A Beginner’s Guide to the World of Cryptocurrency

Cryptocurrency is a form of digital asset based on a network that is distributed across a large number of computers

A Beginner’s Guide to the World of Cryptocurrency
A Beginner’s Guide to the World of Cryptocurrency
Harsh Kumar - 19 August 2021

In the era of digitalisation, the form of money has also changed rapidly. From barter systems to old age coins, paper notes, now we have jumped towards digital currencies. Cryptocurrencies have emerged as the new method of exchange to purchase various products and services globally. Also, some are buying houses and cars and visualising their future in it. It has made very rapid popularity in the last few years. Let's understand cryptocurrencies in detail.

What are Cryptocurrencies?

Cryptocurrencies are digital currencies or digital money, which do not exist in physical forms like coins and cash. But it exists in the virtual form and holds significant value. It can be stored in a ‘digital wallet’ on a smartphone or computer, and owners can send them to people to buy things. Blockchain is the technology that enables cryptocurrency to function. Blockchain is a decentralised system that organises and records transactions across multiple computers. The security of this technology is part of its attraction.

In addition, unlike regular money, which is created around centralised distribution, cryptocurrency is maintained using something called a distributed ledger. This makes a great degree of transparency but further anonymity through the use of encryption. They are able to exist outside of the control of governments and central authorities because of their decentralised nature. Bitcoin is considered the first cryptocurrency which was developed by a Japanese programmer Satoshi Nakamoto in the year 2009.

How Do Cryptocurrencies Work?

When a transaction takes place through cryptocurrencies, then no third parties like banks or others are involved. This exchange of digital currencies is known as ‘peer-to-peer transactions. Importantly, every transaction ever made is recorded on an immense database known as a blockchain - think about it as a large spreadsheet. Individual transactions made are represented by a block that is added to the larger chain, hence the name blockchain, and all the transactions remain in the blockchain forever.

Blockchain is not based in a central location but is scattered among a large network of computers which is kept protected at all times through complex systems. This makes it virtually impossible for anyone to tamper with a blockchain and guarantees all transactions and users are shielded.

Cryptocurrencies have the potential to make it simpler to move payments between two parties without the use of a trusted third party such as a bank or credit card firm. Instead, these transactions are protected by the use of public and private keys and other incentive systems like Proof of Work and Proof of Stake.

In current cryptocurrency systems, a user’s “wallet” or account address has a public key, while the private key is only known by the owner and is used to sign transactions. As a result, users can avoid the high costs banks and financial institutions charge for wire transfers by completing fund transactions with minimum processing expenses.

How Do You Get Hold of Cryptocurrencies?

The process of holding cryptocurrencies like Bitcoin through a process is termed mining. Also, they can buy and sell too. Individuals or groups can set up computers with high powers, and these are tasked with working out incredibly tough equations. Moreover, machines can add transactions to the blockchain, and further check their validity, ensuring they’re all accurate.

To purchase cryptocurrencies, you’ll need a “wallet,” an internet software that stores your funds. In general, you open an account at a cryptocurrency exchange and then use real money to purchase cryptocurrencies like Bitcoin or Ethereum.

However, the sums are becoming more and more complex as more Bitcoins enter circulation - a fancy way of saying there are more coins up for grabs - to make sure there are not too many being generated. To put it in context, if you were to begin mining now, it could be years before you got a single Bitcoin.

Coinbase is a well-known cryptocurrency exchange where you can open a wallet and buy and sell Bitcoin and other cryptocurrencies. Cryptocurrencies are also available via an increasing number of online brokers, including eToro, Tradestation, and Sofi Active Investing.

Popular Cryptocurrencies

Bitcoin was the first blockchain-based cryptocurrency, and it is still the most popular and lucrative. However, thousands of alternative cryptocurrencies exist today, each with its own set of features and requirements. Some are Bitcoin clones or forks, while others are brand-new currencies created from the ground up.

Litecoin, Peercoin, Namecoin, and Ethereum, Cardano, and EOS are some of the rival cryptocurrencies generated by Bitcoin’s success. The entire value of all cryptocurrencies has surpassed 1.8 trillion dollars, with Bitcoin accounting for around 46.5 per cent of that total.

Criticisms in Recent Years

Since cryptocurrency market values are determined by supply and demand, the rate at which a cryptocurrency may be traded for another currency might vary greatly. This is especially true because many cryptocurrencies are designed to be scarce.

There is a worry that any tangible assets do not back cryptocurrencies such as Bitcoin. According to certain studies, the cost of creating a Bitcoin, which consumes a growing quantity of energy, is directly proportional to its market price.

Although bitcoin blockchains are extremely secure, other elements of the cryptocurrency ecosystem, including exchanges and wallets, are vulnerable to hacking. Several online exchanges have been hacked and stolen over Bitcoin’s ten-year lifespan, with millions of dollars in “coins” taken in certain cases.

Despite this, many analysts regard cryptocurrencies as having potential benefits, such as the ability to preserve value against inflation and facilitate exchange while being simpler to carry and split than precious metals and existing beyond the authority of central banks and governments.

Cryptocurrencies have been chastised for various reasons, including their usage for criminal operations, exchange rate volatility, and the infrastructure that underpins them being vulnerable. Their mobility, divisibility, inflation resistance, and transparency, on the other hand, have been lauded.

Cryptocurrency as an Investment

Cryptocurrencies may appreciate in value, but many investors regard them as speculative investments rather than long-term investments. What is the reason behind this? Cryptocurrencies, like actual currencies, have no cash flow. Therefore, for you to benefit, someone else must pay more for the currency than you did. This is known as the “greater fool” investment hypothesis. In contrast, a well-managed firm grows in value over time through increased profitability and cash flow.

For those who believe that cryptocurrencies like Bitcoin will be the currency of the future, it’s important to remember that a currency needs to be stable for merchants and customers to know what a fair price for products is. This price fluctuation is a problem. People might be less inclined to spend and circulate bitcoins now if they are worth a lot more in the future, making them less viable as a currency. However, the boom in popularity and accessibility has led to a general acceptance of cryptocurrency as a probable future of money.

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