What are Cryptocurrencies?
One of the hottest commodities that have taken the world by a storm is none other than cryptocurrency. Most people are not aware that this virtual currency was a side product of another invention. The unknown inventor of Bitcoin, which is the first and the most important cryptocurrency, Satoshi Nakamoto said that he had never intended to invent it. Many other had failed to create digital cash before, but he found a way of building a decentralized digital cash system. So, what exactly is it? Let’s take a look.
A cryptocurrency is simply a virtual or digital currency that makes use of cryptography for the purpose of security. Thanks to this security feature, it can be difficult to counterfeit a cryptocurrency. A number of cryptocurrencies are based on the blockchain technology, which means they are decentralized systems. This is essentially a distributed ledger that’s enforced through a network of computers. One of the biggest allure of cryptocurrency and its defining feature is the organic nature; no central authority issues a cryptocurrency. Theoretically, this means that cryptocurrency is immune to government manipulation and interference.
As mentioned above, Bitcoin was the first blockchain-based cryptocurrency and it still remains the most popular and valuable of the lot. Today, you can find thousands of cryptocurrencies in the market and they have various specifications and functions. Some of these are quite similar to Bitcoin, whereas others are forks or new cryptocurrencies that have split off from the ones that already exist.
Breaking it Down
The system of cryptocurrencies enables people to make secure payments for online transactions, which are denominated in the form of virtual ‘tokens’. The term ‘crypto’ indicates that various cryptographic techniques and encryption algorithms, like public-private key pairs, elliptical curve encryption and hashing functions are used.
Bitcoin captured the public imagination when it was launched in 2009 by unknown inventor Satoshi Nakamoto. As of February 2019, the total number of Bitcoins in circulation had reached 17.53 million and their market value was about $63 billion, although there is considerable fluctuation in the market price of Bitcoin. Due to the immense success of Bitcoin, a wide array of competing cryptocurrencies have been introduced and they are referred to as ‘altcoins’. Some of these altcoins that have gained recognition are Litecoin, Peercoin, Namecoin and also Cordano, Ethereum and EOS.
Nowadays, there are literally thousands of cryptocurrencies that exist in the market and they have an aggregate market value of more than $120 billion. Currently, Bitcoin accounts for more than 50% of the total market value of all cryptocurrencies. (This value is subject to change as prices fluctuate regularly).
Benefits and Drawbacks
With the introduction of cryptocurrencies, it became a possibility that transferring funds directly between two parties when conducting a transaction would be easier. When cryptocurrencies are being used, there is absolutely no need for a trusted third party, such as a credit card company or a bank. Instead, the transfers are facilitated through the use of private keys and public keys for security reasons. The modern cryptocurrency systems that are used these days have a user’s account address or wallet, which comprises of the public key whereas the private key is used for signing transactions.
The good thing about cryptocurrency transfers is that they have minimal processing fees, which enables users to avoid the very steep charges they would have to incur when they use financial institutions or banks for conducting wire transfers. One of the most appealing functions of Bitcoin and other cryptocurrencies is the blockchain technology that’s used for storing an online ledger. In this ledger, you can find a list of all the transactions that have been conducted with Bitcoins.
The data structure of the ledger is such that it is not completely vulnerable and the threat from hackers is limited. Plus, the data can be copied across all computers that are part of the cryptocurrency’s network. In addition, every new block of data that’s generated have to be verified by the ledgers of every single user on the market, which means it is nearly impossible for hackers and other cyber criminals to forge the transaction histories.
According to many experts, this blockchain technology can have a number of important uses, such as in the case of crowdfunding and online voting. Moreover, major financial institutions believe that cryptocurrencies have a lot of potential when it comes to lowering transaction costs as they can lead to greater efficiency in payment processing. However, it is also essential to bear in mind that the existence of these cryptocurrencies is completely virtual and there is no central repository. Therefore, a computer crash can completely wipe out your balance of this digital cryptocurrency if you do not have a backup copy. The same will happen if you lose your private keys.
Nonetheless, there is no denying that your personal information or your funds cannot be accessed by any central authority, corporation or government. This is an advantage in some cases, but there is also a downside. Due to their semi-anonymous nature, cryptocurrency transactions are being used for conducting some really nefarious activities, such as tax evasion and money laundering. Still, the anonymity of cryptocurrencies is highly valued by their advocates.
There are some cryptocurrencies that offer more privacy than others. For instance, Bitcoin would be a very poor choice for doing any illegal transactions on the internet because a forensic analysis can be performed on these Bitcoin transactions. Authorities have made use of it for arresting and prosecuting criminals. There are some coins that are more privacy-oriented, such as ZCash, Monero and Dash and these can be a lot more difficult to trace.
As the prices of these cryptocurrencies depend on the principle of supply and demand, the rate at which you can exchange one cryptocurrency for another can fluctuate considerably. But, plenty of research has been conducted for identifying the fundamental factors that drive the price of cryptocurrencies. There have been some rapid collapses and surges in the case of Bitcoin itself, as the coin reached $19,000 in December of 2017 before it returned to a value of $7,000 in the next few months.
