Cryptocurrency is a digital currency that uses cryptography to secure transactions, process payments, and control the creation of new units. The first cryptocurrency was Bitcoin, which was created in 2009 by an anonymous programmer, or a group of programmers, under the pseudonym Satoshi Nakamoto. Today there are over 1,000 different cryptocurrencies in circulation, with Bitcoin still being the most popular one. There are also other types of digital currencies, such as Litecoin, Cardano, and Ethereum.
These digital assets are revolutionary due to the underlying technology that they use. We’re talking about blockchain technology, which is used by many other digital currencies, and platforms as well. We’ll get into more details about various digital assets, but let’s first answer the question – What is cryptocurrency?
What is Cryptocurrency?
Cryptocurrency is a digital currency that is created and stored electronically. Cryptocurrency can be transferred between individuals without an intermediary(sometimes automatically thanks to smart contracts), such as a bank or credit card company. Cryptocurrencies are not controlled by a central bank or government but by cryptography. Cryptography is used to secure transactions and to control the creation of new units of a particular cryptocurrency. In most cases, this process works without any central authority verifying transactions.
That eliminates the need for financial institutions but brings forth some risks that we’ll discuss in a later section of this article.
Cryptocurrencies are also called crypto assets or digital currencies, as they use cryptography to secure their transactions and control the creation of new units. All this is made possible by cryptocurrency blockchain, which is at the core of all the crypto projects.
How Does Cryptocurrency Work?
Cryptocurrency is a digital currency. It’s used for online transactions and is created through a process called mining. They are a form of electronic cash, which makes them ideal as a way to make payments online without needing to pay fees or wait days for the transaction to clear.
On top of that, they aren’t controlled by any central authority. They exist only in the digital world. Because they aren’t backed by gold or other precious metals, their value fluctuates based on supply and demand. Aside from supply and demand, there are three core elements that make cryptocurrencies so popular:
- Cryptocurrency security is unmatched
- Every open source project is a decentralized system
- All crypto transactions are recorded in the blockchain ledger and cannot be changed
- Every cryptocurrency transaction is transparent. All the information on the public ledger can be accessed by anyone.
- It is anonymous as the distributed ledger only holds address and transaction details.
- Blockchain networks can process transactions in a matter of minutes.
While all these facts made cryptocurrency appealing, these virtual currencies hold their challenges. We’ll discuss the pros and cons later in the article, but the point is there’s more to the crypto ecosystem than simple supply and demand.
Cryptocurrencies use cryptography for security purposes. This means that transactions are verified by different consensus principles. When it comes to Bitcoin, that’s proof of work. Miners solve mathematical problems before adding them into blocks on public ledgers called blockchains. They are financially rewarded and motivated to keep mining to keep the system impenetrable.
What is the Role of Blockchain Technology in Cryptocurrency?
The blockchain is the technology that powers cryptocurrency and drives its security. The first blockchains were created in 2009 as part of the digital currency Bitcoin. Since then, many other cryptocurrencies have been developed using blockchain technology.
It’s becoming an increasingly popular method for organizing data in a way that allows it to be verified by multiple parties without being tampered with. That is possible because every transaction on the blockchain is stored in thousands of places across the network.
This decentralized database protects against fraud and tampering by requiring multiple parties to verify each transaction before it can be accepted into a block. Once a block has been completed with successful transactions, they cannot be changed or removed from the chain because they’re linked together chronologically through cryptography (encryption).
That gives the power to the crypto world. The role of the blockchain is to replace financial institutions. They are still needed for every fiat currency, but their role is non-existent in the crypto world.
What is Cryptocurrency Consensus?
Consensus is the process by which a decentralized network achieves agreement on what transactions are valid and should be included in the blockchain. That way, nobody can double-spend their digital currencies.
There are many different types of consensus algorithms, each with its own advantages and disadvantages. The most well-known type of consensus algorithm is Proof of Work (PoW). This system has been used by Bitcoin since 2009 and has led to a lot of criticism because it requires massive amounts of energy to perform calculations that prove whether or not someone owns bitcoins at any given time.
Other popular consensus algorithms are Proof of Stake and Proof of Space. There are many other consensus types, but these three are the most popular. Let’s take a closer look at them.
What is the Proof of Work
As you may have guessed, proof of work is a system that requires a computer to work through a problem to prove that it has done the work. It’s used in all kinds of applications today, including as an anti-spam mechanism on email servers and websites, as well as for cryptocurrency mining. It’s also used by blockchain networks like Bitcoin and Ethereum.
In order for transactions on a blockchain network to be verified (and therefore added), they must first pass through what’s known as “proof of work.” Proof of work functions by requiring computers within the network to solve complex mathematical problems in order for new blocks onto the chain; these computers are also referred to as miners.
In return for their efforts in solving these problems, miners receive rewards. Newly created tokens or transaction fees from users who want their transactions processed faster than others. The main disadvantage of this system is the complexity that requires more computing power. That causes higher power expenditure, making running the system costly.
What is the Proof of Stake
One of the most common ways to mine cryptocurrencies is through proof of work (PoW), which requires an immense amount of computing power. Proof of stake (PoS) is another method that’s gaining popularity, and it has some significant benefits over Proof of Work.
Proof of Stake mining is a way for cryptocurrency miners to prove that they own a certain number of coins. In fact, it’s where the term “staking” comes from staking coins means depositing them as collateral so you can gain more coins faster when you’re selected by the network to mine new blocks on the blockchain.
With PoS mining, there are no hard-and-fast rules about how many coins one must own before being able to participate in this process; instead, people are chosen based on their wealth. The more money they’ve put into buying up coins, the better chance they have of being chosen as miners. Blockchain networks like Cardano use this type of consensus, and they enable everyone to participate through various stake pools. That way, all the users who stake, no matter how much ADA they have, can benefit from Proof of Stake algorithms.
What is Proof of Space?
Proof of Space is becoming increasingly popular among crypto enthusiasts. Unlike proof of work, it requires much less computing power. As its name suggests, it relies on a storage set and uses it in the consensus process. The more storage network members are delegated to the system, the higher the rewards they’ll receive.
What is Cryptocurrency Mining?
Mining is the process of creating new coins. It’s how cryptocurrency transactions are verified and added to the blockchain. The way mining works is that miners solve complex mathematical problems using computers and the processing power of their machines.
These problems can be solved fairly quickly, but verifying them requires a lot more work by other miners who see if they match up with the solution that’s been shared publicly. If it does, then it’s stored in a block as part of a transaction record (aka distributed ledger).
This means that every time you send money or buy something online using Bitcoin or another cryptocurrency, there are many people around the world working together to ensure that your transaction goes through safely and securely (and anonymously).
Those who participate in the mining process are rewarded with the new coins that are added to the network. To prevent long-term inflation, all cryptocurrencies like Bitcoin have a limited supply. Once the supply is reached, miners get their rewards from the fees that users pay to the network.
That is the primary reason why many participate in mining. In fact, Bitcoin mining is still profitable, despite the insane computing power it now requires.
What are the Most Popular Cryptocurrencies?
Some of these coins, such as Bitcoin and Ethereum, are well-known. Other digital currencies are less common but still popular in the cryptocurrency space. Here’s a list of some of the most popular cryptocurrencies:
- Bitcoin (BTC)
- Ethereum (ETH)
- Ripple (XRP)
- Cardano (ADA)
- Polkadot (DOT)
- Litecoin (LTC)
- Solana (SOL)
- Chainlink (LINK)
You may have heard about some of these cryptocurrencies but don’t know much about them, luckily there are white papers for each of these projects. They contain all the details of the crypto project. If you want to learn more, there are communities surrounding each of these projects where you can learn more.
Whether we’re talking about major cryptocurrencies such as Bitcoin or new platforms that have only launched, learning more about them can significantly pay off in the future. Here are the pros and cons that all cryptocurrencies share.
Cryptocurrency Pros and Cons
Cryptocurrency Pros:
- Cryptocurrency is not controlled by a central government or bank. This means that no government can directly influence cryptocurrencies. As a decentralized network, the nodes in the network hold all the voting rights. No single entity can interfere with the network.
- Cryptocurrency is decentralized and cannot be hacked because it uses cryptography (encryption) technology to secure transactions. The blockchain technology used in Bitcoin makes it impossible for anyone but the owner of an account with the right information (private key) to access their money.
- Cryptocurrencies are anonymous. Digital wallets are only in the system, there are no names and surnames linked to them.
- Cryptocurrency payments are processed extremely quickly. That makes cryptocurrencies practical for things like online payments and international payments with particles that accept Bitcoin.
- No need for physical money. All financial transactions with cryptocurrencies are digital.
- Transaction costs are significantly cheaper than traditional currency. Especially when more money is transferred.
- Buying virtual currency and other cryptocurrencies is simple. You can convert crypto to fiat currency and vice-versa seamlessly.
Cryptocurrency Cons:
- Cryptocurrencies are still new technologies, so there are risks involved with using them that won’t apply when using traditional currencies such as dollars, euros, or credit cards. These are namely security concerns. This includes protecting yourself against scams.
- User-friendliness is a major challenge. Fiat currencies are simple to use. Since cryptocurrencies are still new, there’s a steep learning curve to using them.
- Governments are yet to make cryptocurrencies legal in numerous countries. They are still not considered currencies but digital assets. Only after becoming the official currency, like in El Salvador, will it be able to go mainstream.
How to Buy Cryptocurrency?
You can buy cryptocurrencies in several ways. The most common way to do this is by using a cryptocurrency exchange. It is a platform that allows you to purchase cryptocurrency at current market rates. They make it easy to invest in crypto but also to enjoy crypto trading. Once you make the payment to an exchange, you can proceed and buy and sell cryptocurrencies.
Exchanges are not the only way to acquire cryptocurrency. There are many other ways. You can mine cryptocurrency, you can stake your funds and receive rewards. You can invest in Initial coin offerings when projects are launching. ICOs are available only with a specific cryptocurrency. The most popular example is the Ethereum blockchain. It is a platform on top of which projects are built.
With DeFi (Decentralized Finance) being developed, cryptocurrency holders can earn more crypto through lending their funds.
What are the Top Cryptocurrency Exchanges?
Although there are many cryptocurrency exchanges, here are the top ones:
- Coinbase
- Binance
- Bittrex
- Bitfinex
- Kraken
- Bitstamp
These are the best crypto exchanges that have gained much popularity over the years. They are some of the most trustworthy crypto exchanges due to their working principles. This is a short list, considering there are dozens of other options out there.
Decentralized exchanges are also becoming more popular, but they only accept cryptocurrencies. You cannot make deposits and withdrawals with fiat currencies. We’ll talk more about them in a different article.
How Can You Store Cryptocurrency?
If you want to own cryptocurrency and use it as a payment method, you must have a digital wallet. Unlike having an account with central banks, using a cryptocurrency like Bitcoin will require learning how to use a wallet. The wallet can be stored in many different places, but the most common options are:
- Digital wallets (e.g., Coinbase)
- Hardware wallets (e.g., Trezor)
- Paper wallets (e.g., MyEtherWallet)
- Mobile wallets (e.g., Blockchain Wallet)
Some of these options also allow for offline storage, which requires printing out your private keys and storing them in a safe place like your home safe or safety deposit box at the bank. This is definitely not recommended for beginners as it’s a more complex process.
However, it’s important to mention that using a cold wallet (paper wallet) is the most secure option. Whether you’re using Bitcoin or other cryptocurrencies, storing them long-term is the best in a cold wallet.
What is a Hot Crypto Wallet?
A hot wallet is a digital wallet that is connected to the internet. Hot wallets are best for day-to-day transactions because they enable you to easily access your funds, send them to anyone, and use them from different devices.
If you use a hot wallet, you don’t need to download the whole blockchain—the record of all previous transactions on the network—and can instead rely on third parties (e.g. cryptocurrency exchanges) that keep track of your balance for you.
However, keep in mind that technically, a third party controls your Bitcoin or other crypto assets. Therefore, all currency holders should consider moving their funds away from hot wallets when they’re not using them to make transactions daily.
What is a Cold Crypto Wallet?
When you store cryptocurrency on a cold wallet, it is stored offline and therefore not vulnerable to data breaches or hacks. When you use a hot wallet, your cryptocurrency may be at risk because it is stored online and connected to the internet.
Some types of cold wallets are better than others for long-term storage. Hardware wallets like the Trezor or Ledger Nano S work well for this purpose because they are designed for that purpose specifically: holding large amounts of cryptocurrency off the internet to protect them from hackers.
However, any type of paper wallet can also be considered “cold” if it isn’t connected directly to the internet and can only be accessed when physically plugged into another device (such as a computer) that has been previously authenticated by its owner (you).
Should You Invest in Cryptocurrencies?
If you’re going to invest in cryptocurrencies, it’s important to do your research and know what the risks are. Cryptocurrencies are volatile and subject to market forces. You should only invest what you can afford to lose.
For example, Bitcoin reached an all-time high of nearly $70,000 recently before falling below $20,000 only a couple of months later. These fluctuations of Bitcoin and other cryptocurrencies are a clear indicator of their volatility.
Cryptocurrencies are also relatively new: they only existed for a few years before 2016, when Bitcoin experienced its first surge in popularity. Therefore there hasn’t been time for regulators or economists to understand them well enough yet.
Many experts doubt whether these currencies will be successful long-term or if they’ll remain legal tender at all. This means that even if you buy into cryptocurrency today with money saved up specifically for this purpose (which is already risky), there’s still no guarantee that your investment will pay off later on down the line, especially considering how volatile cryptocurrency prices have been so far.
Why are Cryptocurrencies Volatile?
Cryptocurrencies are highly volatile assets due to several reasons. The price of a cryptocurrency can change rapidly, sometimes several times within a single day. This is due to many factors, including market manipulation and speculation, but it also has to do with what some people call fear of missing out.
The reason for this is simple: cryptocurrencies have only existed since 2008 (Bitcoin), so there aren’t many long-term investors in the market who can help keep the price stable when things start crashing down around it.
Additionally, factors like news can make a significant impact on the whole crypto space. Bitcoin, being the first, dictates the direction of all the other altcoins. When you add the fact that governments don’t want to legalize something they can’t fully control, it’s clear that there are various elements that impact the price of BTC, ETH and ADA, among other crypto assets.
Is Cryptocurrency Widely Accepted?
Currently, cryptocurrency is not widely accepted as a form of payment. However, you can find some places that will accept it as a form of payment. The good news is that all big businesses are considering accepting at least some cryptocurrencies. Bitcoin and Litecoing have the highest adoption, as thousands of businesses accept them. Still, it’s a long road for these payment systems to take over traditional banking.
Is Cryptocurrency Secure?
Cryptocurrency is secure if you store it in a wallet. The main security risk is that someone can access your private key and steal your coins. However, this can happen with any asset (e.g., paper money). The only way to prevent this from happening would be to not share anything about cryptocurrency with anyone. That includes your friends and family!
If you don’t want anyone to know about your cryptocurrency holdings, then consider using something like CoinJoin or CoinShuffle for Bitcoin or privacy coins such as Monero or Zcash. These tools make it harder for people to find out how much money was sent to an address by combining outputs together before sending funds back out again (i.e., mixing them).
Conclusion
Cryptocurrencies are a promising new technology, but they still have a long way to go. It’s important to keep an open mind about the risks and benefits of this new world of money to make an informed decision when deciding whether or not to invest in it. The cryptocurrency market has a long way to go, but if you judge from the past, its future looks bright.
Again, before making any crypto purchases, ensure you know everything about the project you’re investing in. Like all the other financial decisions, investing in crypto requires a thorough analysis. Only buy cryptocurrency with money that you can afford to lose. If you want to read more about crypto, take a look at our other crypto articles to learn more about the exciting space.
