What is a cryptocurrency?
A cryptocurrency is a digital or virtual currency secured by cryptography, which makes counterfeiting or double spending almost impossible. Many cryptocurrencies are decentralized networks based on blockchain technology – a distributed ledger enforced by a patchwork network of computers. A defining feature of cryptocurrencies is that they are generally not issued by a central authority, which theoretically makes them immune from government interference or manipulation.
Key points to remember
- A cryptocurrency is a new form of digital asset based on a network distributed over a large number of computers. This decentralized structure allows them to exist outside the control of governments and central authorities.
- The word “cryptocurrency” is derived from the encryption techniques used to secure the network.
- Blockchains, which are organizational methods for ensuring the integrity of transactional data, are an essential component of many cryptocurrencies.
- Many experts believe that blockchain and related technologies will disrupt many industries, including finance and the law.
- Cryptocurrencies are subject to criticism for a number of reasons, including their use for illegal activities, exchange rate volatility and vulnerabilities in the underlying infrastructure. However, they were also praised for their portability, divisibility, resistance to inflation and transparency.
Cryptocurrencies are systems that allow secure online payments that are denominated in terms of virtual “tokens”, which are represented by general ledger entries inside the system. “Crypto” refers to the various encryption algorithms and cryptographic techniques that protect these entries, such as elliptical curve encryption, public-private key pairs and hash functions.
Types of cryptocurrency
The first blockchain-based cryptocurrency was Bitcoin, which is still the most popular and most valuable. Today, there are thousands of alternative cryptocurrencies with various functions and specifications. Some of them are clones or forks of Bitcoin, while others are new currencies that were built from scratch.
Bitcoin was launched in 2009 by an individual or group known by the pseudonym “Satoshi Nakamoto”.TheAs of November 2019, there were over 18 million bitcoins in circulation with a total market value of approximately $ 146 billion.TheThe
Some of the competing cryptocurrencies engendered by the success of Bitcoin, called “altcoins”, include Litecoin, Peercoin and Namecoin, as well as Ethereum, Cardano and EOS. Today, the total value of all existing cryptocurrencies is around $ 214 billion – Bitcoin currently accounts for more than 68% of the total value.TheThe
Part of the cryptography used today in cryptocurrency was originally developed for military applications. At one point, the government wanted to put controls on cryptography similar to legal restrictions on weapons, but the right of civilians to use cryptography was guaranteed for reasons of freedom of expression.
At the heart of the appeal and functionality of Bitcoin and other cryptocurrencies is blockchain technology, which is used to keep an online record of all transactions that have ever been made, thereby providing a data structure for this register which is fairly secure and is shared and accepted by the entire network of individual nodes, or computers keeping a copy of the general ledger. Each new block generated must be checked by each node before being confirmed, which makes it almost impossible to create the transaction history.
Many experts see blockchain technology as having serious potential for uses such as online voting and crowdfunding, and large financial institutions such as JPMorgan Chase (JPM) see the potential to reduce transaction costs by streamlining the payment processing.TheHowever, since cryptocurrencies are virtual and are not stored on a central database, a digital cryptocurrency balance can be wiped out by the loss or destruction of a hard drive if there is no backup copy of the private key. At the same time, no central authority, government or company has access to your funds or personal information.
Pros and cons of cryptocurrency
Cryptocurrencies promise to facilitate the transfer of funds directly between two parties, without the need for a trusted third party such as a bank or credit card company. These transfers are rather secure by the use of public and private keys and various forms of incentive systems, such as proof of work or proof of participation.
In modern cryptocurrency systems, a user’s “wallet” or account address has a public key, while the private key is known only to the owner and is used to sign transactions. Money transfers are done with minimal processing fees, allowing users to avoid the high fees charged by banks and financial institutions for wire transfers.
The semi-anonymous nature of cryptocurrency transactions makes them well suited for a multitude of illegal activities, such as money laundering and tax evasion. Defenders of cryptocurrencies, however, often highly value their anonymity, citing the benefits of privacy such as protecting whistleblowers or activists living under repressive governments. Some cryptocurrencies are more private than others.
Bitcoin, for example, is a relatively poor choice for conducting illegal business online, as the forensic analysis of the Bitcoin blockchain has helped authorities arrest and prosecute criminals. However, there are more privacy-oriented pieces, such as Dash, Monero or ZCash, which are much more difficult to trace.
Since the market prices of cryptocurrencies are based on supply and demand, the rate at which a cryptocurrency can be exchanged for another currency can vary widely, as the design of many cryptocurrencies guarantees a degree high of rarity.
Bitcoin experienced rapid increases and collapses in value, reaching $ 19,000 per Bitcoin in December 2020 before dropping to around $ 7,000 in the following months.TheCryptocurrencies are therefore considered by some economists as a short-term fashion or a speculative bubble.
It is feared that cryptocurrencies like Bitcoin are not rooted in any material asset. However, some research has identified that the cost of producing a Bitcoin, which requires an increasing amount of energy, is directly linked to its market price.
Cryptocurrency blockchains are highly secure, but other aspects of a cryptocurrency ecosystem, including exchanges and wallets, are not immune to the threat of hacking. In Bitcoin’s 10-year history, several online exchanges have been the subject of hacking and theft, sometimes with millions of dollars in “coins” stolen.TheThe
Nevertheless, many observers see potential benefits in cryptocurrencies, such as the ability to preserve value against inflation and facilitate trade while being easier to transport and divide than precious metals and to exist outside. influence from central banks and governments.