An Introduction to Cryptocurrency
A cryptocurrency is a digital coin, designed to be transferred between people in virtual transactions. Cryptocurrencies exist only as data and not as physical objects; you cannot actually hold a Bitcoin in your hand or keep Ethereum in your safe. Owning a Bitcoin means you have the collective agreement of each and every computer on the Bitcoin network that it is currently owned by you and – more importantly – that it was legitimately created by a miner. cryptocurrency is a digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of this security feature.A defining feature of a cryptocurrency, and arguably its most endearing allure, is its organic nature; it is not issued by any central authority, rendering it theoretically immune to government interference or manipulation.
Blockchain – The Technology Behind Cryptocurrencies
Unlike traditional transactions, cryptocurrency transfers are not handled by banks or other financial institutions. Every time someone pays via e-coin, his payment is recorded on a digital ledger called the blockchain.
What is Blockchain
A list of transaction records, called blocks, which are linked to each other and encrypted. The blockchain is continuously growing and is completely open to anyone.
Each block in the blockchain contains:
- The details of the sender, receiver and amount of e-coins.
- A hash, which serves as a unique fingerprint.
- A hash of the previous block in the chain.
When a new block is created, it is sent to all the users in the network. Each user then verifies the block and it is added to the blockchain.
Cryptocurrency mining, or cryptomining, is a process in which transactions for various forms of cryptocurrency are verified and added to the blockchain digital ledger. Also known as cryptocoin mining, altcoin mining, or Bitcoin mining (for the most popular form of cryptocurrency, Bitcoin), cryptocurrency mining has increased both as a topic and activity as cryptocurrency usage itself has grown exponentially in the last few years. Each time a cryptocurrency transaction is made, a cryptocurrency miner is responsible for ensuring the authenticity of information and updating the blockchain with the transaction. The mining process itself involves competing with other cryptominers to solve complicated mathematical problems with cryptographic hash functions that are associated with a block containing the transaction data.
A cryptocurrency wallet stores the public and private “keys” or “addresses” which can be used to receive or spend the cryptocurrency. With the private key, it is possible to write in the public ledger, effectively spending the associated cryptocurrency. With the public key, it is possible for others to send currency to the wallet. A hardware cryptocurrency wallet is considered to have key advantages over other software wallets:
- It is immune to viruses or malware
- Its private keys are not exposed to your computer
- Does not require an import to a software
- More secure and interactive
- Uses an open source software that allows you to validate the entire device operation
- Can host multiple cryptocurrencies
Cryptocurrency Benefits and Drawbacks
Cryptocurrencies make it easier to transfer funds between two parties in a transaction; these transfers are facilitated through the use of public and private keys for security purposes. These fund transfers are done with minimal processing fees, allowing users to avoid the steep fees charged by most banks and financial institutions for wire transfers.
Central to the appeal and function of Bitcoin is the blockchain technology it uses to store an online ledger of all the transactions that have ever been conducted using bitcoins, providing a data structure for this ledger that is exposed to a limited threat from hackers and can be copied across all computers running Bitcoin software. Every new block generated must be verified by the ledgers of each user on the market, making it almost impossible to forge transaction histories. Many experts see this blockchain as having important uses in technologies, such as online voting and crowdfunding, and major financial institutions such as JP Morgan Chase see potential in cryptocurrencies to lower transaction costs by making payment processing more efficient.
However, because cryptocurrencies are virtual and do not have a central repository, a digital cryptocurrency balance can be wiped out by a computer crash if a backup copy of the holdings does not exist. Since prices are based on supply and demand, the rate at which a cryptocurrency can be exchanged for another currency can fluctuate widely.
The anonymous nature of cryptocurrency transactions makes them well-suited for a host of nefarious activities, such as money laundering and tax evasion. However, cryptocurrency advocates often value the anonymity highly. Cryptocurrencies are also considered by some economists to be a short-lived fad or speculative bubble – concerned especially that the currency units, such as Bitcoins, are not rooted in any material goods. Bitcoin has indeed experienced some rapid surges and collapses in value.
Cryptocurrencies are not immune to the threat of hacking. In Bitcoin’s short history, the company has been subject to over 40 thefts, including a few that exceeded $1 million in value. Still, many observers look at cryptocurrencies as hope that a currency can exist that preserves value, facilitates exchange, is more transportable than hard metals, and is outside the influence of central banks and governments.
Categorizing cryptocurrencies is a difficult task because of the changing nature of this platform. It means that new characteristics emerging by the day are making it difficult to have a set of categories to talk about when referring to cryptocurrencies. Each is being designed to solve a particular problem. Each is also being used as an improvement over the existing coins. However, cryptocurrencies can simply be categorized as transactional- which is the original idea behind cryptocurrency which was for use in transferring value, platform which reduces or totally eliminates middlemen in transactions and utility which is a category that is meant for a specific task. Some of these roles may overlap with one currency offering more than one feature. It is expected that as people understand the currency and developments feed the market to saturation, clear types and categories will emerge.