Cryptocurrency is relatively new to some people, so what exactly it is and how it works can be a little confusing. This article elaborates on the basics and explains some of the terms in a way that will help you understand cryptocurrency, then provide some examples of how cryptocurrency has been used or could be used in a future situation.
What is Cryptocurrency?
Cryptocurrency is essentially digital money that has been created by a computer algorithm. Cryptocurrency involves using mathematics and computer security to create a digital currency that can be used as both an investment and a form of payment. Cryptocurrency provides you with an anonymous and secret way to transfer money over the internet which allows you to carry out fast, free and secure transfers.
How Does Cryptocurrency Work?
Cryptocurrency works by using complex computer codes (computer programs) to verify the transfer of money. Cryptocurrency uses blockchain technology, a computer network that records transactions. This allows transactions to be made securely and privately, as the transactions can only be accessed using the unique username and password assigned to each user in the system.
After a transaction is made, a new block of information consisting of cryptocurrency is created and added to a growing list of blocks that are tied together by cryptography. This prevents any individual user from having access to more than one copy of the blockchain or the data within it, so it can never be changed or altered without the agreement of all users. Although the blockchain is owned by everyone, it cannot be controlled by any single person or entity.
When you want to create a new transaction, it is validated by the network and then added to the blockchain which is a public ledger containing all of the transaction data. Cryptocurrency carries out its purchases by having all of the transactions verified and encrypted before they are recorded in a permanent database that cannot be tampered with. In this way, the records of all transactions are stored securely and any attempt to edit them is immediately detected.
What Are The Popular Types of Cryptocurrencies?
1. Bitcoin
Bitcoin is the first and most popular cryptocurrency that was launched in 2009 by Satoshi Nakamoto who remains anonymous. Bitcoin uses a peer-to-peer network for the verification of transactions and does not require banks, governments, or central authorities. Bitcoin is currently the most valuable currency in the market and has a market cap of $387.861 Billion with more than 19 million bitcoin in circulation according to coinmarketcap.com
2. Litecoin
Litecoin is one of the most popular altcoins on the market and has risen in popularity since its creation in 2011 by Charlie Lee. One of the reasons for this is the fact that bitcoin is similar to bitcoin and so can be used similarly. Litecoin was created to improve upon some of bitcoin’s shortcomings, most notably its fourfold transaction capacity and faster transaction settlement times.
3. Dogecoin
Dogecoin, also called doge, is a cryptocurrency that was created in 2013 as a joke. The currency intends to make people laugh and to make it fun, so the founders of dogecoin chose the name “Doge” because it sounded like ‘do work’ since they wanted to create something without any serious intentions. It quickly became an extremely popular currency and can be used for many different things including tipping on social media sites and purchasing Amazon goods through third-party vendors.
4. Ethereum
Ethereum is a relatively new cryptocurrency and it was created in 2015 by Vitalik Buterin. The cryptocurrency works similarly to Bitcoin and Litecoin, except that it operates on a blockchain network designed specifically for decentralized applications, or apps. Ethereum has some fantastic features such as smart contracts, which are a set of computer programs that we can use to agree on an event without the need for an intermediary or middleman.
5. Binance Coin
Binance Coin is the cryptocurrency that Binance is based upon and it is another relatively new digital currency, having only been created in 2017 by Changpeng Zhao. The currency can be used on the Binance exchange and gives users a 50% discount on fees when using it to make transactions.
Why Use Cryptocurrency?
- Cryptocurrency is anonymous, it reduces or eliminates many unnecessary taxes and fees with traditional financial institutions.
- No one can counterfeit the cryptocurrency because there are no physical bills or coins, just data files stored on computers that can be duplicated and altered without your consent or knowledge.
- Cryptocurrency allows you to keep all of your money in one place, as opposed to having to use multiple financial institutions for different people and accounts.
- No one can freeze or seize your money like they might with traditional banks. There is no federal reserve system regulating cryptocurrency, so there is never a risk of a government coming in to interfere with your money.
- It offers much better privacy, which means that your transactions will be less likely to be tracked. If you are using a cryptocurrency, no one knows where the money is going, since it can be sent from anywhere and into any location.
- Cryptocurrency allows you to carry out fast, free and secure transfers. The transactions are recorded in the public ledger, known as the blockchain, which is shared among all the users in the network.
Are There Risks to Using Cryptocurrency?
Although there are many benefits to using cryptocurrency, it also has some drawbacks and some inherent risks. The most common risks include:
- The high volatility of cryptocurrency. Since cryptocurrency functions on a decentralized network, there is a very wide range of prices for any single currency. This means that the price and value of cryptocurrency can change extremely quickly with no warning or explanation and it can be subject to extreme fluctuations.
- The anonymity of cryptocurrency. Cryptocurrency can completely hide the identity behind one user’s account and transactions. Meaning when used for illegal purposes it can make it less likely that someone will be identified or tracked down.
- Cryptocurrency is decentralized, so there is no bank or central authority to hold accountable for the programming code and security system of the network. This means that there is no guarantee of how it will be able to perform in the future as developments are constantly being made and new technological advances are constantly being made.
- Cryptocurrency puts you at risk of hacking if it is stored online or on devices that people can access since third parties can hack into your account and steal your money at any time.
How Do I Get Started With Cryptocurrency?
Most new users of cryptocurrency will start by using a service called an exchange, where they will be able to buy, sell, and trade cryptocurrencies. Cryptocurrency can be bought and sold through exchanges as well as in other services such as online trading sites.
Conclusion
Overall, cryptocurrency is a great new form of currency that is much more secure than the traditional banking system. It offers many advantages over the traditional system and it can be used to conduct business more safely with lower fees and less risk of fraud. Of course, there are also some disadvantages to using cryptocurrency. The risks include online security risk and anonymity for illegal activities. However, these can easily be overcome by following correct security procedures and being aware of the risks when using cryptocurrency.
I hope this article was helpful and that you found it interesting. If you have any questions, we will be more than happy to answer them below.
All the best,
Pete