Cryptocurrency - Here's What You Should Know About It

A cryptocurrency, crypto-currency, or crypto is a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it .

Individual coin ownership records are stored in a digital ledger, which is a computerized database using strong cryptography to secure transaction records, to control the creation of additional coins, and to verify the transfer of coin ownership.

Despite their name, cryptocurrencies are not necessarily considered to be currencies in the traditional sense and while varying categorical treatments have been applied to them, including classification as commodities, securities, as well as currencies, cryptocurrencies are generally viewed as a distinct asset class in practice.

Some crypto schemes use validators to maintain the cryptocurrency. In a proof-of-stake model, owners put up their tokens as collateral. In return, they get authority over the token in proportion to the amount they stake. Generally, these token stakers get additional ownership in the token over time via network fees, newly minted tokens or other such reward mechanisms.

cryptocurrency does not exist in physical form (like paper money) and is typically not issued by a central authority. Cryptocurrencies typically use decentralized control as opposed to a central bank digital currency (CBDC).

cryptocurrency examples

There are thousands of cryptocurrencies. Some of the best known include:

Bitcoin

Founded in 2009, Bitcoin was the first cryptocurrency and is still the most commonly traded. The currency was developed by Satoshi Nakamoto – widely believed to be a pseudonym for an individual or group of people whose precise identity remains unknown.

Ethereum

Developed in 2015, Ethereum is a blockchain platform with its own cryptocurrency, called Ether (ETH) or Ethereum. It is the most popular cryptocurrency after Bitcoin.

Litecoin

This currency is most similar to bitcoin but has moved more quickly to develop new innovations, including faster payments and processes to allow more transactions.

Ripple

Ripple is a distributed ledger system that was founded in 2012. Ripple can be used to track different kinds of transactions, not just cryptocurrency. The company behind it has worked with various banks and financial institutions.

Non-Bitcoin cryptocurrencies are collectively known as “altcoins” to distinguish them from the original.

How Can You Mine cryptocurrency ?

Mining is how new units of cryptocurrency are released into the world, generally in exchange for validating transactions. While it’s theoretically possible for the average person to mine cryptocurrency, it’s increasingly difficult in proof of work systems, like Bitcoin.

“As the Bitcoin network grows, it gets more complicated, and more processing power is required,” says Spencer Montgomery, founder of Uinta Crypto Consulting. “The average consumer used to be able to do this, but now it’s just too expensive. There are too many people who have optimized their equipment and technology to outcompete.”

And remember: Proof of work cryptocurrencies require huge amounts of energy to mine. It’s estimated that 0.21% of all of the world’s electricity goes to powering Bitcoin farms. That’s roughly the same amount of power Switzerland uses in a year. It’s estimated most Bitcoin miners end up using 60% to 80% of what they earn from mining to cover electricity costs.

While it’s impractical for the average person to earn crypto by mining in a proof of work system, the proof of stake model requires less in the way of high-powered computing as validators are chosen at random based on the amount they stake. It does, however, require that you already own a cryptocurrency to participate. (If you have no crypto, you have nothing to stake.

Blockchain explained

Blockchains are distributed (i.e., without a single repository) and decentralized digital ledgers that are tamper-evident and resistant. At their most basic level, they allow users to record transactions in a shared ledger within that group. The result is that no transaction can be modified once it has been published under standard blockchain network functioning.

The blockchain concept was integrated with numerous other technologies and computer concepts in 2008 to create modern cryptocurrencies: electronic cash that is protected by cryptographic processes rather than a central repository or authority.

Blockchain implementations are frequently created with a specific goal or function in mind. Cryptocurrencies, smart contracts and distributed ledger systems for businesses are all examples of functionalities.

Bitcoin was the first blockchain-based cryptocurrency, allowing users to share data publicly so that participants can independently verify the transaction's validity. Cryptocurrencies are built on blockchain technology, which is named after the intensive use of cryptographic functions.

To digitally sign and securely transact within the system, users use public and private keys. Users can solve puzzles using cryptographic hash functions in the hopes of being paid with a fixed quantity of money in cryptocurrency-based blockchain networks that involve mining.

The field of blockchain technology has seen a steady stream of advancements, with new platforms being introduced regularly — the environment is constantly shifting. Other than cryptocurrencies, blockchain technology can be used to establish a permanent, public, and transparent ledger system for collecting sales data, tracking digital usage, and making payments to content creators like musicians.

How does blockchain work ?

In the context of cryptocurrencies, a blockchain consists of a stable chain of blocks, each one storing a list of previously confirmed transactions. Since the blockchain network is maintained by a myriad of computers spread around the world, it functions as a decentralized database (or ledger). This means that each participant (node) maintains a copy of the blockchain data, and they communicate with each other to ensure that they are all on the same page (or block).

Therefore, blockchain transactions occur within a peer-to-peer global network and this is what makes Bitcoin a decentralized digital currency that is borderless, censorship-resistant. In addition, most blockchain systems are considered trustless because they do not require any kind of trust. There is no single authority in control of Bitcoin.

A central part of almost every blockchain is the process of mining, which relies on hashing algorithms. Bitcoin uses the SHA-256 algorithm (Secure hash algorithm 256 bits). It takes an input of any length and generates an output that will always have the same length. The output produced is called a "hash" and, in this case, is always made of 64 characters (256bits).

So the same input will result in the same output, no matter how many times the process is repeated. But if a small change is made to the input, the output will change completely. As such, hash functions are deterministic, and in the cryptocurrency world, most of them are designed as a one-way hash function.

Being a one-way function means that it is almost impossible to calculate what was the input from the output. One can only guess what the input was, but the odds of guessing it right is extremely low. This is one of the reasons why Bitcoin's blockchain is secure.

Now that we know what the algorithm does, let's demonstrate how a blockchain works with a simple example of a transaction.
Imagine that we have Alice and Bob along with their Bitcoin balance. Let's say Alice owes Bob 2 Bitcoins.

For Alice to send Bob that 2 bitcoin, Alice broadcasts a message with the transaction that she wants to make to all the miners in the network.

In that transaction, Alice gives the miners Bob's address and the amount of Bitcoins she would like to send, along with a digital signature and her public key. The signature is made with Alice's private key and the miners can validate that Alice, in fact, is the owner of those coins.

Once the miners are sure that the transaction is valid they can put it in a block along with many other transactions and attempt to mine the block. This is done by putting the block through the SHA-256 algorithm. The output needs to start with a certain amount on 0's in order to be considered valid. The amount of 0's needed depends on what's called the "difficulty" which changes depending on how much computing power there is on the network.

In order to produce an output hash with the desired amount of 0's in the beginning, the miners add what's called a "nonce" into the block before running it through the algorithm. Since a small change to the input completely changes the output, the miners try random nonces until they find a valid output hash.

Once the block is mined the miner broadcasts that newly mined block to all the other miners. They then check to make sure that the block is valid so that they can add it to their copy of the blockchain and the transaction is complete. But in the block, the miners also needs to include the output hash from the previous block so that all blocks are tied together, hence the name blockchain. This is an important part because of the way trust works in the system.

Every miner has their own copy of the blockchain on their computer and everyone trusts whichever blockchain that has the most computational work put into it, the longest blockchain. If a miner changes a transaction in a previous block, the output hash for that block will change which leads to all the hashes after it changing as well due to the blocks being liked with hashes.

 The miner would have to redo all of the work in order to make anyone accept he's blockchain as the right one. So if a miner wanted to cheat he would need more than 50% of the networks computing power which is very unlikely. Network attacks like this are thereby called 51% attacks.

The model of making computers work in order to produce blocks is called Proof-of-Work (PoW) there are also other models like Proof-of-Stake (PoS) which does not require as much computing power and is meant to require less electricity while being able to scale to more users.

How to buy cryptocurrency

You may be wondering how to buy cryptocurrency safely. There are typically three steps involved. These are:

Step 1 is deciding which platform to use. Generally, you can choose between a traditional broker or dedicated cryptocurrency exchange:

Traditional brokers. These are online brokers who offer ways to buy and sell cryptocurrency, as well as other financial assets like stocks, bonds, and ETFs. These platforms tend to offer lower trading costs but fewer crypto features.

cryptocurrency exchanges. There are many cryptocurrency exchanges to choose from, each offering different cryptocurrencies, wallet storage, interest-bearing account options, and more. Many exchanges charge asset-based fees.

How to store cryptocurrency

Once you have purchased cryptocurrency, you need to store it safely to protect it from hacks or theft. Usually, cryptocurrency is stored in crypto wallets, which are physical devices or online software used to store the private keys to your cryptocurrencies securely.

Some exchanges provide wallet services, making it easy for you to store directly through the platform. However, not all exchanges or brokers automatically provide wallet services for you.

There are different wallet providers to choose from. The terms “hot wallet” and “cold wallet” are used:

Hot wallet storage: "hot wallets" refer to crypto storage that uses online software to protect the private keys to your assets.

Cold wallet storage: Unlike hot wallets, cold wallets (also known as hardware wallets) rely on offline electronic devices to securely store your private keys.

Pros and cons of cryptocurrency 

cryptocurrency inspires passionate opinions across the spectrum of investors. Here are a few reasons that some people believe it is a transformational technology, while others worry it's a fad.

Supporters see cryptocurrencies such as Bitcoin as the currency of the future and are racing to buy them now, presumably before they become more valuable. 

Some supporters like the fact that cryptocurrency removes central banks from managing the money supply since over time these banks tend to reduce the value of money via inflation. 

Other advocates like the blockchain technology behind cryptocurrencies, because it’s a decentralized processing and recording system and can be more secure than traditional payment systems. 

Some speculators like cryptocurrencies because they’re going up in value and have no interest in the currencies’ long-term acceptance as a way to move money. 

Some cryptocurrencies offer their owners the opportunity to earn passive income through a process called staking. 

Crypto staking involves using your cryptocurrencies to help verify transactions on a blockchain protocol. Though staking has its risks, it can allow you to grow your crypto holdings without buying more. 

Many cryptocurrency projects are untested, and blockchain technology in general has yet to gain wide adoption. 

If the underlying idea behind cryptocurrency does not reach its potential, long-term investors may never see the returns they hoped for. 

For shorter-term crypto investors, there are other risks. 

Its prices tend to change rapidly, and while that means that many people have made money quickly by buying in at the right time, many others have lost money by doing so just before a crypto crash. Those wild shifts in value may also cut against the basic ideas behind the projects that cryptocurrencies were created to support. 

For example, people may be less likely to use Bitcoin as a payment system if they are not sure what it will be worth the next day. 

The environmental impact of Bitcoin and other projects that use similar mining protocols is significant. 

A comparison by the University of Cambridge, for instance, said worldwide Bitcoin mining consumes more than twice as much power as all U.S. residential lighting. 

Some cryptocurrencies use different technology that demands less energy. 

Governments around the world have not yet fully reckoned with how to handle cryptocurrency, so regulatory changes and crackdowns have the potential to affect the market in unpredictable ways.

Why is cryptocurrency the future of finance?

Cryptocurrencies are the first alternative to the traditional banking system, and have powerful advantages over previous payment methods and traditional classes of assets. 

Think of them as Money 2.0. -- a new kind of cash that is native to the internet, which gives it the potential to be the fastest, easiest, cheapest, safest, and most universal way to exchange value that the world has ever seen.

Cryptocurrencies can be used to buy goods or services or held as part of an investment strategy, but they can’t be manipulated by any central authority, simply because there isn’t one. 

No matter what happens to a government, your cryptocurrency will remain secure.

Digital currencies provide equality of opportunity, regardless of where you were born or where you live. As long as you have a smartphone or another internet-connected device, you have the same crypto access as everyone else.

Cryptocurrencies create unique opportunities for expanding people’s economic freedom around the world. Digital currencies’ essential borderlessness facilitates free trade, even in countries with tight government controls over citizens’ finances. 

In places where inflation is a key problem, cryptocurrencies can provide an alternative to dysfunctional fiat currencies for savings and payments.

As part of a broader investment strategy, crypto can be approached in a wide variety of ways. 

One approach is to buy and hold something like bitcoin, which has gone from virtually worthless in 2008 to thousands of dollars a coin today. Another would be a more active strategy, buying and selling cryptocurrencies that experience volatility.

One option for crypto-curious investors looking to minimize risk is USD Coin, which is pegged 1:1 to the value of the U.S. dollar.

 It offers the benefits of crypto, including the ability to transfer money internationally quickly and cheaply, with the stability of a traditional currency. Coinbase customers that hold USDC earn rewards, making it an appealing alternative to a traditional savings account.

Digital currencies provide equality of opportunity, regardless of where you were born or where you live.