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What Is Cryptocurrency?
A cryptocurrency is a digital or virtual currency that is protected by encryption, making counterfeiting and double-spending practically impossible. Many cryptocurrencies are built on blockchain technology, which is a distributed ledger enforced by a distributed network of computers.
Cryptocurrencies are distinguished by the fact that they are not issued by any central authority, making them potentially impervious to government intervention or manipulation.
KEY TAKEAWAYS
- A cryptocurrency is a form of digital asset based on a network that is distributed across a large number of computers. This decentralized structure allows them to exist outside the control of governments and central authorities.
- Experts believe that blockchain and related technology will disrupt many industries, including finance and law.
- The advantages of cryptocurrencies include cheaper and faster money transfers and decentralized systems that do not collapse at a single point of failure.
- The disadvantages of cryptocurrencies include their price volatility, high energy consumption for mining activities, and use in criminal activities.
Understanding Cryptocurrencies
Cryptocurrencies are digital or virtual currencies that rely on cryptography technologies to function. They make it possible to make safe online payments without the involvement of third-party payment processors.
Various encryption methods and cryptographic approaches, such as elliptical curve encryption, public-private key pairs, and hashing functions, are referred to as “crypto.”
Blockchain
Blockchain technology is at the heart of Bitcoin’s and other cryptocurrencies’ attractiveness and usefulness. A blockchain is, as its name implies, a collection of interconnected blocks, or an online ledger. Each block comprises a collection of transactions that each network member has independently validated.
Every new block must be validated by each node before being confirmed, making forging transaction histories nearly impossible. The contents of an online ledger must be agreed upon by the whole network of a single node, or computer, that keeps a copy of the ledger.
Types of Cryptocurrency
The most well-known and valued cryptocurrency is Bitcoin. It was conceived and introduced to the public in 2008 by an unidentified individual named Satoshi Nakamoto through a white paper. Thousands of cryptocurrencies are currently available on the market.
Every cryptocurrency claims to have a unique purpose and specification. Ethereum’s ether, for example, is marketed as “gas” for the underlying smart contract platform. Banks utilize Ripple’s XRP to ease transfers between different locations.
available to the public in 2009. There were around 18.8 million bitcoins in circulation as of November 2021, with a total market cap of around $1.2 trillion. There will only be 21 million bitcoins ever created.
In the wake of Bitcoin’s success, many other cryptocurrencies, known as “altcoins,” have been launched. Some of these are clones or forks of Bitcoin, while others are new currencies that were built from scratch.
They include Solana, Litecoin, Ethereum, Cardano, and EOS. By November 2021, the aggregate value of all the cryptocurrencies in existence had reached over $2.1 trillion, and Bitcoin represented approximately 41% of that total value.
Are Cryptocurrencies Legal?
Fiat currencies derive their authority as mediums of transaction from the government or monetary authorities. For example, each dollar bill is backstopped by the Federal Reserve.
Cryptocurrencies, on the other hand, are not backed by any government or corporate entity. As a result, establishing their legal standing in many financial countries throughout the world has proven problematic. The fact that cryptocurrencies have mostly operated outside of the current financial infrastructure doesn’t help matters.
.Within its boundaries, China has outlawed cryptocurrency trades and mining. In December, it was claimed that India was working on a cryptocurrency architecture.
The European Commission published the Markets in Crypto-Assets (MiCA) regulation in June 2021, which defines regulatory safeguards and requirements for organizations or suppliers who provide financial services utilizing cryptocurrency.
Crypto derivatives such as Bitcoin futures are offered in the United States, the world’s largest and most sophisticated financial market.
Advantages and Disadvantages of Cryptocurrency
Cryptocurrencies were introduced with the intent of revolutionizing financial infrastructure. As with every revolution, however, there are tradeoffs involved.
At the current stage of development for cryptocurrencies, there are many differences between the theoretical ideal of a decentralized system with cryptocurrencies and its practical implementation.
- Cryptocurrency transfers between two transacting parties are faster than traditional money transfers since they do not employ third-party intermediaries. Flash loans are a nice illustration of decentralized transfers in decentralized finance. These loans, which are not backed by security, can be completed in seconds and are employed in trading.
- Investing in cryptocurrencies can be profitable. Over the last decade, the value of cryptocurrency markets has surged, reaching nearly $2 trillion at one time. On December 20, 2021, Bitcoin was worth over $862 billion on crypto marketplaces.
- The remittance economy is testing one of cryptocurrency’s most prominent use cases. Currently, cryptocurrencies such as Bitcoin serve as intermediary currencies to streamline money transfers across borders.
- Thus, a fiat currency is converted to Bitcoin (or another cryptocurrency), transferred across borders, and, subsequently, converted to the destination fiat currency. This method streamlines the money transfer process and makes it cheaper.
Disadvantages
- Although they claim to be an anonymous form of transaction, cryptocurrencies are actually pseudonymous. They leave a digital trail that agencies such as the Federal Bureau of Investigation (FBI) can decipher. This opens up the possibility of governments or federal authorities tracking the financial transactions of ordinary citizens.
- Cryptocurrencies have become a popular tool with criminals for nefarious activities such as money laundering and illicit purchases. The case of Dread Pirate Roberts, who ran a marketplace to sell drugs on the dark web, is already well known. Cryptocurrencies have also become a favorite of hackers who use them for ransomware activities.
- In theory, cryptocurrencies are meant to be decentralized, with their wealth distributed among many parties on a blockchain. In reality, ownership is highly concentrated. For example, an MIT study found that just 11,000 investors held roughly 45% of Bitcoin’s surging value. One of the conceits of cryptocurrencies is that anyone can mine them using a computer with an Internet connection.
- However, mining popular cryptocurrencies requires considerable energy, sometimes as much energy as entire countries consume. The expensive energy costs coupled with the unpredictability of mining have concentrated mining among large firms whose revenues run into the billions of dollars. According to an MIT study, 10% of miners account for 90% of the country’s mining capacity.
- While ThThoryptocurrency blockchains are highly secure, other crypto repositories, such as exchanges and wallets, can be hacked. Many cryptocurrency exchanges and wallets have been hacked over the years, sometimes resulting in millions of dollars worth of “c” coins being stolen. Cryptocurrencies traded in public markets suffer from price volatility.
- Bitcoin has experienced rapid surges and crashes in its value, climbing to as high as $17,738 in December 2017 before dropping to $7,575 in the following months. Some economists, therefore, consider cryptocurrencies to be a short-lived fad or speculative bubble.
$862.1 billion
Total market cap of Bitcoin, as of Dec. 20, 2021.
Frequently Asked Questions
What Is Cryptocurrency in Plain Words?
Cryptocurrencies are digital assets and decentralized systems that allow for secure online payments.
How Do You Get Cryptocurrency?
Any investor can purchase cryptocurrency from popular crypto exchanges such as Coinbase, thru apps such as Cash App, or thru brokers.
Another popular way to invest in cryptocurrencies is thru financial derivatives, such as CME’s Bitcoin futures, or thru other instruments, such as Bitcoin trusts and Bitcoin ETFs.
What Is the Point of Cryptocurrency?
Cryptocurrencies are a new paradigm for money. Their promise is to streamline the existing financial architecture to make it faster and cheaper.
Their technology and architecture decentralize existing monetary systems and make it possible for transacting parties to exchange value and money independently of intermediary institutions such as banks.
Can You Generate Cryptocurrency?
Cryptocurrencies are generated by mining. For example, Bitcoin is generated using Bitcoin mining. The process involves downloading software that contains a partial or full history of transactions that have occurred on its network.
Tho anyone with a computer and an Internet connection can mine cryptocurrency, the energy- and resource-intensive nature of mining means that large firms dominate the industry.
What Are the Most Popular Cryptocurrencies?
Bitcoin is by far the most popular cryptocurrency, followed by other cryptocurrencies such as Ethereum, Binance Coin, Solana, and Cardano.
Are Cryptocurrencies Securities?
The SEC has said that Bitcoin and Ethereum, the top two cryptocurrencies by market cap, are not securities. It has not commented on the status of other cryptocurrencies.