What is cryptocurrency?
Cryptocurrency is cryptography protected digital or virtual currency, rendering it almost impossible to counterfeit or replicate. Many cryptocurrencies are decentralized networks focused on blockchain technology — a distributed ledger backed by a dispersed network of computers. The distinguishing characteristic of cryptocurrencies is that they are usually no central authority partakes in its distribution. This makes them potentially immune to government intervention or exploitation.
- Cryptocurrency is a modern type of a network-based digital asset spread through a large number of computers. This decentralized structure enables them to operate beyond the influence of governments and central authorities.
- The term “cryptocurrency” derives from the encryption methods used to protect the network.
- Blockchains, which are organizational methods for maintaining the integrity of transactional data, are key components of many cryptocurrencies.
- Many analysts agree that blockchain and related technologies can disrupt a range of sectors, including finance and law.
- Cryptocurrencies suffer criticism for various reasons, including their use in illicit activities, exchange rate fluctuations, and the infrastructure’s vulnerabilities underpinning them. However, they were also lauded for their portability, divisibility, inflation tolerance, and transparency.
Cryptocurrencies are systems that enable encrypted online payments, denominated in terms of virtual “tokens,” defined by the system’s internal leads. “Crypto” refers to the various encryption algorithms and cryptographic methods that secure such entries. Like elliptical curve encryption, public-private key pairs, and hashing functions.
The first blockchain-based cryptocurrency was Bitcoin, which remains the most common and valuable. Today, there are thousands of alternative cryptocurrencies with different features and specifications. Some of these are Bitcoin clones or forks, while others are new currencies that have been developed from scratch.
Bitcoin was introduced in 2009 by the persona or group, “Satoshi Nakamoto”. As of November 2019, there were over 18 million bitcoins in circulation with a total market value of around $146 billion.
Some of the competing cryptocurrencies exist due to Bitcoin’s success. The known as “altcoins” include Litecoin, Peercoin, Namecoin, Ethereum, Cardano, and EOS. Today, the combined value of all known cryptocurrencies is about $214 billion. Bitcoin accounts for more than 68% of the overall value of the cryptocurrencies.
The key to the appeal and usefulness of Bitcoin and other cryptocurrencies is blockchain technology. Its usage is to hold an encrypted leaflet of all transactions that have ever been carried out. Thereby provides a stable database for this leaflet that is exchanged and decided upon by the entire network of individual nodes or by the machine holding the copy. Each node’s new block must pass a review before authentication, making it almost impossible to fake transaction history.
Many analysts see blockchain technology as having considerable potential for uses such as online voting and crowdfunding. Major financial companies such as JPMorgan Chase (JPM) see the potential to minimize transaction costs by streamlining payment processing. However, since cryptocurrencies are intangible and not held in a central database, the digital cryptocurrency balance can disappear. At the same time, there is no central body, government, or company with access to your assets or personal information.
Benefits and Blockchain Drawbacks
Cryptocurrencies aim to make it easier to make transactions. Passing money directly between two parties without the need for a trusted third party, like a bank or credit card business. Instead, the use of public and private keys secures these transactions. They have various reward schemes, such as Proof of Work or Proof of Stake.
In modern cryptocurrency systems, the “wallet” or account address of the user has a public key. In contrast, only the owner knows the private key and uses it to sign transactions. Fund transfers’ completion with minimum transaction fees allows users to escape high fees by banks and financial institutions for wire transfers.
The semi-anonymous nature of cryptocurrency transactions makes them well suited to various illicit activities, such as money laundering and tax evasion. Cryptocurrency proponents, however, also respect their anonymity, citing privacy advantages such as protection for whistleblowers or activists living under oppressive regimes. Some of the cryptocurrencies are more secure than others.
For example, Bitcoin is a comparatively poor option for conducting an illicit online activity since the technical analysis of the Bitcoin blockchain has helped the authorities arrest and prosecute offenders. More privacy-oriented coins do exist, however, such as Dash, Monero, or ZCash, which are far more difficult to locate.
Criticism of Cryptocurrencies
Because market prices for cryptocurrencies focus on supply and demand, the cryptocurrency exchange rate will fluctuate widely, as the nature of many cryptocurrencies ensures a high degree of scarcity.
Bitcoin experienced some rapid surges and value collapse, rising as high as $19,000 per Bitcoin in December 2017, before falling to about $7,000 in the following months. Some economists consider cryptocurrencies to be a short-lived fad or speculative bubble.
There is concern that cryptocurrencies such as Bitcoin are not embedded in any material goods. However, some research has found that the cost of producing a bitcoin, which requires a growing amount of energy, is directly related to its market price.
Cryptocurrency blockchains are highly stable, but other elements of the cryptocurrency ecosystem, including exchanges and wallets, are not resistant to hacking threats. In Bitcoin’s 10-year history, there were many cases of online exchanges hacking and theft, sometimes with millions of dollars worth of “coins” stolen.
However, many observers see potential advantages in cryptocurrencies, such as the possibility of maintaining value against inflation and facilitating exchange while being easier to transport and divide than precious metals and existing outside the influence of central banks and governments.