Summary
- Private parties and organisations created an almost-immune form of money exchange, known as cryptocurrency.
- The monetary exchange medium is nearly untouchable by national governments, which makes cryptocurrency extremely user-friendly.
- Money transfers are protected by complex codes and cryptographic rules, which involves significant math and IT knowledge that cryptocurrency engineers need to have.
- Miners, particularly crypto users, are crucial in making and maintaining new cryptocurrencies, which results in crypto stability and efficiency.
- Compared to fiat currencies (Euro, US Dollar, and others), cryptocurrencies do not have an infinite supply, as every existing code exceeds a limit over a period.
Cryptocurrency, also known as a digital currency, is a virtual money exchange made and managed by private consumers and organisations. Most cryptocurrencies are not legally controlled. Hence, cryptocurrency is, in theory, invulnerable to any sorts of manipulation or government intervention.
The currency is considered as a medium of the monetary exchange, and the usual financial policies do not apply to cryptocurrencies.
More than a hundred cryptocurrencies exist within the virtual money exchange, but Bitcoin is believed to be the primary digital currency. However, more and more cryptocurrencies emerge monthly.
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High complexity
Cryptocurrencies operate under a cryptographic set of rules and complex code schemes to protect personal money transfers.
Building cryptocurrencies requires advanced knowledge of math and informatics, so the exchange could stay as safeguarded as possible. These protections also keep the user’s privacy safe and sound by not revealing their identities.
User control
User activities ultimately control the supply and worth of the digital currency. Central banks and other governing agencies do not have the power to monitor any cryptocurrency movements. For that matter, cryptocurrency users, also known as miners, have a crucial role in documenting the transactions. They obtain new fees and transactions paid by the consumers, which are the most important for efficient currency function and stability.
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Fiat currencies
Cryptocurrency can also be traded for fiat currencies, money that is not backed by commodities (e.g. gold and silver), but the government that issued the fiat currency. Compared to cryptocurrencies, fiat currencies are controlled by the governments, as banks can oversee how much money is being printed.
Depending on how much the issuing government is worth, fiat currencies will be worth more if there is higher supply and demand, rather than the commodity value. One thing that banks need to be cautious about is not to print too much money, as that action results in hyperinflation.
Most note currencies are fiat currencies, including the Euro, US Dollar, and others.
Do cryptocurrencies have infinite supply?
The answer to the above question is no – most cryptocurrencies do not have an infinite supply.
Over a point in time, miners have difficulties issuing more cryptocurrency units. Every existing code has a limit that is reached at some point, which results in a minted currency.
This characteristic makes cryptocurrencies deflationary, compared to fiat currencies that, in theory, have an infinite supply, as banks could print as much money as they want.
How do they work?
The technology that is used to operate cryptocurrencies is highly complex.
Most cryptocurrencies work the same, but mainly similar to Bitcoin, as that was the first cryptocurrency that was commonly used. Their value is expressed in units, and different cryptocurrencies have different worth. When expressing how much money people have in crypto, they could either say the amount in fiat (e.g. I have 200 dollars) or cryptocurrency (e.g. I have 200 Bitcoin).
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What is Blockchain?
Blockchain is the technology that keeps records of all activities and transactions within the cryptocurrency. The technology keeps cryptocurrency transactions secure.
Just like any cryptocurrency, blockchain is not infinite and has transaction records that grow over time. As previously mentioned, the IT experts (miners) run the blockchain software, where all the transaction data is stored. Their role also involves authentication of every transaction and fees that are paid in cryptocurrency.
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Every transaction is finalised once it reaches the blockchain, usually within a few minutes. After the finalisation, transactions are mostly non-refundable, even though some newer cryptocurrencies have that feature.
During those few minutes that are required for finalising the transaction, no party can gain access to the paid units. The blockchain holds the units away, preventing all manipulations that can occur during the process. The main goal is to avoid duplicating the units, also known as double-spending.
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Accessing the account
The private key allows cryptocurrency users to get access to the unit exchange. Every consumer gets to choose their private key, which is structured of whole numbers between 1 and 78 or have a choice to generate their private key randomly. Once the key is set, spending the cryptocurrency can start. If the key is lost or non-existent, the consumer cannot trade their money, as a safety measure.
The problem with losing private keys is greater than some may expect. Even though everyone could obtain a new private key, all the units that were accessed with the previous key are now lost. For that reason, most cryptocurrency users are very protective of their keys, storing them in safe virtual locations that cannot be accessed on the Internet, as they could face losing a fortune.
Wallets
Just like in a regular world, wallets exist in a virtual cryptocurrency domain. Wallets are there to keep the theft risk low because there is still a threat of a hacker breach.
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Wallets can be stored in several locations, and it is highly recommended to keep it in at least one safe location.
What are the advantages and disadvantages of cryptocurrency?
Advantages
- One of the most apparent crypto advantages is privacy and high security. Blockchain prevents almost all system hacks, as it has a complex mathematical code. Everyday transactions made by credit or debit cards are not as highly protected as cryptocurrency, which some users find more relieving.
- Self-governance is another significant cryptocurrency advantage. Miners are storing all transaction records on their computer hardware. They are compensated for every transaction they overlook, so miners are driven to keep the cryptocurrency reliable for its users.
- Cryptocurrencies are immune to inflation. When a country hits a state of recession, most regular currencies experience a drop in their worth. Unlike other currencies, cryptocurrencies have a fixed value, so there is no concept of inflation.
- One of the reasons why cryptocurrency is popular is cost-free transactions. Overseas transfers are entirely free and quicker than going to the bank.
Disadvantages
- Losing the personal key equals losing money. The wallet stays locked as long as the new key is not obtained. Even though getting a new key is possible, unfortunately, for the consumers, their cryptocurrency will be lost in the process.
- There are many cryptocurrency sceptics because the privacy it offers is a gold mine for possible illegal activities. Governments are not able to track the transactions made on crypto servers, and thus, as an example, buying drugs or weapons can be easier than ever before for criminals.
- Complex codes usually protect the cryptocurrencies. However, there is still a risk of a hacker breach. If criminals gain access to a consumer’s ID, there is a high threat of stolen data and crypto units.
- In case of a wrong transaction, there are no refunds that cryptocurrencies offer. There is no going back once the transaction is done.