Understanding cryptocurrency

The Cryptocurrency market is booming right now. It seems to have come out of nowhere, and now discussion on “cryptos” seems to be inescapable. What are cryptocurrencies? Why are they suddenly so popular? Are they a simple fad? We will try to answer all of these questions in this article.

A short history

The history of cryptocurrencies is not at all long. They were launched  in 2009 by someone under the pseudonym “Satoshi Nakamoto”, in the form of bitcoin. Although not immediately successful its value soon skyrocketed, and its total market value currently stands at an astonishing $146 billion. A whole slew of imitators followed, referred to as altcoins; such as Tezos, Etherum, among others. Bitcoin still holds the premium position among them though, as it holds 68% of the aggregated value of all cryptocurrencies.

What is crytocurrency?

A cryptocurrency is an entirely original form of currency, one which is entirely virtual. The great benefit of these currencies, and why they have suddenly become so popular is down to how very difficult they are to counterfeit. There is no central government producing these currencies, and the network controlling them is spread across a wide number of computers. The benefit here is that no central authority regulates them

or manipulate them at will (as of now).

How do cryptocurrencies work?

Cryptocurrencies refer to various encrypting algorithms, hence “crypto”, which protect each “token” of the currency. This ensures that each of these “tokens” is unique and that no one can forge them.

They all work by use of a technology called blockchain. Cryptocurrencies save their information about transactions in “blocks”, which then link together to create a blockchain. A blockchain is essentially a large online ledger, which keeps track of all transactions of its associated currency.  A real person must verify all transactions within this central linked database, which ensures that cryptocurrencies are incredibly secure and attempting to forge them is near impossible.

Volatility and lack of regulation

Since so many new currencies are constantly appearing, there is lots of opportunity for investors to make sizable profits in the market if they choose wisely. As they are a form of currency, an investor could easily buy tokens at very low prices, with the hope of a rise to much higher values. For example, the value of Ethereum has risen from below a dollar to well over $200 over the last five years. Instances like these makes it evident that investing in bitcoin can result in substantial profits.

Despite the evident benefits, downsides are most definitely present. The chief among these is the incredible volatility of the market. No central government regulates cryptocurrencies and they rely entirely on supply and demand. Since no regulatory figure supervises them, they are susceptible to huge fluctuations. Bitcoin, for example, rose to a value of $19,000 per coin in Dec. 2017 before rapidly dropping to $7,000 by the following February. A positive outcome from this, however, is that any governing force cannot cause unnecessary changes to the market, which is a common cause of inflation.

Crypto transactions can be beneficial, in that they do not need the supervision of any third party to be completed and can be traded directly from the sender to the receiver. Since no financial institution can store cryptos, a party trading in crypto can avoid high processing fees which a bank may have charged.

Security

Although cryptocurrency transactions can be incredibly secure, storing and exchanging the currencies is a completely different story. Unfortunately, illegal interception of multiple online exchanges have resulted in millions of dollars in loss.

Since the only option for storing cryptos is digitally, some have raised concerns regarding their reliability. For one, storing bitcoins on an online server can be very insecure, as anyone could hack your funds at any time without much hassle. Additionally, the hard drives in which they are stored could easily be corrupted or damaged, resulting in potentially huge losses.

Since they are not based on any physical goods, economists usually predict their that they can easily be  overvalued. Some have argued that they do have some measurable value, pointing to the cost of energy needed to produce these coins as evidence.

Cryptos are also not the most practical currency available as so very few stores not accept them, physical or digital. We will have to see if this situation will change.

Anonymity

Cryptocurrency investors can usually hide under a great amount of anonymity, this can have both positive and negative effects. Political refugees can take advantage of the anonymity offered for safety, as they would not need to rely on traditional currencies that keep track of their activities. It can also mean that those who want to engage in illegal activities can very make transactions without any supervision.

Although you can have a great amount of privacy by using cryptocurrencies, not all cryptos have the same level of anonymity. Bitcoin, for example, is very far from anonymous. In fact, the bitcoin blockchain has aided authorities to locate multiple criminals.

Cryptomining

We mentioned earlier that a real-life individual must validate every transaction, to ensure authenticity. This is known as cryptomining. The actual process of cryptomining involves solving difficult mathematical problems. The first to solve the problem can then authenticate the transaction. In return for their services they are given a small monetary reward. This is an alternative route many people employ to make profits from cryptos, using powerful hardware to give them an advantage in the competition to be first. This method only tends to be profitable on very large scale operations, meaning if someone wanted to make any substantials gains, a great amount of hardware to be successful.

Conclusion

Cryptocurrencies are an exciting and legitimate new market to invest in. It can result in huge profits for an potential investor, but only if you deal carefully with the market.

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Cryptos may derive their value from their tight security, but can only ensure this security for recorded transactions.

The lack of regulation on cryptocurrencies brings a balance of advantages and disadvantages. Great volatility means potential for great profits as well as losses, depending on how closely you follow the market.

The anonymity offered by the currency could allow for certain people to feel at ease, but many of these individuals are likely to have criminal intents, which means cryptos can allow for a lot of illegal activity.