What Is Cryptocurrency?
Cryptocurrencies have become the latest phenomenon in the financial industry all over the world. They can be explained as a digital currency which is being operated without the use of a central bank or an authority. Thus, it is immune to any possible manipulation or interference by any government.
It uses the internet as a guarantee of its value and for confirmation of transactions. The users on a network verify each transaction, which becomes a part of the public record. This prevents the coin from being used twice by the same user.
The anonymous nature of cryptocurrencies, however, makes them best suited for illegal activities like tax evasion or money laundering.
How To Keep Cryptocurrency Records?
There is a public ledger where all of the transactions are recorded. This ledger is called the “blockchain.” All of the data is stored throughout the network, so it cannot be exploited by any sort of central failure or by hackers.
Every single record which is on the blockchain individually is known as a “block.” Only after a transaction has been sent to the network and accepted as a valid transfer, it is added to the blockchain. Once a block has been verified and added, it cannot be changed.
Mining Of Cryptocurrencies
Cryptocurrencies are released in the market through a process called mining. In order to mine a cryptocurrency, the user must be able to solve a complex puzzle that is known as the “hash.” Once you have solved this hash, you can add the next block. Only then are the transactions recorded in the blockchain for everyone to see.
There are miners all over the world who are competing with each other to be the first one to be able to solve the hash. The miners who are able to solve the hash are rewarded with a certain amount of cryptocurrency that they have mined, which is known as a block reward.
How To Buy And Use Cryptocurrency
When it comes to cryptocurrencies, one must be aware that it is an extremely volatile market and their exchange rates can fluctuate each day and even by the hour! When you buy some cryptocurrency, you are provided with a digital key through which you can have access to the currency as well as to validate and approve the transactions.
The digital key must be kept safe at all times, which is why a digital wallet is required. There are various cryptocurrency wallets which a user may choose from. They can be:
- Desktop wallets
- Online wallets
- Mobile wallets
- Paper wallets
- Hardware wallets
Why Use Cryptocurrency?
With improvements in technology, cash is hardly being used. Most of us are sticking to plastic money and have either debit or credit cards for making transactions. Most of the younger generation even hardly own a check book as most transactions can be processed online, instantly. Then one must wonder, why should I use cryptocurrency when transactions have already been digitized?
There are various other benefits of using cryptocurrency, which is basically the alternative of government-issued currency:
It Has Lower Fees For Transactions
Miners who are involved in the creation of the cryptocurrency are rewarded by the network itself, so there are usually little and sometimes no fees at all for basic transactions.
You Have Complete Ownership
Since you have the ownership of the digital key, only you have the complete access to your cryptocurrency. It is different from storing your money at a bank, as your cryptocurrency cannot be frozen or be limited by any other entity.
Your Identity Is Protected
When you use your debit or credit card, it usually involves sharing your personal information and data, which can be leaked and your security can be compromised. With cryptocurrency, however, all you need to provide is the information regarding the amount you want to send to the recipient.
It Provides Great Accessibility
There are more than billions of people who have easy access to the internet, but not everyone has access to money exchange systems or banks. Using cryptocurrencies does not require any use of a third party like a bank and one can make transactions and transfer of funds electronically, with ease.
It Is Risk-Free
The payments which are being made through cryptocurrencies cannot be reversed, which means sellers need not worry about their payments being stopped. Thus, this blockchain technology makes difficult for fraud to happen.
Limitations Of Cryptocurrency
The most basic limitation of cryptocurrency is that it is not easy for everyone to understand it, which makes it tricky for many people to use it. Apart from that, there are a few other drawbacks which are associated with cryptocurrencies:
Cryptocurrencies still have a long way to go as there are still many people who are not willing to accept it as a means of payment.
It is quite hard to predict the cryptocurrency rate as it varies greatly and the amount you pay today may be completely different from the amount tomorrow.
It is safe to say that cryptocurrency is still in the infancy stage. Even the most popular Bitcoin is still growing, and it would take quite some time for these digital currencies to finally reach their potential.
Bitcoin –The First Cryptocurrency
The mention of cryptocurrencies cannot be complete without mentioning Bitcoin, which was launched in 2009 and has become a massive success in the market. In fact, its success has given rise to other cryptocurrencies such as Litecoin, Dash, Blackcoin, Peercoin, and Dogecoin.
Understanding Cryptocurrency Conclusion
The basic aim of using a cryptocurrency is generally to stay anonymous while making transactions or storing money as it requires no centralized authority to monitor your funds. Many people, however, use it as a source of investment due to the rising prices and the popularity of the cryptocurrency.
Since cryptocurrency is still in the growing stage and not understood properly, it will take time for it to be accepted as a means of payment, wholly. However, once it has become widely accepted, it will provide a great new avenue for global financial transactions and investments.