no central authority like a bank or government controlling it. It also means that no one can just create more cryptocurrency on a whim.
How Transactions Work
When you make a cryptocurrency transaction, it is recorded on the blockchain. This transaction is verified and added to a block of other transactions by a network of computers, often referred to as miners.
Once the block is full, it is linked to the previous block, forming a chain of blocks.
Cryptography and Security
The term “crypto” in cryptocurrency originates from cryptography, which is used to secure transactions and control the creation of new units. This also makes it difficult for anyone to hack or counterfeit.
The digital wallet of the user is secured with a private key, and can be accessed by a unique code only known to the holder of the wallet.
Popular Cryptocurrencies
Bitcoin of course!
Bitcoin was the first cryptocurrency, created by a still-anonymous person (or group) only known as Satoshi Nakamoto. The coin was created in 2009 and since then, thousands of cryptocurrencies have been developed, each with its own unique features and purposes.
Besides Bitcoin, other major cryptocurrencies include Ethereum, Litecoin, Ripple, Dogecoin.
Buying and Storing
Anyone wishing to hold or invest in cryptocurrency can buy it on various online platforms called exchanges – Binance being the top dog in this area.
After purchasing the digital coins, the buyers store it in a digital wallet where they can manage the assets (coins) they own. Crypto wallets come in different forms including online, mobile, hardware, and paper wallets.
Volatility
Value of cryptocurrencies can be extremely volatile and prices can skyrocket one day and plummet the next. This is because the cryptocurrency market is relatively new and influenced by a range of factors including market sentiment and news events.
Use Cases
Cryptocurrencies are used for a myriad of reasons. Some buy it to invest it for long-term gains. Others use it for online purchases, remittances, or even as a form of investment diversification.
Regulation and Risks
Regulatory environment for cryptocurrencies varies from country to country. While some countries embrace them, others have imposed restrictions on the use of crypto assets.
Due to the decentralized and anonymous nature of the cryptocurrencies, they can be associated easily with illegal activities. It is therefore, essential to use them responsibly and follow the laws and regulations in place.