Cryptocurrencies (or Crypto) are digital currencies or digital money.
They don’t exist physically like the coins and cash people use, they’re completely virtual.
Cryptocurrencies are used to purchase lots of different products and services, and some people are now even buying big things like cars and houses!
They’re not widely used at the moment, but the use of cryptocurrencies could one day become a common way to buy and sell things.
Although we can’t see or touch cryptocurrencies, they hold value.
Cryptocurrencies can be stored in a ‘digital wallet‘ on a smartphone or computer, and owners can send them to people to buy things.
Bitcoin is believed to be the first ever cryptocurrency created. It first came out in 2009 invented by Satoshi Nakamoto.
it is a peer-to-peer electronic cash system. In that, it is much similar to peer-to-peer file transactions, where there is no involvement of any central authority or regulator.
Cryptocurrencies are transactions or entries in a shared ledger that can only be changed upon meeting certain criteria. Typically, in a blockchain technology like the Bitcoin network, each transaction consists of the involved parties’ – sender and receiver – wallet addresses or public keys and the amount of such transaction.
What attributes the safety net in such a network to avoid fraud is that the sender needs to confirm a transaction with their private key. After confirmation, the transaction is reflected in the shared ledger or database.
What is the Use of Cryptocurrency?
It is worth wondering if the popularity that cryptocurrency has garnered over the years is hollow or not. However, even though it is still nowhere near to replacing institutionalized cash, cryptocurrency, especially Bitcoin, has found wide acceptance across the world.
- As a mode of payment
Initially, Bitcoin had little value as a mode of payment to merchants. However, with time, several merchants worldwide like restaurants, flights, jewelers, and apps have come to accept it as a viable payment medium.
One of the most notable acceptors of cryptocurrency as a viable medium of payment is Apple Inc. It allows 10 types of cryptocurrencies for carrying out transactions in the App Store.
However, India, as an economy is still to explore cryptocurrency as a viable payment mode extensively. Nevertheless, with big companies like Apple and Facebook hoisting its cause, it is expected that cryptocurrency will gain traction in India soon.
- Investment
Cryptocurrencies, especially Bitcoin, is one of the most lucrative investment options currently present. Its value appreciation is supremely dynamic and can prove to be an excellent avenue for capital expansion.
However, only miners are authorised to confirm transactions within a cryptocurrency network.
They need to solve puzzles to confirm any specific transaction. In exchange for their service, they receive a transaction fee in that particular type of cryptocurrency and a reward.
What are the Different Types of Cryptocurrencies?
When it comes to the variants of cryptocurrencies, most are forks of Bitcoin, while others were built from scratch. However, there are only 3 broad types of cryptocurrencies currently in existence. These are –
- Bitcoin
It is the first cryptocurrency that was ever introduced and is considered the “digital gold”. It currently holds a market capitalization of $172.76 billion, the largest of any other variant of cryptocurrency. A unit of Bitcoin can be broken down into Satoshis, which is equivalent to the relationship of rupees and paise.
Furthermore, the Bitcoin network is so designed that it can only have 21 million units of Bitcoin circulation at any point in time. This limited availability is a primary component that drives its market price.
- Altcoins
This category primarily involves forks and alternate versions of Bitcoin, thus, the name. However, some Altcoins are exponentially different from Bitcoin and use varying algorithms. For instance, Ethereum, which is an altcoin, is not a currency but a platform where entities can make their apps based on blockchain.
Currently, there are more than a thousand altcoins. Some of the notable altcoins are Ethereum, Factom, Litecoin, NEO, etc.
- Tokens
These are products of altcoins like Ethereum and NEO. These cryptocurrencies do not have a separate blockchain but instead run on the decentralized apps created via such altcoins. However, tokens carry supremely low value compared to the other two types mentioned above, because it can only be used to purchase items from such decentralized apps or dApps.
How to Buy Cryptocurrency?
Compared to other variants of cryptocurrency, units of Bitcoin can be purchased more conveniently owing to a large number of options. Individuals can choose to purchase it from cryptocurrency exchanges, using gift cards, via investment trusts.
How to Store Cryptocurrency?
Entities can hold units of cryptocurrencies in wallets – offline and online. Each such wallet holds a public key, i.e. the wallet address and a private key (used to sign off payments). In any case, it is not exactly the units of cryptocurrency that one holds but the private key.
Nevertheless, entities can select from a wide range of crypto wallets, each catering to a different purpose. Online wallets largely serve the purpose of regular transactions. Apple, as well as J.P. Morgan Chase, Visa, and Facebook, have introduced online crypto-wallets. Conversely, offline or cold wallets are stored in a person’s hard drive and serve the purpose of security of cryptocurrency.
Cryptocurrency Advantages and Disadvantages
Protection Against Inflation: Inflation has led several currencies to lose value over time. The amount of any coin is specified in the source code. As demand grows, its value rises, keeping pace with the market and, in the long term, preventing inflation.
Privacy: Cryptocurrency privacy and security have long been key concerns. The blockchain ledger is built on many mathematical problems that are difficult to decode. As a result, bitcoin transactions are more secure than standard electronic transactions. To improve security and privacy, cryptocurrency uses pseudonyms that are unrelated to any user, account, or stored data that may be traced to a profile.
Self-Governed: The governance and upkeep of any currency are critical to its development. Developers/miners hold cryptocurrency transactions on their hardware and receive the transaction fee as a reward. Since miners are compensated for their efforts, they keep transaction records accurate and up to date, preserving the cryptocurrency’s integrity and keeping records decentralized.
Decentralization: One important advantage of cryptocurrency is that it is mostly decentralized. Many cryptocurrencies are controlled by the developers who use them and people who own a large amount of the coin or by a firm that develops it before it is given to the market. Decentralization serves to keep the currency monopoly free and in check by ensuring that no single entity determines the flow and value of the coin, which, in turn, keeps it stable and secure, not like fiat currencies, which are controlled by the government.
Easy Transfer: Cryptocurrencies have traditionally been seen as the best option for transactions. Cryptocurrency transactions, whether international or domestic, are lightning fast. Because there are minimal barriers to overcome, the verification takes extremely little time to complete.
Disadvantages
Some coins cannot be obtained in other fiat currencies: Some cryptocurrencies are only available in a single or a few fiat currencies. This forces the user to first convert these currencies into one of the major currencies, such as Bitcoin or Ethereum, and then to their desired currency via other exchanges. This only applies to a few cryptocurrencies. This results in the addition of superfluous transaction fees to the process.
Hacks: Although cryptocurrencies are extremely secure, exchanges are not. Most exchanges save user wallet info in order to correctly operate their user ID. Hackers can steal this information and get access to a large number of accounts. These hackers can quickly move funds from those accounts once they have gained access.
Some exchanges, including Bitfinex and Mt Gox, have been hacked in recent years, and Bitcoin worth thousands and millions of dollars has been stolen. Most exchanges are now highly secure, but there is always the possibility of another hack.
No refunds or Cancels: If there is a disagreement between the parties involved or if funds are sent to the wrong wallet address by mistake, the sender cannot retrieve the coin. Many people can utilise this to defraud others for their money. Because there are no refunds, one can simply be formed for a transaction for which they never received the product or services.
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