There are different definitions of cryptocurrency. Some people say it is a digital currency, while some argue that cryptocurrency is not money at all because it does not act as a store of value or medium of exchange.
We would like to offer another definition: Cryptocurrency is a cryptographically secured digital asset which works with decentralized consensus. This means that cryptocurrency is a digital asset that you can transfer, save and use in transactions.
It is secured with cryptography (hence the term cryptocurrency) through decentralized consensus which means that no central authority or third party is needed for validating transactions (like banks).
How do Cryptocurrencies Work?
Cryptocurrency is a decentralized digital currency that relies on public and private key cryptography. Public key cryptography uses a. We call it “public” because anyone can use this information for encrypting messages. A private key is usually used for decrypting encrypted messages and verification of signatures. The combination of these keys allows cryptocurrency to be transferred between users without any central authority.
Every transaction in cryptocurrency works like this: Alice wants to send 1 BTC to Bob. Proof of ownership is cryptographically signed and verified by the network using public key cryptography. The transaction is then propagated through the network until it reaches miners.
Miners pick up transactions from the network and put them into blocks that will be solved within 10 minutes. The first miner to solve the block gets a reward and transaction fees for validating transactions, while all others who helped with solving the block get a small part of the fees as well. To prevent double spending, miners keep track of all unspent transactions in the network and verify them before including them in the solved block.
Cryptocurrency Mining and the blockchain
Cryptocurrency is mined using powerful mining computers (so-called ASICs) which solve complex mathematical equations in order to cryptographically sign the next block of transactions. This whole process is known as the blockchain. Once a new block is solved, it needs to be propagated through the network and added to the blockchain by miners.
The Future of Cryptocurrency
Cryptocurrency is becoming more and more popular around the world. Bitcoin was the first cryptocurrency to launch, but now there are numerous other cryptocurrencies that derive from Bitcoin’s original source code (for example Litecoin or Dogecoin). The total market capitalization of all cryptocurrencies exceeded 20 billion USD on September 1st, 2015. This makes it one of the fastest-growing markets in the world.
Pros and Cons of Investing in Cryptocurrencies
- Cryptocurrencies are decentralized which means that there is no one (like a bank) to control the flow of money.
- There are no transaction fees like credit cards or PayPal.
- Cryptocurrencies can be transferred worldwide within seconds, while transfers between banks may take several days or weeks.
- Cryptocurrencies are completely dependent on the demand and can cost of energy needed for mining. This means that they may become more expensive if the price of electricity used for mining goes up. Also, there is a risk that it will become unprofitable to mine some cryptocurrencies (like Bitcoin) because currently, it costs more in electricity than you will earn in the mined currency.
- Cryptocurrencies are anonymous but not completely secure, because transactions can be tracked when they are included in the blockchain. Also, cryptocurrencies are often used for illegal activities (like selling drugs) because you can transfer them anonymously and no one will know who made the transaction.
- Cryptocurrencies are very volatile, which means that their value can fluctuate very quickly. Cryptocurrencies are not currently regulated by governments and may be unsafe to invest large amounts of money in them.
- Most cryptocurrencies rely heavily on computers (like Bitcoin) or smartphones (like Dogecoin), so they can become even more expensive if there is a shortage of either computers or smartphones.
- Cryptocurrencies can be hacked, stolen, or lost due to technical issues with the wallet software or hardware crash. Also, since cryptocurrencies are anonymous it is very difficult to track down people who stole your coins.
Why do People invest in Cryptocurrencies?
Demand for cryptocurrencies is increasing rapidly with the rise of new blockchain projects, which are making cryptocurrency more accessible to the general public. A blockchain is an open-source software that can be used by anyone, so it may become mainstream in near future.
Also, there are some cryptocurrencies that you can acquire for free (like Dogecoin) which makes them easy to get if you already have an internet connection.
How to Buy and Sell Cryptocurrencies?
Currently, cryptocurrencies are mostly traded on online exchanges (for example Coinbase). Cryptocurrencies can be bought with fiat currencies like USD, EUR, CAD, or GBP and then either sold for another cryptocurrency if the price is expected to go up. The price of cryptocurrencies also depends on supply and demand, so they can become more expensive if there are fewer of them available.
The cryptocurrency market is growing rapidly and it’s becoming more popular day by day. The future of cryptocurrency is expected to be bright, however, the technology behind cryptocurrencies (blockchain) may become even more important than the currencies themselves.
New blockchains are being created every now and then with their own features which aim to decentralize other industries like governments or healthcare. Cryptocurrencies are here to stay, but the role of blockchain technology in our lives maybe even more important.