What Is Cryptocurrency?Posted by khalil daiy on June 28th, 2022
Source: investopedia.comCryptocurrencies are secure because they are encrypted using public key cryptography. This means that you need both your private and public keys to access your money. If someone gets hold of your private key then they could spend your money. The public key allows others to send you money securely. You can also create multiple addresses for each wallet. This means you don't need to remember all your passwords. Key Takeaways A cryptocurrency is a form of digital asset based on a network that is distributed across a large number of computers. This decentralized structure allows them to exist outside the control of governments and central authorities. Experts believe that blockchain and related technology will disrupt many industries, including finance and law. The advantages of cryptocurrencies include cheaper and faster money transfers and decentralized systems that do not collapse at a single point of failure. The disadvantages of cryptocurrencies include their price volatility, high energy consumption for mining activities, and use in criminal activities. 0 seconds of 1 minute, 55 secondsVolume 75% Source: investopedia.com Watch Now: What Is Cryptocurrency? Understanding Cryptocurrencies Cryptocurrencies are digital or virtual currencies underpinned by cryptographic systems. They enable secure online payments without the use of third-party intermediaries. "Crypto" refers to the various encryption algorithms and cryptographic techniques that safeguard these entries, such as elliptical curve encryption, public-private key pairs, and hashing functions. Cryptocurrencies can be mined or purchased from cryptocurrency exchanges. Not all ecommerce sites allow purchases using cryptocurrencies. In fact, cryptocurrencies, even popular ones like Bitcoin, are hardly used for retail transactions. However, the skyrocketing value of cryptocurrencies has made them popular as trading instruments. To a limited extent, they are also used for cross-border transfers. Source: investopedia.comCryptocurrencies are an alternative currency system that was designed to solve the problems associated with fiat currencies. These currencies are issued by companies called “crypto exchanges” or “miners”. The main difference between cryptocurrencies and fiat currencies is Central to the appeal and functionality of Bitcoin and other cryptocurrencies is blockchain technology. As its name indicates, blockchain is essentially a set of connected blocks or an online ledger. Each block contains a set of transactions that have been independently verified by each member of the network. Every new block generated must be verified by each node before being confirmed, making it almost impossible to forge transaction histories.1The contents of the online ledger must be agreed upon by the entire network of an individual node, or computer maintaining a copy of the ledger. Experts say that blockchain technology can serve multiple industries, such as supply chain, and processes such as online voting and crowdfunding. Financial institutions such as JPMorgan Chase & Co. (JPM) are testing the use of blockchain technology to lower transaction costs by streamlining payment processing.2 Source: investopedia.comthat there is no government backing them. Instead, they are backed by the computing power of users and miners. Cryptocurrency transactions are recorded on a public ledger called a blockchain. There are two types of blockchains: public and private. Public blockchains are shared among all participants while private blockchains are kept within a company or institution. Types of Cryptocurrency Bitcoin is the most popular and valuable cryptocurrency. An anonymous person called Satoshi Nakamoto invented it and introduced it to the world via a white paper in 2008. There are thousands of cryptocurrencies present in the market today. Each cryptocurrency claims to have a different function and specification. For example, Ethereum's ether markets itself as gas for the underlying smart contract platform. Ripple's XRP is used by banks to facilitate transfers between different geographies. Bitcoin, which was made available to the public in 2009, remains the most widely traded and covered cryptocurrency. As of November 2021, there were over 18.8 million bitcoins in circulation with a total market cap of around .2 trillion. Only 21 million bitcoins will ever exist.3 In the wake of Bitcoin's success, many other cryptocurrencies, known as "altcoins," have been launched. Some of these are clones or forks of Bitcoin, while others are new currencies that were built from scratch. They include Solana, Litecoin, Ethereum, Cardano, and EOS. By November 2021, the aggregate value of all the cryptocurrencies in existence had reached over .1 trillion—Bitcoin represented approximately 41% of that total value.4 Source: investopedia.com Are Cryptocurrencies Legal? Fiat currencies derive their authority as mediums of transaction from the government or monetary authorities. For example, each dollar bill is backstopped by the Federal Reserve. But cryptocurrencies are not backed by any public or private entities. Therefore, it has been difficult to make a case for their legal status in different financial jurisdictions throughout the world. It doesn't help matters that cryptocurrencies have largely functioned outside most existing financial infrastructure. The legal status of cryptocurrencies has implications for their use in daily transactions and trading. In June 2019, the Financial Action Task Force (FATF) recommended that wire transfers of cryptocurrencies should be subject to the requirements of its Travel Rule, which requires AML compliance.5 As of December 2021, El Salvador was the only country in the world to allow Bitcoin as legal tender for monetary transactions. In the rest of the world, cryptocurrency regulation varies by jurisdiction. Japan's Payment Services Act defines Bitcoin as legal property.6 Cryptocurrency exchanges operating in the country are subject to collect information about the customer and details relating to the wire transfer. China has banned cryptocurrency exchanges and mining within its borders. India was reported to be formulating a framework for cryptocurrencies in December.7 Cryptocurrencies are legal in the European Union. Derivatives and other products that use cryptocurrencies will need to qualify as "financial instruments." In June 2021, the European Commission released the Markets in Crypto-Assets (MiCA) regulation that sets safeguards for regulation and establishes rules for companies or vendors providing financial services using cryptocurrencies.8 Within the United States, the biggest and most sophisticated financial market in the world, crypto derivatives such as Bitcoin futures are available on the Chicago Mercantile Exchange. The Securities and Exchange Commission (SEC) has said that Bitcoin and Ethereum are not securities. Although cryptocurrencies are considered a form of money, the Internal Revenue Service (IRS) treats them as a financial asset or property. And, as with most other investments, if you reap capital gains in selling or trading cryptocurrencies, the government wants a piece of the profits. On May 20, 2021, the U.S. Department of the Treasury announced a proposal that would require taxpayers to report any cryptocurrency transaction of and above ,000 to the IRS.9 How exactly the IRS would tax proceeds—as capital gains or ordinary income—depends on how long the taxpayer held the cryptocurrency.10 Source: investopedia.comBlockchain is a distributed database that records all transactions made using cryptocurrency. These transactions are recorded chronologically and publicly available. The record is stored across a peer-to-peer network of computers, called nodes. Nodes verify the validity of transactions and keep track of balances. To ensure that the system remains secure, every node verifies every transaction.In simple Advantages and Disadvantages of Cryptocurrency Cryptocurrencies were introduced with the intent to revolutionize financial infrastructure. As with every revolution, however, there are tradeoffs involved. At the current stage of development for cryptocurrencies, there are many differences between the theoretical ideal of a decentralized system with cryptocurrencies and its practical implementation. Some advantages and disadvantages of cryptocurrencies are as follows. Source: investopedia.comterms, cryptocurrencies are digital or virtual currencies that are protected by cryptography. There are many different types of cryptocurrencies. Some of the most well-known cryptocurrencies are bitcoin, Ethereum, Litecoin, Ripple, Dash, Monero, Zcash, NEM, Stellar Lumens, Cardano, EOS, IOTA, NEO, Qtum, Stratis, Waves, Factom, ByteCoin, Dogecoin, MaidSafeCoin, DigiByte, Golem, Steemit, Augur, Siacoin, Peercoin, Peercoin Cash, Reddcoin, Primecoin, Quark, Darkcoin, and BlackCoin. A few examples of cryptocurrencies include Bitcoin, Ether, Litecoin, Ripple and Dash. These cryptocurrencies are traded on Advantages Cryptocurrencies represent a new, decentralized paradigm for money. In this system, centralized intermediaries, such as banks and monetary institutions, are not necessary to enforce trust and police transactions between two parties. Thus, a system with cryptocurrencies eliminates the possibility of a single point of failure, such as a large bank, setting off a cascade of crises around the world, such as the one that was triggered in 2008 by the failure of institutions in the United States. Cryptocurrencies promise to make it easier to transfer funds directly between two parties, without the need for a trusted third party like a bank or a credit card company. Such decentralized transfers are secured by the use of public keys and private keys and different forms of incentive systems, such as proof of work or proof of stake.11 Because they do not use third-party intermediaries, cryptocurrency transfers between two transacting parties are faster as compared to standard money transfers. Flash loans in decentralized finance are a good example of such decentralized transfers. These loans, which are processed without backing collateral, can be executed within seconds and are used in trading.12 Cryptocurrency investments can generate profits. Cryptocurrency markets have skyrocketed in value over the past decade, at one point reaching almost trillion. As of Dec. 20, 2021, Bitcoin was valued at more than 2 billion in crypto markets.13 The remittance economy is testing one of cryptocurrency's most prominent use cases. Currently, cryptocurrencies such as Bitcoin serve as intermediate currencies to streamline money transfers across borders. Thus, a fiat currency is converted to Bitcoin (or another cryptocurrency), transferred across borders and, subsequently, converted to the destination fiat currency. This method streamlines the money transfer process and makes it cheaper. Source: investopedia.comcryptocurrency exchanges. Crypto coins are not backed by any government or central bank. Instead, they are issued through an algorithm, which means that there is no physical supply of coins. The number of crypto coins that exist at any given time is determined by market demand.Cryptocurrencies are not backed by any governmental or private entity. When you buy something using cryptocurrency, there is no guarantee that the seller will actually deliver what he promised. That means that if you lose your wallet containing all of your money, you could never get it back. Cryptocurrency exchanges also hold your coins, meaning that if they go bankrupt, you may lose access to them. Some governments have taken action against cryptocurrency exchanges, making it harder for users to trade.As with any new technology, cryptocurrency has both benefits and drawbacks. One major benefit is the potential to reduce transaction fees and speed up transactions. Another advantage is the ability to transfer funds anonymously. A disadvantage is that the value of cryptocurrencies can fluctuate significantly, making them less stable than other forms of currency.Blockchain technology can serve many industries, including supply chains, crowdfunding, and online voting. Financial institutions like JPMorgan Chase & Co. are experimenting with using blockchain technology to streamline payment processing.Cryptocurrencies like bitcoin are digital currencies designed to allow online payments to be sent directly from one party to another without going through a financial institution. These currencies are also referred to as altcoins because they are not tied to any specific country or government. Bitcoin was first released in January 2009 by an unknown individual calling himself Satoshi Nakamoto. He published a research paper describing the concept of a peer-to-peer electronic cash system. The original design included a proof-of-work consensus mechanism, which required miners to solve complex hashing puzzles. Miners could then add transactions to the blockchain and receive rewards in the form of newly minted coins. However, the proof-of-work algorithm was soon replaced with a proof-of-stake protocol, which requires users to stake certain amounts of coins in exchange for transaction confirmations. Since its inception, bitcoin has become increasingly popular and valuable. In November 2011, the value of all outstanding bitcoins exceeded 0 per coin. By March 2017, the price had reached over ,000 per bitcoin. In April 2019, the price of a single bitcoin surpassed ,000. Like it? Share it! More by this author |