You may have heard of Bitcoin and Ethereum. You’ve probably also heard that people make thousands, if not millions of dollars by “investing” in cryptocurrencies. But what is it? Or, better yet, what’s the point of cryptocurrencies?
The main purpose of cryptocurrencies is to solve the problems of traditional currencies by putting the power and responsibility in the hands of the holders of the currency. All cryptocurrencies adhere to the 5 properties and 3 functions of money†
They also try to solve one or more real-world problems. Let’s take a look at how cryptocurrencies work and why more and more people are starting to appreciate this new evolution of money.
1. Cryptocurrencies belong to everyone
Cryptocurrencies work similar to any traditional national currency, with a few differences. There “fiat moneyElectricity is created and regulated by a government agency, which represented from now a debt† Anyone who owns a country’s currency has an IOU issued by that country. The cryptocurrency does not represent debt†
It strictly represents itself and its value is determined by what one is willing to trade for it. The fact that cryptocurrency is decentralized plays a vital role in how its value is determined. No one owns or regulates any cryptocurrency. Its value is not subject to the political whims of a country or the monetary policy of a central bank.
Remark: Some view the lack of centralization of cryptocurrencies as a method of avoiding taxes. However, just like stocks and bonds, cryptocurrencies are considered an asset. In the United States, they are subject to capital gains tax on sale or barter.
Currencies operating from a centralized ledger (i.e. a single entity that maintains transaction records, such as a national central bank) are exposed to human manipulation and corruption† By being decentralized, cryptocurrency operates on a “distributed ledger” or shared list of transactions. This type of ledger is the heart of cryptocurrency and brings us to the next reason why cryptocurrency is important.
2. Cryptocurrencies are virtually impossible to counterfeit
Cryptocurrencies run on a blockchain, the distributed ledger we talked about above. Understanding blockchain technology will not only help you understand what cryptocurrency is and why it is digital currency on/off key† The “block” consists of: chunks of encrypted data†
The “chain” is the public database in which blocks are stored sequentially and linked together. Each block of the blockchain has a specific code that distinguishes it from all other existing blocks.
This unique code is called a hash. Blocks of information added to a blockchain are added chronologically. Immediately after the last block created, a new block is added, which also has its own unique hash. The blockchain ledger or block database is: simultaneously distributed worldwidespread over thousands, or in the case of Ethereum and Bitcoin, millions of computers.
There you have it, a simple explanation of cryptocurrency. Now suppose someone wants to mess with a single block of data in the chain. In this case, he must manipulate all blocks from some point in history AND update all computers that contain copies of the blockchain’s ledger. It’s theoretically possible, but the amount of strength and money it takes to do it successfully makes the effort practically impossible†
3. Cryptocurrency transactions are (largely) confidential
With traditional currency issued by governments, you can make a private transaction or pay for something in person using physical kind† Paper, metal, fabric and plastic currencies represent only a small fraction of the total amount of most fiat currencies in circulation. Large withdrawals of physical money are immediately reported and reviewed by a central authority such as governments and regulators of financial systems.
Remark: Monitoring large cash transactions is a good thing. It protects the legitimacy of the currency and deters criminal enterprises such as money laundering.
Cryptocurrencies are different. They rely on well-designed mathematics to track the exchange between two people or companies. This exchange usually done anonymously†
While the ledger or list of transactions is publicly available worldwide, parties trading cryptocurrencies are more private. By definition, cryptocurrencies are held electronically in digital wallets. The owner is the private key holder of the wallet.
The currency is exchanged digitally of mostly anonymous wallets of users.
Other note:: While cryptocurrencies should be anonymous, advanced forensic analysis can uncover the identity of wallet holders. Some cryptocurrency projects, such as Monero, are designed to resist identity discovery.
A few companies like Titan Bitcoin offer premium physical coins, minted with cryptocurrency addresses and verifiable values stored on the blockchain.
It is an exciting concept for enthusiasts, collectors and even gifts. He brings a small digital cryptocurrency in the real world† Disclosure: This is not a paid sponsorship. Neither the author, Data Overhaulers, nor the parent company have any bitcoin currency at the time of publication.
4. Security of cryptocurrencies increases over time and in value
Earlier we explained that a hacking or manipulating took an enormous amount of power and money, to the point that it becomes a worthless effort. To proceed, a hacker would need to control more than 50% of the computers that are part of the ‘consensus’ network.
The consensus network is simply the collection of computers that receive copies of the blockchain or distributed ledger. For more established cryptocurrencies like Bitcoin or Ethereum, cryptocurrency networks are so big thathacking is almost impossible†
In the early days of cryptocurrencies, it was easier to gain majority control because the cryptocurrency network itself was much smaller. This is an important fact to remember for investors or users of newer cryptocurrencies whose networks have not yet reached a relatively large size.
The smaller the network, the more vulnerable it is to hacking. An example of this almost happened with early Bitcoin: a group known as BitFury brought together large numbers of computers for “mining”
What is cryptocurrency mining?
Mining is the process by which cryptocurrency transactions are verified and blocks are assigned their hashes. It requires a lot of computing power. Users who lend their computers to the network of cryptocurrency validators will receive rewards (via transaction fees) paid in the cryptocurrency they support. BitFury created a mining pool or verification network, which became very profitable as the value of bitcoin increased.
In 2014, however, they reached nearly fifty percent of the network’s total strength. While hacking and manipulating the blockchain is not their goal, they have decided to limit the extent of their influence on the Bitcoin network.
The pool’s owners have pledged never to exceed 40 percent of the network’s total strength. They did this to protect the value of bitcoin as holders of the currency could fear a 51% attack from a single trader. If the value of bitcoin had crashed, BitFury’s profits would have been tarnished, if not wiped out completely.
l’balance requires between potential profit and network power is another form of blockchain security† Too much network power leads to lost profits and currency stability.
— Coin Trading (@CoinTrading) May 23, 2022
So what’s the point of Crypto?
Imagine a situation where you want to send money to an online friend in his account. There are many ways this transaction can go wrong. Special :
- The bank or financial institution may experience a technical error, such as machines not working properly or systems not working
- Your account could be hacked; for example, there could be identity theft or denial of service
- Your friend’s account or your account may have exceeded its limit.
All of these scenarios are possible because there is a central point of failure: the financial institution. And that’s why cryptocurrencies were created as the future of money! Now imagine the same scenario between two people using a bitcoin app or any other cryptocurrency. A warning will appear asking if you are sure you want to send bitcoins. If you agree, the transaction will be processed immediately. The system verifies the user’s identity and verifies that you have the required balance to process the transaction. The payment is then transferred to your friend’s wallet.
The transaction is much smoother as it is straight forward with no technical issues or procedural steps associated with banks. The purpose of cryptocurrencies is to eliminate all the problems associated with traditional banking.
There are no limits to the money you can transfer with bitcoin, accounts are almost impossible to hack because you don’t use a financial institution and there is no central point of failure. Also, international cryptocurrency transactions are faster than traditional bank transfers, which have been around since 1872, or any other transfer method.
Unlike bank transfers that take hours or even days, cryptocurrency transfers only take minutes or even seconds.
Cryptocurrency is a way for us to create transfers electronic peer-to-peer without the risk of a single entity gains too much power over the monetary system. The merits of crypto currencies are still in their get started†
The followers and lovers will continue to sing the praises of cryptocurrencies.
The experts will continue to measure this new financial instrument against established currencies and real money. the the average consumer has to decide which is a good time to test the place of cryptocurrencies in your life.
As blockchain technology continues to mature and useful blockchains emerge into the mainstream, the necessity of cryptocurrency and its place in your financial toolbox will inevitably become apparent.