A cryptocurrency is a virtual or digital currency that can be used to buy goods and services; which implies there’s no physical coin or bill used and all the transactions take place online. It used an online ledger with strong cryptography to ensure that online transactions are completely secure. Here, we have included all the details pertaining to cryptocurrency such as types, how it works, uses, how to buy and store it.
What is Cryptocurrency?
It is a purely virtual line of currency that runs on the system of cryptography. It functions as a decentralised medium of exchange where cryptography is used to verify and facilitate each transaction. Cryptography also underlines the creation of units of different cryptocurrencies.
This mode of exchange primarily runs on the blockchain technology – that which lends cryptocurrencies the decentralised status. It is a shared public ledger that contains all the transactions that have ever taken place within a network. Therefore, everyone on the network can see each transaction that takes place and also view others balances.
The Blockchain technology addresses one of the primary concerns with digital payment platforms, i.e. double-spending while ensuring there is no monopoly of authority. That is because, in blockchain technology, parties to a transaction themselves verify and facilitate every such activity.
How was the Idea of Cryptocurrency Conceived?
The concept of digital currency gained considerable traction in the 90s tech boom. Multiple organisations and programmers ventured to create a parallel line of currency that would be out of any central authority’s reach. However, ironically, the companies that tried to create this digital currency themselves assumed the authority of verifying and facilitating transactions.
It not only defeated the purpose but founded the venture as well. Moreover, the digital currencies back then were riddled with frauds and other financial challenges. For a long time since then, this idea of digital currency was considered a lost cause. This idea was falsified when Satoshi Nakamoto – a programmer or a group of programmers – introduced and explained what is Bitcoin in 2009, the first-ever cryptocurrency.
How does Cryptocurrency Work?
According to Satoshi Nakamoto, the founding father of Bitcoin, it is a peer-to-peer electronic cash system. In that, it is much similar to peer-to-peer file transactions, where there is no involvement of any central authority or regulator.
Ergo, cryptocurrencies are mere transactions or entries in a shared ledger that can only be changed upon meeting certain prerequisites. Typically, in a blockchain technology like the Bitcoin network, each transaction consists of the involved parties’ – sender and receiver – wallet addresses or public keys and the amount of such transaction.
What attributes the safety net in such a network to avoid fraud is that the sender needs to confirm a transaction with their private key. After confirmation, the transaction is reflected in the shared ledger or database.
However, only miners are authorised to confirm transactions within a cryptocurrency network. They need to solve cryptographic puzzles to confirm any specific transaction. In exchange for their service, they receive a transaction fee in that particular type of cryptocurrency and a reward.
Once miners confirm a transaction, they spread it to the network, and every node in that automatically updates its ledger accordingly. Furthermore, once a miner confirms a particular transaction, it becomes irreversible and non-modifiable.
However, there is a crucial catch in mining. It is that as a particular type of cryptocurrency gains popularity and more and more miners join the bandwagon, the miners’ fees and reward per transaction go down. For instance, initially, miners could get 50 bitcoins (BTC) as a reward for mining; however, due to the recent halving in May 2020, miners’ rewards have gone down to 6.25 BTC.
What is the Use of Cryptocurrency?
It is worth wondering if the popularity that cryptocurrency has garnered over the years is hollow or not. However, even though it is still nowhere near to replacing institutionalised cash, cryptocurrency, especially Bitcoin, has found wide acceptance across the world.
- As a mode of payment
Initially, Bitcoin had little value as a mode of payment to merchants. However, with time, several merchants worldwide like restaurants, flights, jewellers, and apps have come to accept it as a viable payment medium.
One of the most notable acceptors of cryptocurrency as a viable medium of payment is Apple Inc. It allows 10 types of cryptocurrencies for carrying out transactions in the App Store.
However, India, as an economy is still to explore cryptocurrency as a viable payment mode extensively. Nevertheless, with big companies like Apple and Facebook hoisting its cause, it is expected that cryptocurrency will gain traction in India soon.
Cryptocurrencies, especially Bitcoin, is one of the most lucrative investment options currently present. Its value appreciation is supremely dynamic and can prove to be an excellent avenue for capital expansion.
However, individuals must also note the volatility of this investment avenue. Bitcoin, the most popular cryptocurrency with the largest market share, has experienced some of the most erratic price changes as an asset. For instance, in December 2017, Bitcoin’s value plunged from $19000 per BTC to $7000 per BTC.
Since cryptocurrency is not rooted in any material change but a change in popularity and fad, such price fluctuation is natural.
What is the Price of Cryptocurrencies?
The following table illustrates the top 10 cryptocurrency list currently trading and their market prices as of January 2021.
|Name||Market Cap (in $)||Per Token Value (in $)|
|Bitcoin cash||8.9 billion||513.45|
|Bitcoin SV||3.5 billion||187.22|
|Binance Coin||6.8 billion||44.26|
What are the Different Types of Cryptocurrencies?
When it comes to the variants of cryptocurrencies, most are forks of Bitcoin, while others were built from scratch. However, there are only 3 broad types of cryptocurrencies currently in existence. These are –
It is the first cryptocurrency that was ever introduced and is considered the “digital gold”. It currently holds a market capitalisation of $172.76 billion, the largest of any other variant of cryptocurrency. A unit of Bitcoin can be broken down into Satoshis, which is equivalent to the relationship of rupees and paise.
Furthermore, the Bitcoin network is so designed that it can only have 21 million units of Bitcoin circulation at any point in time. This limited availability is a primary component that drives its market price. Currently, the market supply of Bitcoin is 18.39 million.
This category primarily involves forks and alternate versions of Bitcoin, thus, the name. However, some Altcoins are exponentially different from Bitcoin and use varying algorithms. For instance, Ethereum, which is an altcoin, is not a currency but a platform where entities can make their apps based on blockchain.
Currently, there are more than a thousand altcoins. Some of the notable altcoins are Ethereum, Factom, Litecoin, NEO, etc.
These are products of altcoins like Ethereum and NEO. These cryptocurrencies do not have a separate blockchain but instead run on the decentralised apps created via such altcoins. However, tokens carry supremely low value compared to the other two types mentioned above, because it can only be used to purchase items from such decentralised apps or dApps.
How to Invest in Cryptocurrency?
Compared to other variants of cryptocurrency, units of Bitcoin can be purchased more conveniently owing to a large number of options. Individuals can choose to purchase it from cryptocurrency exchanges, using gift cards, via investment trusts.
How to Store Cryptocurrency?
Entities can hold units of cryptocurrencies in wallets – offline and online. Each such wallet holds a public key, i.e. the wallet address and a private key (used to sign off payments). In any case, it is not exactly the units of cryptocurrency that one holds but the private key.
Nevertheless, entities can select from a wide range of crypto wallets, each catering to a different purpose. Online wallets largely serve the purpose of regular transactions. Apple, as well as J.P. Morgan Chase, Visa, and Facebook, have introduced online crypto-wallets. Conversely, offline or cold wallets are stored in a person’s hard drive and serve the purpose of security of cryptocurrency.
Cryptocurrency – FAQs
Ques. What is blockchain technology?
Ans. The term “blockchain technology” is the transparent, trustless, publicly accessible ledger that allows secure transfer the ownership of units of value using public key encryption and proof of work methods. The first successful implementation of blockchain technology was the Bitcoin Network.
Ques. What’s the transaction fees of bitcoin?
Ans. All the bitcoin transaction must be added to the blockchain, which is the official public ledger of all the transactions of bitcoin. It will be considered as successfully completed or valid once added.
Ques. What’s the working procedure of Cryptocurrency?
Ans. Cryptocurrencies make use of decentralized technology to secure the payments and store money without the obtaining the users’ name or go through a bank.
Ques. Is Cryptocurrency safe to invest?
Ans. Cryptocurrencies are generally volatile in nature and cryptocurrency investment can be risky at times. However, all forms of investment carries a certain degree of risk. But one should always research thoroughly to avoid risks, especially when it’s your hard-earned money you are thinking to invest.