Cryptocurrency is a digital currency that exists electronically. Cryptocurrency refers to a system that employs encryption to enable the secure transfer and exchange of digital tokens in a distributed and decentralized manner. In dealing with cryptocurrency, you don’t receive a physical coin or bill unless you utilize a service that allows you to exchange your cryptocurrency for a physical token. The beauty of this digital coin is that you get to exchange your cryptocurrency with someone online without the use of an intermediary such as a bank.
Cryptocurrency is a type of digital asset that is based on a network circulating across numerous computers. Central banks do not regulate the money supply or supervise financial institutions in the case of cryptocurrencies. It can exist outside of the control of government and central authorities because of its decentralized structure. Cryptocurrency can be purchased using an online exchange platform like Binance, Coinbase, and KuCoin. Some people get cryptocurrency via a complex process known as “mining”.
Many cryptocurrencies depend on the blockchain, for preserving the integrity of transactional data. The blockchain is a ledger that is used in cryptocurrency. A central authority does not manage the blockchain. Instead, the blockchain is a public document that is spread across thousands of nodes in the cryptocurrency network in a peer-to-peer manner.
Many traditional financial operations face an existential threat as a result of the rise of cryptocurrencies. Cryptocurrencies rely on a peer-to-peer system to eliminate the “middle man,” which may be a financial institution. For instance, no bank account or credit card is required before transactions can be done in the world of cryptocurrency. The technology also extends far beyond supplying unbanked people with banking services. It has the potential to enable billions of individuals to enter the world of internet commerce, paying and getting paid for products and services outside the traditional banking and credit infrastructure. Cryptocurrency systems promise to make micropayments simple and smooth, allowing businesses to offer real-time pay-per-use consumption of their products, such as video, audio, mobile phone service, utilities, and so on.
Paper Money vs Cryptocurrency
There was a period when the entire globe ran on the barter system. Someone needing to sell or trade their commodities would need to find someone who was prepared to accept those items in exchange for the exact other goods they desired. This is referred to as the ‘double coincidence of wants.” Consider a farmer who wishes to exchange some food for clothing. To trade, he would need to find a tailor who is also looking for food. This problem was overcome by paper money, which served as a store of value. People acclimated to the barter system were undoubtedly perplexed as to why worthless papers would be equally or more valuable than their items at the time of their origin and manufacture.
Cryptocurrency replaces paper money in the same way paper money replaced the barter system. It establishes a new store of value that allows users to pay for items as well as other currencies. However, some people may be confused as to why the cryptocurrency is valuable, similar to how barterers may have been confused as to why paper money is valuable.
Any sort of currency is valuable because it is regarded as a store of value at its core. The greater the number of people who accept this, the more precious it becomes. Furthermore, greater acceptability leads to greater stability in the value of money. In addition, cryptocurrency runs on blockchain technology. This innovative technology approach improves the security of the currency and enables the verification of transactions in the currency.
Cryptocurrency wallets keep track of the value of your coins and tell you how much you have in total. For instance, when you deposit Bitcoin into your wallet, it verifies the transaction against the mining network’s ledger to inform the network that the coins have arrived in your wallet.
Cryptocurrency wallets might be software (apps) or hardware (thumb drive or card) wallets. Each wallet, both software and hardware, is made up of addresses that look like hash codes. There are a lot of letters and numbers in this string. You use this address to tell the network where to transfer the coins and where they will be stored when you deposit coins into your wallet.
Uses of Cryptocurrency
- It is used as a quick payment
- It is to avoid transaction fees charged by traditional banks
- For anonymity purpose
- Investment purpose, hoping that the value goes up
Popular Types of Cryptocurrency
Thousands of cryptocurrencies exist today, each with its own set of features and requirements. Some are clowned from another, while others are created from scratch.
Bitcoin: This is the first blockchain-based cryptocurrency, and it is still the most popular and most valuable. It was first traded in 2009. Two parties couldn’t transact electronically before the introduction of Bitcoin without the use of a trusted third-party middleman.
Since the introduction of Bitcoin, a large number of new cryptocurrencies has emerged, each based on Bitcoin’s inventions, but tweaking some of the ruling algorithm’s specific settings. Some of the competing cryptocurrencies encouraged by Bitcoin’s success, known as “altcoins”, are:
Merits of Cryptocurrency
- Cryptocurrencies have several characteristics that make them particularly effective as a medium of exchange
- If an internet connection is available, they can be transacted online as well as in-person
- Cryptocurrency is mobile
- It is resistant to inflation
- Funds can be transferred directed between two parties without the need for an intermediary
- Transactions are done with minimal processing fees
Demerits of Cryptocurrency
- Cryptocurrency semi-anonymous nature makes it suitable for illegal activities like money laundering and tax evasion
- Exchange rate volatility
- Vulnerabilities of the infrastructure underlying them
- Payments via cryptocurrency are not reversible
- Payments through cryptocurrency do not have legal protections
The future of cryptocurrency is yet to be seen. Some financial professionals believe that crypto is the future of monetary transactions, while other professionals feel it is merely a fad. As governments decide how to deal with these alternative currencies, consumers can only wait and see what the future for these monetary systems holds.