What is Cryptocurrency?

Nowadays, the global economy is moving toward the digital world, and from investments to money transfer, everything is becoming digital. Here, the newest and most promising digital payment system has come into the market, which is cryptocurrency. In this topic, we will understand what exactly cryptocurrency is, what are different types of Cryptocurrencies, its advantages, and disadvantages.

Cryptocurrency definition

Cryptocurrency, also known as crypto, is a type of online payment method that can be exchanged online to purchase goods and services. It is much similar to real-world currency, but it does not have any physical appearance. It is encrypted, transparent, and decentralized digital money, which is based on blockchain technology. There are approximately 5000 different types of cryptocurrencies, among which Bitcoin and Ethereum are the popular ones.

Cryptocurrency is digital or virtual currency, which is transparent, decentralized, and secured by cryptography.

The most important feature of cryptocurrency is that it is a decentralized currency. Decentralized means it is not issued by the central authorities, the user owns it, and neither government nor the bank controls it. It is also known as the money of the future.

Bitcoin is the first decentralized cryptocurrency, which was released as open-source software in the year 2009. After the creation of bitcoin, several other cryptocurrencies have been created.

Cryptocurrency has various features, such as:

• It has a limit to how many units can exist, such that bitcoin has 21 million limits.
• It performs easy verification of transfer of funds with the help of hashing algorithms that verify each transaction.
• It is independent of any central authority or a bank.
• The new units can only be added after certain conditions are met.

What is Blockchain?

Blockchain is the technology, which is used by bitcoin or other cryptocurrencies. It is a type of record maintaining system which multiple users run in a decentralized manner. When a bitcoin is exchanged over the network, a block of data is created and shared over the entire network. Once this block is verified, it is added with the previous blocks and forms a chain type, hence known as a blockchain.

Advantages of Cryptocurrency

Last several years, cryptocurrencies are being more popular among the public because of their several advantages over paper money. Some of these advantages are given below:

1. Fraud-Proof

One of the important advantages of cryptocurrency is that it is fraud-proof. When a cryptocurrency is created, all the user's confirmed transactions are saved in the public ledger. The identity of coin owners is kept encrypted. Hence there is no chance for a fraudulent transaction.

2. User ownership

Since the cryptocurrency is decentralized, the user owns it. No, any government or bank has any control over it. There is also not any electronic cash system.

3. Easy transaction

In the traditional economy system, for doing any type of business or deal, there is always a lot of transaction fees applicable that we need to pay for each transaction. Apart from this, there are also various paper works, brokerage fees, commissions, etc., users need to pay. But when we use cryptocurrency, all these things are removed; as for any transaction, there is no middle man. Every transaction is performed between one to one within a secured network. This one-to-one transaction makes it easier and more transparent than the traditional one.

4. Confidential Transactions

When we perform any transaction in a traditional transaction system with either cash or credit, each transaction is recorded in our bank history. It means each transaction data remains with banks.

In cryptocurrency, every transaction with the recipients would be unique. The information is exchanged on the basis of the push concept. It means we are allowed to share only that information that we want to disclose to the recipients.

5. Instant Settlement

The easy use of cryptocurrency is making it more popular among people. For starting any transaction, we just need a smart device such as a Mobile phone, internet connection, and instantly we will become our own bank to make online payments and transactions.

6. Identity theft

In cryptocurrency, it is ensured by the ledger that all transactions performed between digital wallets can calculate the accurate balance. This public ledger is also known as a "transaction blockchain." Blockchain technology makes secure digital transactions through encryption and "smart contracts" that make the entity virtually unhackable and immune to fraud.

How does Cryptocurrency Works?

Cryptocurrencies are decentralized systems that work on blockchain technology.

A cryptocurrency is a medium of exchange that is digital, encrypted, and decentralized. Unlike other currencies such as U.S. Dollar or the Euro, there is no central authority involves that manages and maintains the value of a cryptocurrency. Instead, managing and maintaining tasks are broadly distributed among cryptocurrency's users via the internet.

The working phenomenon of cryptocurrency transaction is given below:

• One user or sender who wants to send funds to another user starts the transaction.
• In this, each transaction is represented as a block. And this block is forwarded over the blockchain network.
• This block is validated by the users of the chain, and once it is verified as a valid transaction, a block is added to the chain.

Each transaction is encrypted and contains a unique set of keys, and whoever has those set of keys, he can only own the amount of cryptocurrency.

Note: The above working of cryptocurrency is explained with respect to bitcoin as some cryptocurrencies may differ in functioning, as some don't use blockchain technology.

What is Crypto in Cryptocurrency

Crypto is used for cryptography, which is a technique of encryption and decryption for secure communication between two parties. The cryptography technology usually uses a computational algorithm such as SHA256, a public key, and a private key.

The public key is shared with everyone, and a private key is like the digital signature of the user.

A general bitcoin transaction occurs in the below steps:

• The first step is the user has the transaction details, which means to whom bitcoin needs to be shared and how much.
• The transaction is passed through the hashing algorithm to validate the transaction. In bitcoin, the SHA256 hashing algorithm is used.
• The output of hashing algorithm goes to the signature algorithm with the user's private key. This uniquely identifies the user.
• The output of the above step is distributed over the network for the people to verify the transaction. The transaction is verified using the sender's public key, and those who verify it are known as minors.
• After the verification, the bitcoin is added into the blockchain, which cannot be reversed.

Types of Cryptocurrency

After the creation of bitcoin, there are various types of cryptocurrencies available in the market. Below is the list of popular types of cryptocurrencies:

1. Bitcoin

Bitcoin is the most recognizable type of cryptocurrency system. As per the studies, there are approximately more than 18.5 million bitcoin tokens available for circulation, with a capped limit of 21 million.

2. Bitcoin Cash

Bitcoin cash was introduced in the year 2017, and it is one of the most popular types of cryptocurrencies available in the market.

3. Litecoin

Litecoin is gaining popularity day by day, and it works the same as bitcoin. It was developed by Charlie Lee(former employee of Google) in the year 2011.

4. Ethereum

Etherum is heard in the same context as Bitcoin, but itself, it is not a cryptocurrency. Instead, it is an online programmable platform that uses blockchain technology. It helps the developer to develop and run DAapps within the system. Ethereum can be understood as an app store.

5. Ripple

Ripple is also a type of cryptocurrency, but it does not use Blockchain technology. It is not for the particular user; rather, it mainly works for large companies or corporations to move a huge amount of money across the world.

6. Stellar

Stellar is an open network, which is mainly used to store and transfer money. It is designed in a way that all the financial systems across the world can work together over the same network. It allows to create, send and trade all possible digital forms of money, whether it is dollar, pesos, bitcoin, or anything.

It does not charge users to use its network.

7. NEO

NEO was formally called Antshares and created in China. Its main goal is towards smart contracts, which enable the users to create and execute agreements without involving the intermediary.

8. Cardano

Cardano or ADA is a type of cryptocurrency, which is used for sending or receiving digital funds. It was created by Charles Hoskinson. It is the only coin that is available with the "Scientific philosophy and research-driven approach." It means it is reviewed by scientists and programmers.

9. IOTA

IOTA stands for Internet of Things Application. It was launched in the year 2016. The main difference between IOTA and other blockchain technologies is that IOTA does not work with blocks and chains; rather, it works with smart devices on the internet of things.

To use it, we need to verify two previous transactions on the IOTA ledger, which is known as Directed Acyclic Graph(DAG), also known as Tangle.

What is Cryptocurrency Mining?

In cryptocurrency, mining means the validation of a transaction. Since cryptocurrency works on a decentralized network, which doesn't have any central authority to validate the task, anyone in the network can be minor, and to do this, a successful minor gets a new cryptocurrency as the reward. Minors need to find a hash, which is a product of a cryptographic function that connects the new block with its predecessor. The minor reward is given to the miner who finds the solution to the complex hashing puzzle first. Once the minor gets the solution, he can build a block and add it to the blockchain.

To set-up a mining rig, users need either a GPU or an application-specific integrated circuit.

How to buy Cryptocurrencies?

There are two ways to buy a cryptocurrency, either by US dollars or by another cryptocurrency. It means some cryptocurrencies, including bitcoins, can be purchased using US dollars, while others can be purchased using the other cryptocurrencies.

To purchase it, the user needs an online app to contain the currency and the digital wallet. Generally, a user creates an account on an exchange and transfer real money to buy cryptocurrencies.

Risks of investing in Cryptocurrency

Some of the advantageous features of cryptocurrency also become risky when investing in it. The three major risks are given below:

• Operates without any government Authority
  As we have discussed above, it works in a decentralized way and hence does not contain any central authority or government role in it. This fact raises many questions, such that what type of taxes are to be paid for any gain or loss of the assets. So, this is the main risk for investing in cryptocurrency.
• No physical existence
  As cryptocurrency is a virtual currency, and hence there is no physical existence of this. It neither represents a company like stock or bond nor a tangible asset like Gold. It is not printed on papers similar to other currencies. Hence, it does not have its fundamental value but only its trading value.
• Volatile in Nature
  The last risk factor of cryptocurrency is its volatile nature. The prices of crypto vary very irregularly, and it may sometimes get reduced or increased by 100 $ in an hour. In contrast, other currencies have a limited variation.

Future scope of Cryptocurrency

As per the current growth rate, it can be easily seen that cryptocurrency will have a great scope in upcoming years. But there are also some conflicts that can occur in accepting cryptocurrency as part of the economy.

It can be easily seen that some top cryptocurrencies will play an important role in the future, as they are gaining popularity day-by-day from past years. Bitcoin is currently being used in 96 countries, and there occur approximately 12000 transactions/hour.