Cryptocurrency has become a household name in recent months as its value soared and fell, but what is it?
Cryptocurrency is virtual or digital currency that acts as a medium of exchange using cryptography to secure the transactions. It’s often referred to as the folk’s money because of how accessible it is. Even though there are many who are unaware of cryptocurrency, over 1,300 digital currencies exist today, representing an increase of more than 10 percent in the past six months alone. Cryptocurrency can be used to buy goods and services online or in physical stores just like with any other normal currency we use every day. In addition to this, some merchants also accept virtual currencies as payment for their products or services. When you think about it, why shouldn’t they? After all, merchants don’t have to be tied down to one particular payment processor who requires them to pay in dollars or euros if they prefer another currency instead.
If you have heard of Bitcoin before then you have probably heard of other similar cryptocurrencies such as Ethereum and Litecoin too. But what exactly are these? Let’s take a closer look:
What is Cryptocurrency?
In order to define what cryptocurrency is, we first need to understand the difference between traditional money and virtual currency.
Traditional money is something that you can use to buy products and services with a bank account or credit card. It’s paper money and coins that are printed and held in trust by the government. Virtual currency is a digital asset that isn’t printed by a government, but rather exists as software code. There are several different types of virtual currency such as decentralized, centralized, and public.
We’ve all heard of centralized virtual currency exchanges such as Coinbase, Kraken, and Gemini. These are businesses that let you trade digital assets like Bitcoin for other currencies such as dollars.
They store your digital assets and provide an interface that lets you trade.
Decentralized virtual currency exchanges are decentralized autonomous organizations (DAOs) that are run through smart contracts on the Ethereum network. These are operated by a code that automatically executes trades each time a certain condition is met such as the purchase of Bitcoin for another currency.
History of Cryptocurrency
In the beginning of the Internet, there was the promise of a new form of money that would be accessible by anyone with an online computer. In 1998, a programmer or group of programmers under the pseudonym “Satoshi Nakamoto” published a white paper on the Internet describing the design for a decentralized digital cash system. The idea behind this paper was to create a currency that would be distributed in a way that made it accessible to everyone.
However, they needed a way to honor transactions without relying on a central authority. This is where their solution came in. They designed a decentralized method of transaction verification that required everyone’s computer to participate. In other words, it involved everyone’s computer solving a mathematical problem to verify the transaction. Once it verified the transaction, they would add the solution to the network. In this way, the network’s consensus was reached by everyone’s computer solving the problem.
This decentralized approach to transaction verification is what makes cryptocurrency so highly secure. It’s decentralized and because it’s verified by everyone’s computer, it’s highly secure.
Types of Cryptocurrency
You may be wondering what’s the difference between Bitcoin, Ethereum, and Litecoin? They are all different major cryptocurrencies that exist on the market today. When you hear about the value of Bitcoin, it’s alluding to the value of the entire cryptocurrency market as a whole.
There are also many other types of virtual currencies such as gaming virtual currencies, token sales, and industry-specific tokens that are considered tokens.
– Bitcoin: Bitcoin is a decentralized virtual currency that exists on the blockchain. The whole concept behind cryptocurrency is that you don’t have to rely on a third party such as a bank to verify transactions. However, the main problem with Bitcoin is that it is a finite resource. It was designed to have a maximum of 21 million coins that are expected to be mined by 2140. As of now, about 16 million coins have been mined. Bitcoin is already expensive. If the supply is severely limited, then the value of Bitcoin will soar.
– Ethereum: Ethereum is similar to Bitcoin in that it exists on the blockchain. However, unlike Bitcoin, Ethereum was designed to be a decentralized computing platform.
It is using a Turing-complete language that can run any code. Ethereum is similar to Bitcoin in that it is also a decentralized virtual currency that is highly secure as it is verified by everyone’s computer running the Ethereum network.
– Litecoin: Unlike Bitcoin and Ethereum, Litecoin was designed to function as a decentralized currency that is also efficient. It was designed to be more practical by using a Proof-of-Work (PoW) consensus mechanism to generate new coins. Additionally, it is a faster and cheaper transaction compared to Bitcoin.
The value of a cryptocurrency is determined by supply and demand. If more people want to use the currency and merchants accept it as payment, then its value will increase.
Advantages of Cryptocurrency
– Accessible – You don’t have to have millions of dollars to invest in cryptocurrency.
You can start trading in a few dollars and if you learn from your mistakes, you can make a fortune. You can buy and sell cryptocurrency on almost every online exchange.
– No Fees – Unlike trading in stocks and forex markets where you’re charged fees for every transaction, there are no fees when you trade in virtual currency. You can get money into and out of your trading account without paying any fees.
– No Lock-In – Most investment companies and financial advisors want you to put your money in speculative investments that can go down in value. However, you don’t have to do that with cryptocurrency. You can just keep it stored in a digital wallet and forget all about it.
– No Government Control – The government can’t shut down virtual currency exchanges like they can with traditional exchanges.
If you want to trade in cryptocurrency, then you don’t have to be a millionaire. You don’t have to have millions of dollars in the bank either. You only need enough money in your trading account to buy some cryptocurrency.
Disadvantages of Cryptocurrency
– Volatility – You can make a fortune from cryptocurrency, but you can also lose everything in a heartbeat. A lot of people invest in it thinking they can make a quick buck, but they don’t know how volatile it can be. In trading virtual currency, you can lose millions of dollars in a few hours.
– Security – The best way to describe the security of a virtual currency is to say that it’s mostly a risk of losing your own time. There have been many instances of hacking virtual currency exchanges and stealing millions of dollars worth of cryptocurrency.
– Volatility vs. Security – There’s a big difference between the volatility of virtual currency and the security of having your own private keys. The volatility is that it can go up and down like a roller coaster. You never have to worry about your private keys getting hacked. You can keep them safely stored in a digital wallet.
Conclusion
Cryptocurrency is a virtual or digital currency that acts as a medium of exchange using cryptography to secure the transactions. There are many advantages to using cryptocurrency, but there are also risks involved. It’s important to understand how it works, how to make money trading it, and how to protect your money while trading in cryptocurrency.
