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By now, almost anyone has heard about Bitcoin. Bitcoin was the first cryptocurrency, created in 2009, and is still the most commonly traded to date. But what is cryptocurrency?
In simple terms, cryptocurrency is a digital form of currency that is designed to be secure and, possibly, anonymous. It can be exchanged online for regular goods and services in addition to stocks or precious metals. Most people are familiar with the more popular ones such as Bitcoin and Ethereum, but research suggests that a majority of the people who have heard of them don’t fully understand how they work and what gives them value.
How do cryptocurrencies work?
A cryptocurrency is a decentralized, digital medium of exchange based on blockchain technology. Blockchain itself is a decentralized network of computers that adheres to a specific protocol to manage and record transactions in a secure and verifiable way. As a result, there is no governing authority to manage or maintain the value of cryptocurrencies, unlike the U.S. Dollar or the Euro, and since any payment made using a cryptocurrency boils down to digital entry on an online database, there is no need for banks to verify transactions, or to keep track of your money – instead, you store your cryptocurrency in a digital wallet.
Cryptocurrencies inherit their name from cryptography – they are secured by various encryption algorithms and techniques that are used to safeguard transactions.
Block chains Overview
Blockchains are essentially a list of records linked using cryptography. Cryptocurrencies make use of this technology by running a system of transaction records on blockchain. The blockchain network itself is supported by volunteers – “miners”, computer systems that put their power to solving complicated math problems that generate coins. Each of these computer systems has a ledger of all previous and current transactions in the chain, which means it’s impossible to create illegitimate coins or steal them from someone else’s wallet, because every copy of the ledger will recognize this transaction as fraudulent.
What gives cryptocurrencies value?
Any type of currency is valuable because it is simply accepted as a store of value. Gold is an example of this. The same is true for cryptocurrencies – the more people accept their existence as a store of value, the more valuable they become, and the more stable this value becomes.
As of March 2021, the total crypto market value was more than $1.67 trillion, and the sum value of all bitcoins was about $1 trillion, according to CoinMarketCap, a market research website.
Can you mine cryptocurrency?
It is possible for the average person to mine cryptocurrency. In fact, early on in Bitcoin’s history, it could be mined with regular at-home computers, however, this is no longer the case. The reason for this is that as the Bitcoin network gets bigger, it also gets more complicated, and solving the complicated math problems required for mining gets more and more complex over time, and the needed processing power increases. Nowadays, in order to mine competitively, miners must invest in powerful GPUs, or application-specific integrated circuits (ASICs), which can cost hundreds to tens of thousands of dollars. In addition, these pieces of equipment utilize significant amounts of electrical power to mine. As a result of these circumstances, bitcoin mining has become unprofitable for most individual miners, and many miners have shifted to mining Ethereum instead.
Examples of cryptocurrency
Bitcoin was the very first decentralized cryptocurrency, and was created in 2009 by an anonymous developer known only by the pseudonym “Satoshi Nakamoto”. It is still the most valuable and the most commonly traded cryptocurrency – at the time of writing, this digital coin has a price over $50,000.
More than 6,700 other cryptocurrencies are traded publicly, and more are developed every day. Cryptocurrencies that are not bitcoin are collectively referred to as “altcoins” – short for alternative cryptocurrencies. Examples of altcoins include Ethereum, the second most popular and valuable cryptocurrency, Litecoin, which has faster payments.
Uses of cryptocurrency
Cryptocurrencies, like any other form of currency, can be used to make purchases, although most mainstream retailers do not accept them as a form of payment. What gives them an advantage over other forms of currency, however, is their high level of security and anonymity. There is no way to cheat the system, and due to their decentralized nature, they’re available to everyone.
Another use of cryptocurrency is investment: many people see cryptocurrencies like Bitcoin as the currency of the future and thus are investing their money in them in hopes of turning a profit when/if they become more valuable.
To pay a person or retailer who accepts cryptocurrency, you’ll need a cryptocurrency wallet. Cryptocurrency wallets store your coins and can either be software programs, or hardware wallets (cards, thumb drives and such). Wallets interact with the blockchain essentially as a smaller miner – they they record and verify transactions on a smaller scale: For instance, when you deposit coins into your wallet, the wallet will verify this transaction against the blockchain ledger to let the network know that these coins are now in your wallet.
All wallets (software or hardware) have a specific string of letters and numbers which works as an address. When you deposit coins into your wallet, the network will use this address to identify your wallet and store your coins inside.
How do I buy cryptocurrency?
Some cryptocurrencies require purchase with bitcoin or another cryptocurrency, but investors can directly purchase most popular cryptocurrencies, including Bitcoin, with U.S. Dollars through exchanges such as Coinbase, Binance, Cash App and Robinhood. To purchase crypto through exchanges, you’ll need to create an account, transfer real money to that account, and then purchase your cryptocurrency of choice using that money and deposit it into your wallet.
Crypto is a highly speculative investment, and the markets tend to be volatile with price swings. As a result, some financial advisers don’t recommend investing in crypto, and recommend trading stocks of established companies as a less risky alternative.
The future of cryptocurrency
Cryptocurrencies suffer from many drawbacks and obstacles that may refrain mainstream adoption of them in the future. For instance, there are cybersecurity risks involved with Bitcoin exchanges: after all, they’re digital and vulnerable to hacks and glitches. One infamous example is the 2014 Mt. Gox hacking incident, in which hackers stole the equivalent of $460 million from the Japanese exchange.
There are also market risks: most cryptocurrencies lack inherent value and thus can be very volatile in price. Within their short time of existence, cryptos have had massive swings in value, and it’s possible that they’ll lose value if there’s continued resistance to the adoption of them.
Another massive concern with cryptocurrencies is their environmental impact: Bitcoin mining has a carbon footprint comparable to that of New Zealand, and consumes as much power as the entire nation of Chile, and as its price rises, so does its power consumption.
The bottom line
Cryptocurrencies, like many other new and exciting inventions, have the potential to be a curse or a blessing. They’re portable, secure and transparent forms of currency that also can be used for illegal activities, and are vulnerable to price swings, and, if not regulated, can be a massive detriment to the environment in an age of rapid climate change.