Cryptocurrency 101
What You Need to Know About Cryptocurrencies
Have you heard about Bitcoin? Do you know what Litecoin, Ethereum, IOTA and Dash are? All are cryptocurrencies – which are also called virtual currencies, tokens or digital cash. They work like money but are different from government-backed U.S. dollars. Although cryptocurrencies are generating a buzz in the media, they are generally not well understood.
Most people, when they do hear about Bitcoin and other cryptocurrencies, associate it with a skyrocketing market – some would say they’re in a bubble mode. The cryptocurrency market capitalization went up to USD 135 billion from USD 18 billion in just a span of eight months (January to August 2017), which translates to a whopping growth of 650%.
If cryptocurrency captures your interest as a phenomenon or a potential investment, but you recognize you need to learn the fundamentals, here are the basics.
What is cryptocurrency?
Cryptocurrencies “live” online, and, unlike government-issued currency, are backed by their own networks. Speaking technically, cryptocurrencies are restricted entries in a database.
A cryptocurrency is like money or a medium to exchange goods and services in the online arena. You can also trade cryptocurrency for physical cash, and it works with the help of cryptography.
Cryptography – or cryptology – is the process of changing usual plain text to indecipherable text and the other way around. It is a technique of transmitting and storing data in a specific form, which allows only the intended recipients to read and process the same. Cryptography not just protects your data from theft and alteration, it can be used for user authentication, as well.
In other words, cryptography is the practice and study of processes for secure and safe communication involving third parties – also referred to as adversaries. Cryptography is used in cryptocurrency for transaction security and in controlling the creation of additional currency units.
Cryptocurrency is a digital or virtual currency that is used for online transactions only. These digital coins are stored in digital wallets, and are transferred electronically to the digital wallets of other people. Currently, there are many kinds of cryptocurrency, of which Bitcoin is the first and best-known.
A cryptocurrency overview
Cryptocurrency is decentralized and produced communally by the entire system of cryptocurrency, which is established at a predetermined rate and is publicly known from the start. The technical system being used for decentralized cryptocurrencies was first put in place by an individual or group known as Satoshi Nakamoto, developer of Bitcoin.
In the case of centralized banking and state economies like the Federal Reserve System, government or corporate boards have the control of supplying currency by getting money printed or demanding for additions to the digital banking ledgers.
However, governments or corporates have no control over producing new cryptocurrency units. In addition, the secret nature of cryptocurrency transactions makes it disposed to being used in criminal activities, such as tax evasion and money laundering.
As of September 2017, over 1,000 cryptocurrency specifications are in existence. Most of these are either derived from or akin to Bitcoin – the first fully implemented decentralized cryptocurrency. In the cryptocurrency system, the balance, safety, and integrity of ledgers is sustained by mutually distrustful parties in a community. Known as miners, these users – with the help of their computers – validate and timestamp transactions, then add them to the ledger in accord with a specific timestamping system.
Miners are given financial incentive to maintain the security of a cryptocurrency ledger.
Almost all of the cryptocurrencies are designed to slowly reduce production of currency, which means there is a restriction on the total amount of currency in circulation at any given time. In comparison to the regular currencies kept as cash in-hand or held by other financial institutions, it is difficult for law enforcement agencies to seize cryptocurrencies because of cryptographic technologies.
How does cryptocurrency work?
A cryptocurrency like Bitcoin is made up of peer networks. Each peer has a history of all the transactions and the balance in every account is also known to all of them.
The transaction here is defined as a file that contains information, like Alice gives 25 Bitcoins to Harry, with Celina’s private key aiding as a signature. Once the transaction is signed, it is then shared on the network. And, as soon the information is shared, based on a peer-to-peer (P2P) technology, every peer in the group receives the transaction detail. However, these details are also confirmed on public ledgers after a specified time.
Confirmation is of utmost importance in the case of cryptocurrency transactions because a transaction can be forged even as it is pending until that step.
But, once a transaction is confirmed, forgery cannot be committed as it becomes a transaction history record that is deemed as final. This is known as blockchain. Only miners can confirm a transaction. Miners are accountable for stamping a transaction, and are the ones who spread this information all across the network. For stamping transactions, the miners are given an incentive in the form of a token.
Put simply, the process of confirming a transaction and adding it to a public ledger is known as mining. The miners have to solve a complex computational problem, a kind of mathematical puzzle, to add a transaction to the public ledger.
Since the time cryptocurrencies came into being, all the confirmed transactions are stored in the public ledger. The coin owner’s identities are encrypted, and other cryptographic techniques are used by the system to make sure that the record keeping is legitimate. The ledger makes sure that the given digital wallets are able to calculate the exact spendable balance.
Once confirmed, a cryptocurrency transaction cannot be reversed.
Basic characteristic of cryptocurrencies:
Each cryptocurrency is somewhat different, but most have the following basic characteristics in common.
- All cryptocurrency transactions are irreversible – Once a cryptocurrency transaction is confirmed, there is no way to retract it.
- Cryptocurrencies are globally accessible and fast – All entries are transmitted across the network instantly and are confirmed in just a few minutes.
- All cryptocurrencies are anonymous – Anyone can open a wallet. It is not necessary to provide identification, and all have varying steps of anonymity, which primarily depends on the token you use.
- All the cryptocurrencies have a limited supply, which is controlled by the network.
- All the cryptocurrencies are very secure, using the latest cryptographic technologies.
What is The Future of Cryptocurrency?
To get an idea of the future of Cryptocurrecy, we turned to Yael Tamar, CEO of HACERA,
“The regulation around cryptocurrency tightens every day. Most experts agree that utility tokens will play a role in the future economy; however, most also agree that cryptocurrencies will not replace fiat currencies and that the case of replacing financial intermediaries with all their security measures isn’t even the most interesting use of blockchain-based technologies, and cryptocurrencies in particular.”
So, is it too late for you to take a plunge in the cryptocurrency market?
No, it is not too late to invest in cryptocurrency. However, the standard advice for making any kind of investment holds true for cryptocurrency: Don’t speculate more that you are comfortable losing.
As of now, only some countries, like Japan and the Philippines, have legalized Bitcoin, but others are soon to follow suit. Though cryptocurrency is legal – as well as taxable – in the U.S., it is still not a legal tender, and works only as an investment instrument. Regardless of what the future holds for cryptocurrency, its game-changing impact on the financial world will continue to reverberate.
